Moldova with a population of 4.5 million is one of Europe’s poorest countries, it is a landlocked country located within Eastern Europe graced with a mild and sunny climate as it is located quite close to the Black Sea. Moldova’s flirtation with free market economics during the 1990’s has resulted in very difficult times and a low standard of living for the Moldovan people. Below is a summary of BankINTRO.com’s research as it relates to the Moldovan leu currency.
POLITICS: in April 2005, the left leaning but pro-Western president Vladimir Voronin of the Communist Party won re-election by Parliament. This political statement reaffirms Moldova’s drive for closer ties with the West including both the United States and the European Union. Independence for Moldova was obtained in August 1991 from the former Soviet Union, some analysts have commented on the limited democracy such as in media control. Disenchantment with the painful transition to Western style capitalism led to Moldova’s parliament in 1999 rejecting further land privatization as requested by the IMF. Moldova is balancing the move and direction from centrally planned ideology to free market thinking. The question is timing, at what pace is acceptable to the people. Moldova’s transition attempt to Western ways to date has been a tragic hardship, a challenging road. Does Moldova have the drive and ambition to fulfill its dreams, to modernize and become part of the global economy?
ECONOMICS: economy is recovering from a difficult era of the 1990’s when the economy entered a prolong depression whereby total GDP contracted by 65 percent and inflation peaked in 1994 at 104 percent. However, since 1999 Moldova’s economy has emerged from depression with annual positive GDP growth rates. Moldova has relied on foreign financial support including the IMF, the World Bank and the European Bank. The transition from Soviet era communist central planned economy to free market has been an extremely painful time for Moldova. Moldova has made the correct choices during the 1990’s by implementing market reforms. They freed interest rates, eliminated export controls, implemented land privatization, freed all prices and of course, the introduction of a convertible currency in late 1993. The country usually runs a trade deficit, it is largely dependent upon remittances from Moldovans working abroad as foreign investment levels are modest. Unfortunately, Moldova has no hydrocarbon reserves or major mineral deposits unlike neighboring Romania with its gold geology.
Moldova’s economy has been highly correlated to the success of the Russian economy, the Russian financial crisis in 1998 rippled to Moldova’s fragile economy resulting in a large exodus of Moldovan workers to countries abroad including countries like Turkey, Portugal, Russia and Israel. The deep recession during 1999 following the Russian crisis resulted in the Moldovan leu depreciating by upwards of 50 percent. By 2001, Russia’s economy recovered reflecting in the stabilizing of Moldova’s currency. In 2003, the Moldovan authorities ceased making debt payments on its international obligations but other recent reports have payments resuming to Paris Club creditors. By 2004, Moldova has experienced continued economic growth since 1999 resulting in declining external GDP debt ratios although the country is deeply in debt.
Economic Statistics
Total GDP as measured by purchasing power parity stood at $7.8 billion USD (2003) with corresponding GDP/Capita at $1,800 USD. Market GDP was measured at $1.7 billion USD for 2003 or $460 USD/capita. Other figures have total nominal GDP at 37,000 million MDL or at about $3 billion USD for year 2005. Real GDP growth estimates include year 2005 at 5 percent, year 2006 at 4 percent. Year 2003 GDP growth came in at 6.3 percent, 2002 at 7.2 percent, 2001 at 6.1 percent and 2000 at 2.1 percent. Inflation is projected at 10 percent for 2005 and 8 percent for 2006. Inflation figures include year 2003 at 15.6 percent, 2001 at 12 percent, 2000 at 30 percent, year 1999 at 40 percent, 1997 came in at 11.2 percent. Current account is in deficit at 6.8 percent of GDP for 2003, the trade portion of the figure was in deficit at $544 million USD (2003). The shortfall for the current account has been in the 6 percent range over the last few years (year 2002 at 8 percent deficit) except in 1998 when it went off the map at 16.7 percent. The fiscal account is in deficit at 2.5 percent of GDP. External debt at $1.5 billion USD (2003). Export partners include Russia, Romania while import partners include Ukraine, Russia.
POSITIVE: fertile agricultural farmland yields a national food surplus (dairy, tobacco, grapes/mature vineyards, etc), very high literacy rate. CONCERN: import energy - oil & natural gas/coal, weather - droughts & floods.
BANKING SYSTEM: the Central bank is the ‘National Bank of Moldova’. February 2005 interest rates for the NBM base rate stood at 13 percent. Recent inflation figures for Moldova included February 2005 inflation at 13.4 percent, December 2004 inflation at 12.5 percent. The central bank tightened rates in 2000-01 to combat inflation. Broad money growth is high with 30 percent year over year. A plus to the Moldovan leu is the increasing foreign reserve position which amounted to $392 million USD equivalent in September 2004 and are projected to rise to $500 million USD in 2005.
REGIONAL ANALYSIS: Transdniestria, Ukraine, Russia
Regional dispute include the separatist Transdniestria republic which is a narrow land segment bordering the Dniester River which is home to the majority of ethnic Russian and Ukrainians. This Transdniestria region does not consider itself to be a part of Moldova as it declared so-called independence in 1990 but Transdniestria is not recognized internationally. Over the years, there has been a significant Russian influence in this Transdniestria region as thousands of Russian troops have been positioned in this tiny area. Historically, Transdniestria was a vibrant booming part of Moldova as it was home to many of the former Soviet Union’s military arms industry employing large numbers of scientists and military personnel as it was also a major centre for weapons storage. With the economic collapse of Moldova’s high-tech industry since independence coupled with the end of the Cold War and former Soviet Union, many of these highly educated engineers have since emigrated. Political upheaval has recently taken course in the Ukraine during December 2004 with the public protest and ejection of the former authoritarian government. Better times look they lie ahead with the arrival of Ukraine’s new government of Viktor Yushchenko. The renewed success of Russia’s economy in large part due to huge oil & natural gas windfall revenues and a resurgence in commodity prices bodes well for Moldova with a stronger Russian economy. Russia has long been a supplier of energy to Moldova.
KNOWLEDGE: Moldova to Re-Join Romania?
Prior to 1940, Moldova was a province of Romania. After World War II, Moldova was then absorbed by the new superpower entity of the Soviet Union. Traditionally, Moldova has had a strong historical relationship with Romania with its similar ethnic and cultural backgrounds. With Romania expected to officially join the European Union ‘EU’ in year 2007, the euro will ultimately replace the Romania leu (ROL) currency. Today, Romania’s GDP/Capita stands at 30 percent below the EU average while Moldova is at only 25 percent of Romania’s. To put this in perspective, the standard of living for the average Moldovan stands at about 10 percent of the EU citizen.
The question is, would Romania want Moldova? The acquisition cost at today’s numbers do not make economic sense, perhaps too costly a venture. This follows a similar story line to West Germany absorbing East Germany or the huge economic implications and potential cost for South Korea to absorb North Korea? The negatives include inadequate infrastructure and limited natural resources. On the plus side for Moldova is a highly educated cheap labor pool in addition to its very fertile agricultural lands.
The disintegration of Moldova is a distinct possibility over the medium term. If the Moldovan politicians cannot provide for economic dividends, if the people cannot see the light and potential, Moldova may implode as the north will dissolve into Russia and the rest to Romania. BankINTRO.com does not think this will happen. Our guess is that the huge wage disparity will play into Moldova’s hands as those in the EU and elsewhere will continue to take advantage of the cheap labor supply in Moldova for textile & shoe production, food processing, refrigerators & freezers, washing machines and other machinery.
CURRENCY: ISO Symbol ‘MDL’, Moldovan Leu, Moldovian Lei. (plural). At time of review on April 19, 2005, the Moldovan leu had an exchange value of 12.59 MDL to the US-dollar (USD). The Moldovan leu follows that of a floating exchange rate regime, the currency is considered to be a soft currency. Currency valuations can swing due to seasonality of industry including agriculture where receipts can impact a currency for such a small economy. Year 2004 experienced a real appreciation in the leu exchange rate. As measured by purchasing power parity, the leu is approximately 30 percent undervalued to the USD.
CURRENCY HISTORY: the Moldovan leu was introduced in year-end 1993. Historical currency exchange quotes include: year 2003 at 13.95 MDL to the USD, year 2002 at 13.57, 2001 at 12.86, 2000 at 12.43, year 1999 at 10.52, 1998 at 5.37 (Russian financial crisis period) year 1997 at 4.662, 1996 at 4.67, year 1995 at 4.49, 1994 at 4.27 and 1993 at 3.64. During the period of the Russian financial crisis of 1998-99, the leu depreciated by 50 percent to the USD. During year 2003, the leu appreciated by 4 percent to the USD although the USD itself was in serious decline to many of the world’s currencies including gold.
CURRENCY FORECAST: appreciation ahead over the short to medium term as continued IMF support to help propel economic growth. The economic recovery remains fragile and vulnerable as many Moldovans still rely on the strong level of remittances from abroad which have been an important source of capital inflows and foreign exchange. Water seeks its own level, the huge wage and currency disparity between Moldova and its neighbors including the EU will play into Moldova’s corner even with a global slowdown quite possibly in the next two years. Moldova’s existence over the medium to long term depends entirely on its ability to improve the economy and living standards. The relationship of purchasing power parity also suggests the leu will experience appreciation pressures over the short term to the USD but its long term fate depends on overall nationhood risk under the leadership of its political management. The success of Moldova will depend entirely on its ability to provide for the prudent policies to attract a large increase in foreign direct investment in order to upgrade Moldova’s infrastructure and modernize its economy.
UPDATED:April 19, 2005
