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Currency autumn records

Currency autumn records

Autumn was hot in Moldova - and not only because of the elections. Autumn 2014 made history by the establishing new records: the lowest rate of the Moldovan currency vs. the U.S. dollar was registered.

It can be reminded that the currency reserves of the national Bank pegged to the U.S. currency and the rate of the leu is set exactly to the U.S. dollar to other currencies and MDL exchange rate is calculated through cross-training.

So, from the beginning of the year - 11 months - MDL depreciated on average by 16%.

The dynamics of the exchange rate MDL vs. USD January-November 2014

In general the year was successful. For the first time in 11 years, the rate exceeded 14 lei per dollar in June. In November lei broke two records. First, the official rate established historical maximum from the date of its issuance in 1993 - November 3, 2014 when the rate was 14,8069 lei per US dollar. On 18th of November, the exchange rate broke through the rate of 15 lei per dollar.

Previous high - 14,7840 lei per 1 USD was registered on April 14, 2003.  The highest mark of 14 lei fell in September 2003, to return to this position in June of this year.

As we have noted, the National Bank started the game with the exchange rate in the middle of 2012, buying up currency reserves. Then he repeated purchases in the second half of 2013. In total for 2012-2013 NBM bought at the foreign exchange market 630,46 million dollars.

Witching as NBM buys the currency other players were involved in the game: if regulator is doing this others can also do the same.

The dynamics of the exchange rate MDL vs. USD (2012 - December 2014)

As it was mentioned above, for 2012-2013 NBM bought at the currency market 630,46 million dollars. When the foreign exchange market hauled the other players - not only commercial banks but also economic agents in 2014, the Bank had foreign currency mainly to sell.

At the same time, for 10 months of this year, the NBM has returned to the market exchange only 151,59 million dollars - not even half of what it had taken in 2012-2013. Since then  bank returned less than it had taken and provoked the devaluation of the national currency.

Graph currency interventions of NBM (2012 - October 2014)

Even this year - in August - NBM purchased 28.5 million; in October - 1.58 million dollars. In general, if there were at least these purchases exchange, the rate could not reach a historical high, and especially not to break the mark of 15 lei per dollar.


Of course, the main objective of the NBM - not maintaining the course, and keeping inflation within the specified limits. But it cannot be denied that the course has a direct impact on inflation. (By the way, how could the national Bank to regulate inflation we will talk for the year.)

When the rate exceeded the historical maximum in early November 2014 a statement to the press issued by the head of the Department of currency operations and external relations Lucia Hadarca sound like” A small digression: “I can not say that the former leadership of the NBM has established internal hard rule: all personal statements to the press made by the first party, official information, if it comes out of departments, does not have a signature - that is signed by the National Bank and the responsibility, of course is borne by the Board. And if in the 90-s it was possible to get an official point of view on the particular issues now NBM always evades direct answers to questions about the exchange rate and especially in face of the press.

Lucia Hadarca statement may seem like just such a justification of NBM for situation with the leu exchange rate. She then called several reasons for devaluation of the Moldovan currency:

- Strengthening of USD vs. against other currencies at the foreign markets against the backdrop of improving economic indicators in the United States;

- the geopolitical situation in the region, especially in Russia and Ukraine, where ruble and hryvna have greatly devalued;

- the situation at the domestic foreign currency market, in particular, a small supply of foreign currency from individuals and large demand for dollars on the part of legal entities.

As Lucia Hadarca noted: "Now we observe a quite stable situation, supply and demand for foreign currency is almost completely covered... The NBM has sufficient foreign currency reserves, and, if necessary, it will intervene".

Interesting examples of the national Bank on the fact that the Moldovan LEU has been lucky: for 10 months of 2014 MDL has depreciated only by 13.4%, while the Ukrainian hryvna more than by 50%, and the Russian ruble by 29%.

That is Moldova is in one side with the Ukraine, where there are military operations, and with Russia, which, in fact is also fighting with sanctions from the EU and the US.

For a month the situation has changed. For 11 months the devaluation of leu accounted for 16%; Ukrainian hryvna - 100% (i.e. twice - this was announced on 20 November, the National Bank of Ukraine). The Russian ruble devalued already by 40%. By the way, the Romanian lei since the beginning of the year depreciated by 10%. That is, they are even more fortunate. The most fortunate were Europeans: the euro since the beginning of the year vs. the US dollar has depreciated, by 9%: at the beginning of January 2014, the euro-dollar exchange rate was almost 1,37, and now 1,23. In Europe devaluation vs. dollar was connected with the elections, the change of government and, as a consequence, the output of a given capital in the United States. Then there were the obvious reasons.

It turns out that the currencies of many countries for the year of 2014 in comparison with the US dollar devalued. To be more precise - the dollar has strengthened. And like the national Bank of Moldova holds a sort of middle line between strong devaluations of the currency in Ukraine and Russia and not so significant devaluation in euro area and Romania.

The main reason for devaluation of currency is the outflow of capital from the country or a sharp reduction in the currency earnings. These factors have led to devaluation of currencies in Ukraine and Russia. We did not have a direct outflow of capital- new investment were not seen. In addition, the dynamics of currency inflows to the country remains at the level of previous years, moreover, remittances for 10 months in comparison with the same period of the last year even grew by 6.1%- up to $1.4 billion


So why, in the absence of negative signals in the economy of Moldova lei for 11 months has devalued by 16%? We see that the reason in the first building, located in the Grigore Vieru Street.

Dynamics of currency NBM interventions (2012 – October 2014)

After long periods of non-interference in the market, when the rate was stable, the appearance of the national Bank, which started to buy foreign currency, led to sharp devaluation of leu: for two years - 2012-2013 – it 11.45%.

But already in the beginning of this year the National Bank attempts to stabilize the situation on the currency market and then starts to meet the demand for its currency interventions.

Partly, perhaps, it was influenced by the process and the indignation of the members of the Parliament, which in the beginning of the year called the President of the NBM to present the report on the situation at the market. Then the national Bank in February came out with an unprecedented intervention by investing at the market $73 million per month. In June and July on the background of new encroachments on NBM corresponds to its promises to stabilize the exchange rate and for the two months provided selling $73 million at the market.

So the point of stability is reached.

The dynamics of the exchange MDL rate vs. USD January-November 2014

Tremendous growth from to 15,11 lei in a short period of time requires comment.

The threshold of 14 lei per dollar, the efforts of currency interventions of the national Bank, lei comes back. On 18 August rate made up 13,7119 lei per US dollar - as it turned out it was its  strongest position in the second half.

It would seem that the National Bank, following the February promises to stabilize the currency, executes it, but for some reason only until August. If in February this promise was given to the Parliament in August the politicians were preparing for the elections. The regulator, which made a serious effort to stabilize, in August began to buy foreign currency, causing an increased demand for it. In August it bought $28.5 million, and thus gave a clear signal to the market that support of the exchange rate is not its goal, and it intends to continue to act in the direction of gradual devaluation of leu.

That is, if in February-July, the actions of the National Bank led to the desired effect - the decline in the exchange rate. These actions in August seem like the bank is saying: “In the beginning of 2014 I lost control over situation and had to sell the currency and the exchange rate had to be lowered..."

But in August, when the Parliament did not function and the demand still exceeds the supply, the National Bank allows itself unsafe actions on currency acquisition. And the result, in September it again sells currency, but in small shares- only $25 million; and in October -$1.58 million thereby generates it per hour, outdoor feeding the signal to the participants that it is not going to saturate the market that is not going to meet the demand and is not going to spend foreign currency reserves. So no one can force the Bank to report on situation at the market before the elections.

The coalition Parliament is always associated with distribution. And it is very likely that the attention of politicians at some point will be drawn in the direction of the National Bank. But the current leadership has some trumps: the National Bank is one of the most profitable branches of the state - though the profit is not its main purpose. But somehow, for 9 months of 2014 the national Bank earned 2.71 billion lei profit- half more than at the same period of the previous year. I'm afraid to even speculate on the background of the continuing devaluation of leu what is the cost of the regulator for this year.

Moreover, the National Bank, by its actions gave a good profit to the budget. Recently, the tax was proud to report that taxes for 9 months of this year made 50% more than for 9 months of the last year. Only reason no one has paid attention to the fact that annually the excise taxes, which is tied to euro are increased. That is, at least 16% of devaluation of leu and increased excise taxes, which for some items increased in 2014 to 50% shall be taken back.

Against this background, we shall take into account news from the energy markets which are the most painful topic in the Moldovan economy, because gas and oil products are 100% imported and purchased exclusively for USD. Now, a barrel of oil as the main indicator of the global market since the beginning of the year fell from 106,68 dollars in January to $ 70 in early December - that is almost 35%. If this didn’t occur, growth in prices for petroleum products in Moldova against the devaluation of leu would be inevitable. This would entail a price increase in all sectors of the economy and, as a result, inflation would have gone beyond 3-5% per year planned; thus upper limit. However, the real situation on the market showed that there was a threat of deflation and deposition rate for the lower limit of the corridor. It also seems that the National Bank may kill two birds with one stone - supports inflation in its specified limits, not reducing it as keeping the inflation in the limits is the main objective of the National Bank of Moldova which also brings the profit.

Instead of PostScript: this week the National Bank registers a new record MDL rate but it's already a December story.


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