The WB worsened the GDP forecast for Moldova for 2022 and now expects it to decrease by 0.7%, and not by 0.4%, as it was expected earlier.
In addition, the GDP growth forecast for 2023 was lowered by 0.1 percentage points, from 2.7% to 2.6%, while the GDP growth forecast for 2024 was maintained at 4.2%. This follows from the published updated regional forecast of the World Bank. It should be noted that before the war in Ukraine, the World Bank projected that Moldova's GDP growth would be 3.9% in 2022 and 4.4% in 2023. Subsequently, according to new forecasts made in June, taking into account the aftermaths of the war in Ukraine, the WB experts expected the Moldovan economy to decline by 0.4% in 2022, and to grow by 2.7% next year. The new WB materials note that the war and the recent drought have created serious problems for the Moldovan economy. Trade disruptions, lower foreign capital inflows and high inflation are seriously affecting private consumption and investment. WB analysts believe that Moldova's GDP will shrink by 0.7% from 2022 and will slowly recover in the following years, provided the war in Ukraine is over. It is forecasted that more than 11 thousand people in Moldova will fall below the poverty line. It is stressed that the war in Ukraine poses a serious threat to Moldova's economic prospects due to the overall stability of the macro-fiscal system, trade and remittance channels, as well as growing geopolitical risks undermining domestic and foreign investments. Moldova's main infrastructure networks are mainly linked to Ukraine, despite recent attempts to improve the country's connection to the EU. The spike in inflation represents the biggest challenge for the authorities. Monetary policy faces a compromise between curbing inflation and supporting economic activity, as well as potential pressure on the national currency while maintaining sufficient levels of international reserves. Moldova's fiscal position faces the need to mitigate the erosion of household purchasing power due to inflation, as well as the need to support a reform program to address low productivity growth, persistent structural and governance weaknesses, a large share of state-owned enterprises, low competition, unequal playing field and fiscal distortions. The WB analysts also point out that extreme weather events and the spread of economic and energy shocks have been a traditional risk for Moldova's small open economy. And persistent inequality of opportunity limits the ability of low-income households to access public services, reducing their resilience. Moldova remains one of the poorest countries in Europe. Referring to the recent economic achievements of Moldova, the WB experts remind that the country's GDP increased by 1.1% in Q1 2022, thanks to strong export growth (+36.9%). At the same time, investment fell by 6.1% due to deterioration of confidence as the war escalated and monetary policy tightened. Trade, financial activity, and health care were the busiest sectors, while the side effects of the war began to affect the manufacturing sector. The monetary stance has tightened significantly since 2021, when the discount rate was just 2.5%, but now it has reached 21.5%. Analysts at the WB note that the task of the authorities was to counter high food and energy prices, which culminated in an annual inflation rate of 33.6% in July and stabilize the exchange rate of the MDL, which has lost 8% against the USD since the war. The current account deficit doubled in the first quarter of 2022, reaching 17.1% of GDP, as the cost of energy imports rose rapidly and remittances fell by 9.4%. The current account deficit was covered mainly by reserve assets and foreign direct investment. Foreign debt declined slightly, reaching 64% of GDP. The budgetary situation turned out to be sustainable: in the first half of 2022 the deficit was lower than expected (1.2% of GDP), thanks to a 19.4% increase in revenues. Spending increased by 18% due to social spending (30%) and subsidies (39%). As a result, public debt and publicly guaranteed debt fell to 30% of GDP. Recovery in the labor market continued in the first quarter of 2022, with the number of employed increasing by 3.8% and the number of unemployed decreasing by about 30%. The WB experts expect Moldova's GDP to decrease by 0.7% in 2022. The negative impact on private consumption and investment is partly offset by the positive contribution of net exports and a large fiscal boost. Economic growth is expected to recover slowly to 2.6% in 2023 and reach its potential only in 2024. High inflationary pressures will persist in 2022-2023, with inflation remaining above the NBM target of 5% +/- 1.5%. The current account is expected to be higher than before the pandemic, reflecting high import prices, and will depend on financing from external debt instruments. The budget deficit is estimated to reach 5.9 percent of GDP in 2022 and will remain higher than before Covid-19 because the authorities will need to protect the population from rising prices, support refugees, and support investments and the reform program. As a result, public debt is expected to rise but stabilize at just above 40% of GDP over the medium term. As noted by the WB, the risks of deterioration remain high due to Moldova's proximity to war and uncertainty related to prices and supplies of energy or natural gas. As the cold season approaches, inflationary pressures could further undermine consumer confidence and exacerbate shortages. High production costs and dry weather could reduce crop yields, leading to additional inflationary pressures and reduced economic activity. Despite a 40 percent increase in deposits, an escalation of the conflict could jeopardize the banking system, which has yet to fully recover from the 2014 bank fraud. WB experts predict that inflation in Moldova will be 30.1% in 2022, 12.5% 2023, and 6.2% 2024. // 05.10.2022 – InfoMarket
