Republic of Moldova: Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
22 Oct 2012
eISBN:
9781475527292
Language:
English
Keywords:
ISCR; CR; Moldova; GDP; FDI; asset; bank; FDI source country; FDI to Moldova; FDI potential; Moldova's experience; FDI allocation; Current account deficits; Global competitiveness; Competition; Structural reforms; Europe; Central Asia; Asia and Pacific
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This Selected Issues paper on the Republic of Moldova was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on September 17, 2012. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the Republic of Moldova or the Executive Board of the IMF.

Abstract

This Selected Issues paper on the Republic of Moldova was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on September 17, 2012. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the Republic of Moldova or the Executive Board of the IMF.

II. FDI Potential, Performance, and External Competitiveness1

Contrary to a widespread view in the country, Moldova has had a good record in attracting FDI. Structural reforms implemented in 2010–11 boosted Moldova’s competitiveness and growth potential. Further reforms aimed at broad-based improvements in competitiveness would be most efficient in promoting domestic and foreign investments. After its significant appreciation in 2011, the leu exchange rate has become mildly overvalued. However, moderate wage growth helped sustain external price competitiveness in 2010–11.

A. Introduction

1. Since 2009, Moldova’s economic potential has strengthened considerably. The authorities have undertaken far-reaching structural reforms in several areas, including the tax system, education, pension and social assistance, the energy sector, external trade, and business regulation. With these reforms, the country advanced by 18 positions to rank 81 in the 2011/12 “Doing Business” survey compiled by the World Bank and came second in its list of top reformers in 2011. The reforms have raised the economic potential and sustained solid GDP expansion of 7.1 percent in 2010 and 6.4 percent in 2011.

2. Domestic consumption fuelled by remittances remained the main growth driver. Reflecting the post-crisis recovery in partner countries, remittances from Moldovan workers abroad increased by 13 percent in 2010 and 22 percent in 2011. These remittances, coupled with positive, if moderate, growth in income from domestic sources sustained strong private consumption expansion in 2010–11.

3. The authorities’ efforts to activate the second engine of growth based on investment and exports have initiated important shifts in the economy. Gross fixed capital investment increased by 16 percent in 2010 and 9 percent in 2011 in real terms. Responding to recovering demand in partner countries and the government’s efforts to promote trade integration, exports of goods and services increased by 15 percent in 2010 and another 38 percent in 2011 in US$ terms. Breaking with a long declining trend, the share of value added in industry and agriculture increased to 26 percent of the total in 2011 from less than 22 percent in 2009.

4. Productivity growth, rising remittances, and capital inflows led to currency appreciation. In real effective terms, the Moldovan leu appreciated by 5 percent in 2010 and another 10 percent in 2011. Should this trend continue, Moldova’s exports’ price competitiveness can be threatened. To sustain the high growth despite the loss of price competitiveness, it becomes even more important to accelerate structural reforms.

5. The rest of the paper is organized as follows. Section B considers improvements in Moldova’s competitiveness in recent years in comparison with peers in Europe and Asia. Section C updates the estimates of potential GDP growth and highlights recent changes in growth factors. Section D discusses progress in attracting FDI to Moldova and compares Moldova’s experience with that of its neighbors. Section E analyses developments in price competitiveness of Moldova’s exports. Section F provides a CGER-type exchange rate assessment. Section G concludes with a summary of the results and policy recommendations.

B. Improvements in Competitiveness and Ease of Doing Business

6. Steady implementation of structural reforms has raised Moldova’s competitiveness. In the 2011/12 edition of the World Bank’s “Doing Business” survey, Moldova advanced from rank 99 to rank 81 and took second place in the list of top reformers worldwide for the year. This rapid progress reflected implementation of four reforms:

  • A one-stop shop for business registration made starting a business easier;

  • Private bailiffs made enforcement of court judgments more efficient (although some were controversially implicated in illegal bank takeover attempts);

  • The first private credit bureau improved the credit information system;

  • The amended insolvency law granted priority to secured creditors.

However, Moldova advanced only slowly in the Global Competitiveness Index compiled by the World Economic Forum (GCI WEF; see ¶9).

7. The sub-categories of the “Doing Business” survey show further details of Moldova progress in improving competitiveness. In 2011, establishing of the credit bureau allowed Moldova to advance considerably in the “Getting credit” category. The country also advanced significantly in the “Starting a business” ranking. However, in other categories the advances were relatively small, and in certain rankings Moldova even lost grounds to competitors. As in the previous years, Moldova scored low in “Dealing with construction permits,” “Trading across borders,” and “Protecting investors.” Even after the reforms implemented in so far, the international comparisons suggest ample room for further improvements in these areas.

8. As a result of the reforms, Moldova improved its competitive positions in the region. When compared with peer economies in South-Eastern Europe and the CIS, Moldova advanced by two positions (from 8th to 6th place). In this peer group, Moldova retained high ranking in the “Enforcing contracts” category, but still scored poorly in “Protecting investors.”

9. According to WEF, policy instability and corruption occupied the top places in the list of most problematic factors for doing business in Moldova in 2011. The respondents to the WEF’s GCI survey placed these factors above such traditional factor as “Access to finance,” which is often quoted as an important limitation on the business activity in developing economies. They also named inefficient bureaucracy and government instability among the top five factors problematic for business. This highlights the areas where reforms are badly needed.

Figure 1.
Figure 1.

Moldova: Economic Developments, 1995-2011

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: National Bureau of Statistics; and author's calculations.
Figure 2.
Figure 2.

Moldova: GDP Composition and Investments, 1995-2011

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: National Bureau of Statistics; and author's calculations.
Figure 3.
Figure 3.

Global Competitiveness Index: The Most Problematic Factors for Doing Business in Moldova

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Source: World Economic Forum, Global Competitiveness Report

C. Growth Potential and Engines of Growth

10. The economic recovery surprised on the upside in 2010–11. In 2009, dearth of investments and dim prospects for productivity-enhancing reforms knocked potential GDP growth down to slightly above 3½ percent. In early 2010, the IMF estimated potential growth at below 4 percent on average for 2010–15 (Gorbanyov et al., 2010). However, in the context of the IMF-supported program investment rebounded stronger than expected, and various productivity-enhancing reforms also proceeded faster than envisaged. As a result, estimated potential GDP growth has risen by a full percentage point above the earlier projection and would exceed 5 percent in the medium term.

Figure 4:
Figure 4:

Contributions to Potential GDP Growth, 1996-2016

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Source: Staff calculations.

11. The structure of Moldova’s economy shapes the contribution of the production factors to the potential growth. Total factor productivity brings the largest input into the potential GDP growth. The second-largest contribution comes from the investment activity increasing the capital stock, which is rebounding after the crisis. Unfortunately, the steadily declining labor force continues to subtract from the economy’s potential.

12. Structural reforms and investments are the key to further increasing the growth potential of the economy. Accelerating the productivity-enhancing reforms can speed up the factor productivity convergence towards the level of more advanced neighboring countries. Improving business climate would support foreign and domestic investment. Finally, sustainable improvement in local business conditions should lead to new employment opportunities and real salary increases, which would stem outward labor migration.

D. FDI Inflows: Drivers and Hurdles

13. Foreign investments in Moldova are comparable to those in other countries in emerging Europe. FDI inflows to Moldova were on the rise for several years, reaching 11–12 percent of GDP in 2007 and 2008. Even after the setback caused by the crisis, the stock of accumulated FDI in the Moldovan economy totaled around 50 percent of GDP at end-2011. Both in terms of inflows and accumulated stock of FDI, Moldova has outperformed many countries in the region, including more advanced economies with much higher GDP per capita that are in a better position to attract FDI.

Figure 5.
Figure 5.

FDI Inflows to Selected Countries, 2001-11

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: IMF; BOPS/IIP.
Figure 6.
Figure 6.

FDI to GDP Ratio and GDP per Capita in Selected Countries, 2010

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: IMF; IFS.
Figure 7.
Figure 7.

FDI Performance and Potential Indices for Selected Countries, 2008-10

(Lower number indicates higher potential or performance)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Source: UNCTAD, World Investment Report, 2011.

14. This picture is broadly consistent with UNCTAD rankings, where Moldova’s actual performance in attracting FDI is rated much better than its FDI potential. According to the United Nations Conference on Trade and Development (UNCTAD), in 2010 Moldova ranked 51st in the world in attracting FDI relative to GDP. At the same time, in 2009 it took 96th place in the FDI potential index, which ranked economies based on 12 variables reflecting their attractiveness to foreign investors (see the Appendix for the methodology).

15. These findings contradict a widespread view in Moldova that the country performs poorly in attracting foreign investors. Indeed, direct comparison of certain FDI indicators in Moldova, such as FDI per capita, with those of its more advanced neighbors can lead to such an impression. It also found support in early cross-country studies owing to Moldova’s slow transition to a market economy (e.g., Demekas et al., 2005). However, such comparisons can be considered valid only when adjusting for important determinants of FDI potential, such as already achieved level of income per capita or availability of natural resources. When these factors are properly taken into account, one can see that Moldova is doing better or at least on par with peer countries in attracting FDIs.

16. Both academic literature and Moldova investors’ surveys highlight access to the local and regional markets as the main reason for investing in Moldova. Enabled by large remittances and official assistance, total domestic demand accounts for about 140 percent of GDP in Moldova, much higher than in many comparable countries. In addition, Moldova’s location on the frontier of the EU and CIS gives local companies access to markets in the East and West. Even though this access was often hindered by various obstacles, it was considered by foreign investors as an important positive factor (Dabla-Norris et al., 2010; Kudina and Jakubiak, 2011).

17. The FDI distribution by sectors of economy confirms investor interest in accessing the local market. In 2011, the sectors producing non-tradable goods and services accounted for more than three-quarters of the accumulated direct investments in the equity capital of the companies (Table 4). Their share was on the rise up to 2010, but an important deviation from this rising trend occurred in 2011, when the share of FDI in the tradable sectors increased somewhat. At least in part, this can be attributed to increasing FDI inflows in the free economic zones and ports. The pattern of FDI allocation was broadly consistent with the structure of Moldova’s economy, where the share of key sectors producing tradables—agriculture and industry—declined to as low as 22 percent of GDP in 2009, but rebounded to 26 percent in 2011 (Figure 2).

Table 1.

Moldova: Position in International Rankings

article image

The survey updates methodology each year and recalculates the previous year ranking. The table shows new/old ranking.

Moldova was excluded from ranking because of lack of data.

Table 2.

Moldova and Selected Countries: Positions in ”Doing Business” Survey, 2011

(For Moldova, ranks and positions of 2010 in brackets)

article image
Source: World Bank, ”Doing Business” Survey.

Rank among the 12 comparable countries with GNI per capita less than US$5,000 in 2009 (1-best, 12-worst).

Table 3.

GDP Growth and Contributions, 2001-17

(Percent)

article image
Source: National Bureau of Statistics; and Staff calculations.
Table 4.

Accumulated FDI in Equity Capital of the Companies in Sectors Producing Tradables and Non-tradables

(Percent of total)

article image
Source: NBM, Balance of payments.
Figure 8.
Figure 8.

Moldova FDI Stock: Equity Capital by Main Source Countries, 2008 and 2011

(Millions of U.S. dollars)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Source: NBM, Balance of payments.

18. The source country distribution of the FDI to Moldova broadly follows the “gravitational” factors highlighted in the literature as the main drivers of FDI. The literature points to importance of such “gravitation” factors as GDP size, bilateral trade, and cultural links (Kinda, 2012). Not surprisingly, Romania takes the lead in bank capital investments. And Russia and Cyprus, which often serves as an off-shore platform for the companies of the CIS countries, lead in investments in the rest of the economy.

19. Foreign investors play particularly important role in certain sectors of the economy. Out of the 14 banks in Moldova, 6 are fully or majority foreign-owned. In 2011, foreign and joint companies accounted for more than half of the value added produced in the communications sector and more than a quarter in trade, hotel, and restaurant business. Overall, foreign and joint companies accounted for more than 20 percent of investment in 2011, though this number came down from more than a quarter in 2010 and nearly a third in 2008–09.

20. The inflow of FDI in Moldova declined in 2010–11, in line with the regional trends. The “push” factors in the FDI source countries may have largely explained the surge in FDI to Moldova and other countries in the region in 2006–08 (Atoyan et al., 2012), while the weakening of these “push” factors may have been the main culprit behind the FDI deceleration after the crisis (Arbatli, 2011).

21. The same literature and survey that highlight the attractiveness of Moldova for FDI shed light on the remaining obstacles. The most urgent perceived problems were the volatility of the political environment, the uncertainty of the economic situation, the ambiguity of the legal system, and the high level of corruption (Kudina and Jakubiak, 2011). It is interesting to note that high level of taxation was not mentioned among the major impediments. In the same vein, availability of cheap labor force and other local inputs was mentioned among the positive factors, but was not the main reason attracting FDI to Moldova.

22. The main factors hindering FDI are the same as the main impediments to doing business in Moldova. Such obstacles as government instability and corruption feature prominently in both the responses of foreign investors and in broader business surveys conducted by WEF. This suggests the need for broad-based improvements in the business climate and competitiveness aimed at creating a level playing field with fair rules for both local and foreign-owned businesses. At the same time, these findings caution against providing special treatment and favorable conditions to certain investors and sectors, which can create fertile ground for rent-seeking, selective law application and enforcement, and outright corruption.

23. With the policies focused on improving the business climate, Moldova can aim to repeat the success of the regional leaders in attracting FDI, such as Georgia. This country implemented radical reforms aimed in improving international competitiveness and eradicating corruption. As a result, it advanced from 112th position in 2004 to rank 37 in 2006, and to 16th place in the 2011/12 “Doing Business” ranking (Box 1). Investors rewarded this progress by allocating large FDI to the country. The example of Georgia underscores that bold and ambitious reforms can drastically increase the country’s attractiveness for foreign investors. The benefits of far-reaching reforms can outweigh the disadvantages of poor initial conditions and unfavorable geographic location.

24. Regional trade integration is another promising venue for attracting FDI. Access to the regional markets, particularly to the markets of the new EU member states and candidates, was an important factor cited by investors in Moldova. Widening the networks of trade agreements and speedy resolution of trade disputes with partner countries would help attract new investments in Moldova. One of the recent examples of success in this process was a decision of a foreign company to invest in the production of the automotive spare parts in Moldova for car assembly in the EU and possibly other countries. At the same time, the presence of trade preferences would not automatically trigger new investments. This was illustrated by the case of the EU meat and egg export quotas that remained unfilled for a number of years for the lack of supply meeting the EU standards.

25. Privatization of public property is yet another reliable way to attract FDI. In 2012, the central government’s privatization agency does not envisage privatization of large companies remaining in public ownership, such as national communications operator “Moldtelecom” (where a 92 percent stake belongs to the state), the large bank “Banca de Economii” (where the state has a 56 percent stake), and the national air carrier “Air Moldova” (fully owned by the state). Stakes in these and other large public companies can be attractive for foreign investors.

The Experience with Structural Reforms in Georgia

The Georgian experience suggests that ambitious and comprehensive reforms can greatly improve the business environment and attract large FDI within 2-3 years.

In 2005–07, Georgia implemented bold reforms that radically improved the business climate. Georgia introduced a new company law and customs code to improve transparency and efficiency. A new tax code reduced the number of taxes from 21 to 9, including a CIT with 20 percent rate, a PIT with flat 12 percent rate, and social security contributions with an average rate of 20 percent. A new property registry replaced a confusing system requiring duplicate approvals by multiple agencies. The economy’s first credit information bureau and large-scale judicial reforms aimed at eradication of corruption and arbitrary court decisions followed. As a result, Georgia leaped from 112th to 21st position in the “Doing Business” ranking within a few years.

A02ufg01

Ease of Doing Business and FDI Inflows, 2005-11

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

A02ufg02

How Georgia is Closing the Distance to the Frontier, 2005 and 2011

(Rankings in “Doing Business”)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Source: Doing Business database.

The Georgian government enacted drastic anti-corruption measures. To fight corruption in the road police, it dismissed about 15,000 police officers, including the entire management team and all the heads of local units. In 2005 alone, the judicial disciplinary council reviewed cases against 99 judges, about 40 percent of the total, and 12 judges were dismissed. At the same time, judges’ salaries were increased fourfold, to reduce the influence of bribes.

The reforms bore fruit. In 2008, Georgian firms recognized the low levels of bureaucracy and flexible business environment in enterprise surveys. Senior managers reported spending less than 2 percent of their time dealing with government regulations, down from about 10 percent in 2002 and the smallest share among economies in Eastern Europe and Central Asia. Only 4 percent of firms expect to make informal payments to public officials to get things done, compared with a regional average of 17 percent. Georgian firms participating in survey rounds in both 2005 and 2008 reported adding an average of 23 permanent workers (from 61 to 84) during that period. They also reported a big drop in contacts with tax officials, from an average of 8 in 2005 to only 0.4 in 2008.

Source: World Bank’s “Doing Business” reports, 2006–12.

E. External Price Competitiveness

26. Even after considerable increases in recent years, labor costs in Moldova remain below that of its more advanced neighbors. This helped attract FDI in Moldova, even though it was not the key factor supporting investments (as discussed above). Wage increases and currency appreciation eroded somewhat this wage advantage of Moldova in the years before the crisis of 2009. Actually, the steepest increases in the unit labor costs (ULC) occurred in 2007–08, the years when Moldova benefitted from the highest FDI inflows.2

Figure 9.
Figure 9.

Average Wage in Selected Countries, 2000-11

(Manufacturing, U.S. dollars per month)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: ILO; Moldovan authorities; and IMF staff estimates.

27. During and after the crisis of 2009, labor costs in Moldova experienced larger correction than in its trading partners. In the crisis, the ULC declined by as much as 20 percent amid their stability or smaller declines in the trade partner countries. The manufacturing wages expressed in U.S. dollar terms also declined in the crisis and increased significantly less thereafter than in other countries in the region (although perceived widespread underreporting of wages may overstate this effect). This helped restore Moldova price competitiveness and contributed to rebound in exports in 2010–11. That said, the distance to other CEE countries has declined considerably since 2000.

Figure 10.
Figure 10.

Unit Labor Costs

(y/y growth rate)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: Moldovan authorities; and IMF staff calculations.
Figure 11.
Figure 11.

Unit Labor Costs in Selected Countries

(Index, 2000=100)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: Moldovan authorities; and IMF staff calculations.

28. The crisis of 2009 caused an adjustment in the real exchange rate of Moldova’s leu, which was partly reversed in 2011. The CPI-deflated REER declined from its pre-crisis peak, helping to restore price competitiveness of Moldova’s exports. However, it appreciated considerably again in 2011 before stabilizing at the end-2011 level in 2012. This came in contrast with the developments in the key trading partners, thus creating risks for Moldova’s external competitiveness.

Figure 12.
Figure 12.

Real Effective Exchange Rates: Country Comparison

(2007=100)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: World Economic Outlook; and IMF staff calculations.

29. The ULC-deflated REER followed broadly the same pattern, but appreciated less in 2011. It appreciated considerably in the 2005–08 period, but underwent a larger correction during the crisis than the CPI-deflated REER. Importantly, the ULC-deflated REER appreciated only modestly in 2011, suggesting much less loss of competitiveness for sectors of the economy where labor is the key input into the production.

Figure 13.
Figure 13.

Real Effective Exchange Rates, 2005-12

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: Moldovan authorities; and IMF staff calculations.

F. CGER-type Exchange Rate Assessment

30. After its considerable appreciation in 2011, the CPI-based REER appears moderately overvalued. The external sustainability method estimates the current account deficit that would stabilize NFA at minus 55 percent of GDP at 5.1 percent of GDP compared with the projected deficit of 9.5 percent of GDP in 2017. 3 This translates into the leu overvaluation by 7.8-14.3 percent, depending on the elasticity used (Table 8). Based on the macro balance (MB) approach, the current account deficit norm is estimated at 6.7 percent of GDP compared to structurally-adjusted underlying deficit of -9.5 percent of GDP, suggesting leu overvaluation of 4.8 to 8.9 percent. The equilibrium exchange rate (ERER) method points at the leu overvaluation of 9.9 percent. The ERER estimate is based on the panel estimation along the lines in Vitek (2009); the main contributors to the estimated overvaluation are the initial NFA position and relative productivity.

Table 5.

Fixed Investments of Foreign and Joint Companies, 2001-11

(Percent of total)

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Source: NBS, Statistical Bulletin, January-December 2011.
Table 6.

Value Added Produced by Foreign and Joint Companies in Selected Industries, 2011

(Percent of total)

article image
Source: NBS, Structural Survey of Companies, 2011.
Table 7.

Estimates of Overvaluation of the lei

article image
Source: Staff estimates.
Table 8.

Estimation of the Trade Balance Elasticity for Moldova 1/

article image
Source: IMF staff estimates.

Export and import shares in GDP are set at 53 and 91 percent, respectively, as projected for 2017.

Moldova-specific estimates.

Figure 14.
Figure 14.

NFA-stabilizing Current Account Balance

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: Moldovan authorities; and IMF staff calculations.

31. All these methods suggest that a current account deficit of about 5-7 percent of GDP would be consistent with a safe external position in the long run. The external sector and macro balance approaches estimate the current account norm at about this level. Moreover, the available non-debt creating flows (FDI) in the medium term are projected at 6 percent of GDP. At a minimum, the debt sustainability (DSA) framework suggests that a non-interest current account deficit of 8 percent of GDP is necessary to stabilize the country’s external debt at its presently high level (64 percent of GDP).

32. Moldova’s negative Investment International Position (IIP) narrowed somewhat in 2011 to 75 percent of GDP. However, it stayed above the pre-crisis levels and levels in the comparator countries. The improvement came from a decrease in the international liabilities relative to GDP. The external debt stock in terms of GDP also declined from 67 percent in 2010 to 64 percent in 2011 (the stock of private and public debt increased by 17 percent and 11 percent year-on-year, respectively, while the GDP measured in US$ terms rose by 20 percent).

Figure 15.
Figure 15.

International Investment Position, 2003-11

(Percents of GDP)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: Moldovan authorities; and IMF staff calculations.
Figure 16.
Figure 16.

International Investment Position, 2002-11

(Percents of GDP)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A002

Sources: Moldovan authorities; and IMF staff calculations.

G. Conclusions and Policy Recommendations

33. Since 2009, Moldova’s authorities have implemented a number of ambitious structural reforms in the context of the IMF-supported program. The reforms of the tax system, education, pension and social assistance, the energy sector, external trade, and business regulation have increased Moldova international competitiveness and attractiveness to foreign investors. As a result, Moldova advanced by 18 positions to rank 81 in the 2011/12 WB “Doing Business” survey, claiming second place in the list of top reformers. The reforms also sustained strong GDP expansion of 6½–7 percent in 2010–11 and raised potential growth.

34. Contrary to popular belief, Moldova has built a good track record in attracting foreign investments. The accumulated stock of FDI reached about half of the country’s GDP in 2011, surpassing on this indicator many other economies in the region. Trade integration with EU and CIS countries, improvements in the business climate, privatization, and healthy growth prospects are the factors that would further improve Moldova’s potential for attracting FDI.

35. In the past, foreign investors coming to Moldova focused on accessing the domestic market, but this is already changing. More than three-quarters of the accumulated FDI stock comprise investments in sectors producing non-tradable goods and services. This is broadly in line with the structure of economy focused on serving the domestic demand rather than producing exports. An important shift in this pattern came in 2011, when the share of FDI inflows in the key sectors producing tradables—agriculture and industry—increased considerably.

36. After the significant appreciation in 2011, Moldova’s currency has become moderately overvalued. Both CPI-based and ULC-based measures of the REER went through considerable adjustment in 2009–10, but in 2011 the CPI-based REER appreciated by about 10 percent. According to all three estimation methods, the leu is slightly above its fundamental equilibrium value, with overvaluation generally in the 5–15 percent range. Various methods suggest that a current account deficit of about 5–7 percent of GDP leads to a sustainable external position over the long term. As the current account deficit in 2011 reached 12½ percent of GDP, this underscores the need to boost external competitiveness.

37. To gain an edge in external competitiveness and stimulate new investments, it is critically important to persevere with the structural reform agenda. The international competitiveness rankings and surveys highlighted the factors that investors see as impediments to business growth. According to the WEF GCI surveys, policy instability and governance issues have become the most important hurdles to the business activity. The World Bank’s “Doing Business” survey emphasized obstacles that the businesses face in dealing with construction permits, trading across borders, and protecting investments. These obstacles to investment and growth should be addressed as a matter of priority.

Appendix II.I. Methodology of Calculating FDI Performance and Potential Indices

The Inward FDI Performance Index

The Inward FDI Performance Index ranks countries by the FDI they receive relative to their economic size. It is the ratio of a country´s share in global FDI inflows to its share in global GDP.

A value greater than one indicates that the country receives more FDI than its relative economic size, a value below one that it receives less (a negative value means that foreign investors disinvest in that period).

The index thus captures the influence on FDI of factors other than market size, assuming that, other things being equal, size is the “baseline” for attracting investment. These other factors can be diverse, ranging from the business climate, economic and political stability, the presence of natural resources, infrastructure, skills and technologies, to opportunities for participating in privatization or the effectiveness of FDI promotion.

INDi=FDIi/FDIwGDPi/GDPw

Where,

INDi = The Inward FDI Performance Index of the ith country

FDIi = The FDI inflows in the ith country

FDIw = World FDI inflows

GDPi = GDP in the ith country

GDPw = World GDP

The Inward FDI Potential Index

The Inward FDI Potential Index captures several factors (apart from market size) expected to affect an economy´s attractiveness to foreign investors. It is an average of the values (normalized to yield a score between zero, for the lowest scoring country, to one, for the highest) of 12 variables (no weights are attached in the absence of a priori reasons to select particular weights):

  • GDP per capita, an indicator of the sophistication and breadth of local demand (and of several other factors), with the expectation that higher income economies attract relatively more FDI geared to innovative and differentiated products and services.

  • The rate of GDP growth over the previous 10 years, a proxy for expected economic growth.

  • The share of exports in GDP, to capture openness and competitiveness.

  • As an indicator of modern information and communication infrastructure, the average number of telephone lines per 1,000 inhabitants and mobile telephones per 1,000 inhabitants.

  • Commercial energy use per capita, for the availability of traditional infrastructure.

  • The share of R&D spending in GDP, to capture local technological capabilities.

  • The share of tertiary students in the population, indicating the availability of high-level skills.

  • Country risk, a composite indicator capturing macroeconomic and other factors that affect the risk perception of investors. The variable is measured in such a way that high values indicate less risk.

  • The market share in world exports of natural resources, to proxy for the availability of resources for extractive FDI.

  • The market share in world imports of parts and components for automobiles and electronic products, to capture participation in the leading TNC integrated production systems (WIR02).

  • The market share in world exports of services, to seize the importance of FDI in the services sector that accounts for some two thirds of world FDI.

  • The share of world inward FDI stock, a broad indicator of the attractiveness and absorptive capacity for FDI, and the investment climate.

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1

Prepared by Michael Gorbanyov and Svitlana Maslova.

2

The ULC data are from the Eurostat and local statistical bureaus. When unavailable, the ULC are calculated as a ratio of a product of seasonally-adjusted gross average wages and employment to GDP.

3

Minus 55 percent of GDP is the median of the NFA positions in a few CEE countries, which is considered a relevant long-term benchmark for Moldova. The current account deficit which would stabilize the NFA position at its end-2011 level (-75 percent of GDP) is estimated at 7.0 percent of GDP. On the other hand, a current account deficit of only 3.3 percent will be necessary to stabilize the NFA position at -35 percent of GDP, the European Commission’s benchmark used in their assessment of macroeconomic imbalances.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Republic of Moldova: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2012: Issue 289
Publisher:
International Monetary Fund
ISBN:
9781475527292
ISSN:
1934-7685
Pages:
60
DOI:
https://doi.org/10.5089/9781475527292.002
  • View in gallery

    Moldova: Economic Developments, 1995-2011

  • View in gallery

    Moldova: GDP Composition and Investments, 1995-2011

  • View in gallery

    Global Competitiveness Index: The Most Problematic Factors for Doing Business in Moldova

  • View in gallery

    Contributions to Potential GDP Growth, 1996-2016

  • View in gallery

    FDI Inflows to Selected Countries, 2001-11

    (Percent of GDP)

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    FDI to GDP Ratio and GDP per Capita in Selected Countries, 2010

  • View in gallery

    FDI Performance and Potential Indices for Selected Countries, 2008-10

    (Lower number indicates higher potential or performance)

  • View in gallery

    Moldova FDI Stock: Equity Capital by Main Source Countries, 2008 and 2011

    (Millions of U.S. dollars)

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    Ease of Doing Business and FDI Inflows, 2005-11

  • View in gallery

    How Georgia is Closing the Distance to the Frontier, 2005 and 2011

    (Rankings in “Doing Business”)

  • View in gallery

    Average Wage in Selected Countries, 2000-11

    (Manufacturing, U.S. dollars per month)

  • View in gallery

    Unit Labor Costs

    (y/y growth rate)

  • View in gallery

    Unit Labor Costs in Selected Countries

    (Index, 2000=100)

  • View in gallery

    Real Effective Exchange Rates: Country Comparison

    (2007=100)

  • View in gallery

    Real Effective Exchange Rates, 2005-12

  • View in gallery

    NFA-stabilizing Current Account Balance

  • View in gallery

    International Investment Position, 2003-11

    (Percents of GDP)

  • View in gallery

    International Investment Position, 2002-11

    (Percents of GDP)

Moldova: Economic Developments, 1995-2011

Moldova: GDP Composition and Investments, 1995-2011

Global Competitiveness Index: The Most Problematic Factors for Doing Business in Moldova

Contributions to Potential GDP Growth, 1996-2016

FDI Inflows to Selected Countries, 2001-11

(Percent of GDP)

FDI to GDP Ratio and GDP per Capita in Selected Countries, 2010

FDI Performance and Potential Indices for Selected Countries, 2008-10

(Lower number indicates higher potential or performance)

Moldova FDI Stock: Equity Capital by Main Source Countries, 2008 and 2011

(Millions of U.S. dollars)

Ease of Doing Business and FDI Inflows, 2005-11

How Georgia is Closing the Distance to the Frontier, 2005 and 2011

(Rankings in “Doing Business”)

Average Wage in Selected Countries, 2000-11

(Manufacturing, U.S. dollars per month)

Unit Labor Costs

(y/y growth rate)

Unit Labor Costs in Selected Countries

(Index, 2000=100)

Real Effective Exchange Rates: Country Comparison

(2007=100)

Real Effective Exchange Rates, 2005-12

NFA-stabilizing Current Account Balance

International Investment Position, 2003-11

(Percents of GDP)

International Investment Position, 2002-11

(Percents of GDP)