Country Report Moldova July 2008

Outlook for 2008-09

• Politics will be less stable than at any point during the past two years, with a legislative election due in early 2009 and the ruling Party of Communists of the Republic of Moldova (PCRM) appearing weakened.
• The opposition is expected to win a majority of seats in the 2009 election, but will be too divided to form a coalition quickly or to govern effectively.
• Despite the resumption of dialogue in April 2008, the status of Transdniestr is unlikely to be resolved during the forecast period.
• The budget deficit will remain below 1% of GDP, helped by external grants and by the improvements in fiscal policy made in recent years.
• Real GDP growth is forecast to rebound from 3% in 2007 to 6.5% in 2008, helped by remittances and foreign investment, before easing to 5.5% in 2009.
• Fiscal and monetary policies will remain sound, but rising energy prices and remittance inflows will prevent significant disinflation. We have raised our inflation forecast to 14.5% in 2008 and to 10.5% in 2009.
• The trade deficit will remain at around 50% of GDP, with financing coming from remittances, grants and borrowing. We have raised our forecast for the current-account deficit to 14.5% of GDP in 2008 and to 10% of GDP in 2009.

Monthly review

• The PCRM has allied with the Social Democratic Party (SDP) faction in the city council of the capital, Chisinau, to form a new majority. This undermines the position of the Liberal Party (LP) mayor, Dorin Chirtoaca.
• The election of a chairman for the Popular Assembly of Gagauz Yeri resulted in controversy, with candidates of the PCRM and United Gagauzia both claiming the post. The stand-off has yet to be resolved.
• The Central Election Commission (CEC) refused a petition for a referendum on constitutional changes, including one for direct election of the president.
• Fiscal performance has deteriorated in comparison with 2007, but is still better than targeted, and the government has proposed amending the 2008 budget to cut the deficit from 0.5% to 0.2% of GDP.
• The government has reinvigorated its privatisation programme. Sales in 2008 have reached over Lei300m (US$29m).
• Real GDP grew by 4.3% in the first quarter of 2008. This represents a recovery from negative rates of growth in the second half of 2007.
• The current-account deficit totalled US$250m, or 21.9% of GDP, in the first quarter of 2008, down slightly compared with 22.6% of GDP a year earlier.