Country Report Moldova June 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, then ease 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% in 2008 and 10% in 2009.
• The trade deficit will remain at around 50% of GDP, with financing from remittances, grants and borrowing. We have raised our forecast for the current-account deficit to 14% of GDP in 2008 and 9.6% of GDP in 2009.

Monthly review

• Parliament adopted the new National Security Concept, a security policy framework. It affirms Moldova's military neutrality, as desired by Russia. Discussions with Russia over Transdniestr's status have stepped up.
• The president, Vladimir Voronin, criticised corruption in the traffic police, in an attempt to demonstrate anti-corruption credentials ahead of the election.
• Moldova refused to sign a convention on crossborder traffic with Romania, seeking to link the issue to a wider border treaty.
• Budget performance has weakened: the budget ran a deficit of Lei125m (US$11m) in January-April, compared with a Lei307m surplus in the year-earlier period.
• The National Bank of Moldova (NBM, the central bank) raised its key interest rate by 150 basis points to 18.5%, as inflation continued to accelerate.
• Consumer price inflation rose to 16.9% year on year in May. Inflationary expectations have boosted wage growth, to 10% in real terms in January-April.
• The narrow export base, coupled with an import boom partly fuelled by remittances, has caused the trade deficit to widen to US$699m in January-April, up from US$484m in the year-earlier period.