Moldovan Leu vs Geopolitics. How does the currency rate interplay with government, entrepreneurs and world’s processes?
InfoMarket News Agency Comment
The strengthening of the Moldovan Leu has been steadily observed since the beginning of 2017, the rate of USD-MDL has returned to the level of June 2015 currently. It should be remarked that no one can answer the question of what will happen to the rate in the summer or it will be interesting to note that in the fall. There are some factors showing the prospects.
Let's start with statistics. The National Bank’s official rate fixes every working day at 14.00 in relation to the US dollar, and then, through cross-rates Forex to other currencies. Leu showed the weakest rate in the last two years in February 2015, it was the result of the currency deficit due to the promulgated "theft of a billion" and the subsequent panic on February 18, 2015; the Leu reached a historic lowest rate of 20.9933 lei for $1, but never breaking "the psychological limit" of 21 lei per $1. The correction that followed after the crisis and further growth of Leu led to the new maximum value on January 16, 2016, $1 was worth 20.7002 lei. The rate was very stable throughout 2016, the market and people gradually became accustomed to new indicators and calmed down.
The situation has changed since the beginning of 2017. The lowest rate of Leu (20.1866) was recorded on January 7th this year; if we keep a record from this date, the Leu gained 5,73% over 5 months of this year, it was 18.2215 at the end of May. It seems the trend for its further strengthening towards US dollar still remains.
According to the National Bank, this situation is due to the increased supply of currency on the market, which increases the demand for lei and strengthens its rate. This is true to some extent. The currency flow in the country is due to the export activities of economic agents and individuals. Thus, the net volume of remittances to Moldova through banks transfers in favor of individuals increased by 6.8% in January-April 2017, compared with the same period in 2016, amounting to $338.02 million. Moreover, the volume of banks transfers was $86.25 million in April 2017, which is 12% lower than the previous month ($98.05 million), and 7.2% less than April’s data of the previous year ($92.97 million). It means that the growth in revenues came in the first quarter, and April’s data is lower than comparable ones for 2015 and 2016, it may provoke opinions about lowering the currency rate. The market affected by the money received in April-May due to holidays.
There is also positive dynamics for export operations. The volume of exports increased by 26.81% in the 1st quarter of 2017, compared to the 1st quarter of 2016. The volume of exports amounted to $ 528.19 million for three months in absolute terms which is $111.7 million more than in the first quarter of the previous year.
There was a message that the NBM has sufficiently replenished its reserves and it is no longer necessary to buy more currency at the market. In addition, the International Monetary Fund does not recommend to the National Bank to buy more currency at the market, believing that there should be fair competition at the market. The NBM does not always agree with IMF, because the specifics of a small country is subject to speculative influence on relative "small money"; it happens that one of the major economic agents might need a large amount of currency urgently which can drastically affect the market’s rate. The NBM reserves the right to take actions at the market in such situations.
The NBM redeemed the currency at the market for $37.6 million from January to April with the largest transactions coming in March - $28 million and April - $9.5 million. We would observe a stronger strengthening of the exchange rate lei if NBM did not implement these actions.
But these operations have certain consequences. The figure of 7 billion lei was already mentioned, it shows that the liquidity of the money supply is very high. Another 700 million lei were poured into the economy having bought up the currency in March-April to sterilize the money supply, the NBM is making the usual measures, although, unfortunately, there are not many of them. The simplest and most effective solution for some time is to increase the mandatory reserve requirements for funds attracted by commercial banks in lei, raising the norm in autumn 2015 to a record 35%, the NBM did not stop. The market waited for the reduction of norms along with the reduction of the base rate while the National Bank, on the contrary raised the rates to 37% in March, up to 40% in April, perhaps it is good to remind that this is a new record. Also, the government has started the formation of the Cash Back Fund; 0.5 billion out of 2 billion Leu are already deposited.
We can call increased liquidity in the banking system and its influence on the foreign exchange market as one of the reasons for the sterilization of the money supply.
What about banks? According to the information provided by some commercial banks, the liquidity of many banks reaches 50%. This means that the banks do not know better ways for investments to avoid the inflation. Moreover, it is already impossible to play on the government securities market, on the one hand there are low rates, on the other hand, the Ministry of Finance no longer needs borrowed funds in the domestic market, and vice versa, this year it is planned to reduce the current volume by 218 million lei.
There is one more problem: Entrepreneurs has refused to be credited in recent years. The competition in the credit market is so high that banks in the most aggressive ways buy out reliable customers from each other and after all, low rates.
The overall balance of loans in the economy fell by 8.9% at the end of April, compared to the same period of last year. This data provided by the National Bank. The balance of loans at the end of April 2017 was 34076.89 million lei (equivalent in all currencies); it was 37576.69 million lei a year earlier (in equivalent terms). The difference is 3499.8 million lei or 9.3%.
The balance of deposits increased by 4.7% at the same time. This means, first of all, that the business does not feel so confident to take new loans despite the fact that loans’ rates are quite acceptable this year, and tend to decrease. Some banks even offer the rate of 7% per annum in lei in the first year for consumer-loans which are considered to be the most risky.
The state services report on the increase of all indicators in comparison with the previous year: tax payments to the state budget administered by the SOT increased by 15% in 4 months; The Customs Service has increased tax payments by 20.3% in 4 months. ...There is no activity in the entrepreneurs’ environment as a result, and the main indicator is a decrease in the balance of loans in the economy, this is the indicator that allows private companies to develop and push the economy. Meanwhile, it seems that local entrepreneurs "stew in their own juice."
Many entrepreneurs believe that there is an extortion of funds from local businesses while fighting corruption and making audits, primarily, salary payments. It's good on the one hand, but it forces the entrepreneurs to review their policies in the context of stagnation on the other hand, making them cut their staff or reduce turnover. There was often recalled an anecdote from the 90's among entrepreneurs during the year:
Elk found himself drinking water at the bank of a river after a hangover. There was a hunter nearby, so he made a shot... Bang! The smoke cleared, but the elk stood as it stood though the water was leaking out of his stomach. The hunter crept closer to the elk, shoots again but the result is the same and one more hole in the stomach. The hunter in perplexity, came out of the bushes closer to the elk and shoots again... Smoke cleared the elk was still drinking water!!! The hunter was frightened: It looks like a puck or someone else, and he ran away. The elk stood and it was thinking: "Something I do not understand: I drink water but I'm getting worse and worse."
So many entrepreneurs are working harder and harder in the harsh environment but their incomes are fewer and fewer...
Apparently, this trend is inevitable in the context of fighting corruption, mass arrests and a general negative background in relation to the business environment. After all, those who are currently engaged in more or less medium and large businesses, started in the 90s and 2000s. The rules were different those days, entrepreneurs received incomes but they gave new jobs in turn, keeping in mind the fact that it was possible to bypass tax payments. Some entrepreneurs did it carefully with the help of audit services, some entrepreneurs did it careless and paid more money afterwards.
The current government somewhat consists of former entrepreneurs, as a result, a lot of new legislative changes were adopted in the country, which abolished quite legal schemes of tax optimization. The government is helping itself by introducing electronic management system, reporting, etc.
Many of the entrepreneurs say that anyone who has a business, started at least 7-8 years ago, should have at least small "sins." What can we think about those entrepreneurs who have achieved some results, starting from scratch, creating their own business, having dozens or even hundreds of people working in their companies now? The situation is that no one consider himself safe nowadays.
The fact is that local entrepreneurs have always been headed towards governmental power-centers. Some entrepreneurs did it quite legitimately, some entrepreneurs did it impudently. It is well-known, one power-center is evolved in Moldova now and many entrepreneurs would like to become friends with it. We are not even talking about any kind of corruption but it turned out that there are not enough places on this ship and a large part would remain behind, that is happens now.
Let’s get back to the exchange rate. It is important to note that the Moldovan Leu is very much dependant on world’s trends. The fact that it is strengthening towards the US dollar is also due to the weakening of the US currency.
The US dollar has fallen against the euro by 3.7% (from 1.08 to 1.12); by 5.7% against the British pound (from 1.22 to 1.29); by 5.9% against the Japanese yen (from 0.0085 to 0.009) since the beginning of the year. These are the major world’s currencies.
We cannot omit the last statements of the 45th President of the United States Donald Trump, who actually told Europe: We helped you after the war, you got on your feet, got stronger, carry on yourself now. The European Union has a unique chance as a teenager is often driven out into the world so that he grows up, and Europe can become an independent super-power, instead of "an addition of the United States." It's time for the EU (led by Germany) to rally and prove to the world that the child has grown.
Trump is letting the Europe to float freely, moreover, the US will build its relations with Russia independently. Europe will do the same way without asking opinions of Washington or London.
Moldova falls under the anvil in this situation and it is important for Europe to know: What would be Moldova’s priorities Washington or Brussels "regional committee"?
The active pro-Russian relations and the actions of President Igor Dodon have begun to upset Western partners of Moldova. The expulsion of five Russian diplomats out of the country as a result. Thus, Chisinau had to confirm its commitment to the West, showing that the power of the president in Moldova is not the same as the presidents of Russia or Belarus have in their countries. Moscow, of course, understands it and everyone is waiting for the end of the electoral reform in Moldova and the alignment of policy power after the parliamentary elections in 2018.
...And again we return to the exchange rate, the fact that Leu has been strengthening since the beginning of the year has many negative consequences. The exchange rate was relatively balanced in 2016, both the entrepreneurs and individuals were gradually accustomed to the rate, but the strengthening of Leu is bad for Moldovan exports now, it is already very difficult to get local products to new markets. Strong Leu also "offends" people who receive money in foreign currency from their relatives from abroad.
It is unprofitable to strengthen Leu for the Ministry of Finance because new loans and grants have been sent to the country in foreign currency since the end of last year and it is necessary to convert the money. This factor is the third pressure (after the incomes from individuals and exports) to the foreign exchange market. The National Bank, of course, takes this into consideration, but, as it has been repeatedly stated: the main goal of the National Bank is to keep the inflation rate within the set limits (5% plus or minus 1.5 percentage points) and the National Bank is still coping with this task.
On the other hand, the lei incomes received by the population within the country become more expensive in foreign currency, which gives people more opportunities outside of Moldova. Finally, it is very good for people on the eve of holidays season.
The strengthening of the Leu is so rapid and it is not profitable neither for the National Bank, nor the Ministry of Finance, nor commercial banks, nor exporters. The only justification for strengthening the rate is restraining inflation, which seems to have been dispersed more than it was necessary. One of the facts is the increase of fuel cost by 1.4%-2% since May 31st.
We are seeing increased liquidity of the Leu, an increase in inflation, while the Leu is strengthening. Anamnesis does not converge. This shows that the situation is created artificially... but why?! It seems that someone underestimated their strength, or overestimated their capabilities...
Autumn will come after hot summer and cold shower will affect absolutely everyone: government, entrepreneurs and individuals. It seems that something must happen. // 05/31/2017 - InfoMarket.