This paper discusses key findings of the Financial System Stability Assessment (FSSA) on Moldova. The assessment reveals that vulnerabilities of the financial sector appear to be manageable. Stress tests on likely scenarios do not indicate major vulnerabilities for the banking system as a whole. Since the 2004 Financial Sector Assessment Program, the National Bank of Moldova (NBM) has made progress in identifying bank owners, an issue then flagged as a major vulnerability, but other financial supervisors have been considerably less successful in this respect.
This Selected Issues paper provides a systematic assessment of Moldova’s governance and institutional frameworks. It follows guidelines approved by the IMF executive board, which were developed to deliver systematic and even-handed analysis on macroeconomically critical governance and institutional vulnerabilities. This paper also focuses on seven key areas for IMF engagement: corruption, rule of law, regulatory framework, fiscal governance, financial sector oversight, anti-money laundering/combating the financing of terrorism, and central bank governance. The analysis is based on internationally comparable data, diagnosis from IMF technical assistance reports, as well as other expert assessments. Strengthening the judiciary and rule of law and accelerating state-owned enterprises (SOE) reform are clear priorities. The widespread nature of governance vulnerabilities and institutional weaknesses in Moldova, combined with capacity constraints, creates challenges for policy formulation and prioritization. Policy efforts should therefore focus on strengthening rule of law and reforming Moldova’s judiciary system, as well as building capacity and increasing the autonomy of key institutions. Steadfast SOE reform would foster competition, investment, and productivity, while reducing fiscal risks.
International Monetary Fund. Monetary and Capital Markets Department
This note discusses the stress tests that were carried out on Moldova’s banking system as part of the 2014 Financial Sector Assessment Program (FSAP) Update. The objective of this exercise was to assess the resilience of the banking system to major sources of risk. The stress tests were conducted in collaboration with the National Bank of Moldova (NBM), and complement other approaches, such as the analysis of financial indicators and the assessment of the quality of supervision. The stress tests focused on the banking system and covered all 14 banks operating in the country. Top-down solvency stress tests were conducted jointly by the FSAP team and staff from NBM, using supervisory data. These stress tests were complemented by bottom-up stress tests, conducted by individual banks using their own internal models, but applied to the macroeconomic scenarios provided by the FSAP team. In addition, liquidity stress tests, together with complementary sensitivity analysis were also carried out on all banks in the system.
Mr. Gianni De Nicolo, Mr. Sami Geadah, and Mr. Dmitriy L Rozhkov
This paper documents the great divide in the level of financial development between the Commonwealth of Independent States (CIS) 7 countries and the more advanced economies in transition, in particular those of Central and Eastern Europe and Baltic states. It discusses the roots of financial underdevelopment in the CIS-7 countries by examining the differentials in interest rate spreads between the CIS-7 countries and the transition economies that have achieved faster financial development. The roots of the divide are traced to weaknesses in the institutional infrastructure for financial intermediation, which lead to a combination of low depositor trust in the banking system and high credit risk. High credit risk stems mainly from the poor creditor-rights protection and weak auditing and accounting standards. Financial sector reform strategies that fail to give priority to the resolution of weaknesses in the basic financial infrastructure are unlikely to be successful in letting the CIS-7 countries bridge the great divide.
Moldova’s economy has nearly recovered from the 2009 recession, with GDP growing by almost 7 percent in 2010. GDP rebounded by 6.9 percent in 2010 after declining by 6 percent in 2009. The key objectives for 2011 are to advance fiscal consolidation, keep inflation under control despite adverse shocks, and support balanced growth. The growth momentum is expected to continue in 2011 and beyond, leading to a temporary widening of the current account deficit. The 2011 budget seeks to maintain the pace of fiscal consolidation with emphasis on permanent reduction in current spending.