Moldova’s trade gap widens as currency keeps strengthening

Moldova’s trade gap widens as currency keeps strengthening
By bne IntelliNews July 9, 2018

Moldova’s trade deficit widened by 17% y/y in May, when it hit €238mn, a new record for the past decade except for the higher peak import figures reported seasonally in December. In the rolling 12 months, the gap widened by 15% y/y to €2.22bn (27.5% of the full year’s GDP projected at €8bn), according to bne IntelliNews calculations based on statistics office data.

Moldova’s exports of mainly agricultural products, helped by the free trade agreements with the European Union, cannot keep pace with the rising imports of consumer goods that the local economy cannot deliver. On the upside, the widening trade gap is partly balanced by autonomous (non debt-generating) inflows, and the rising local demand makes the country an attractive place for investments in the consumer goods industries.

A combination of more expensive energy, industrial development (by foreign manufacturers processing intermediate goods in the country) and the local currency’s strengthening contributed to the rampant trade gap amid a robust increase in foreign trade.

The trade gap is thus widening despite the robust increase of exports facilitated by the free trade agreement with the European Union: in May, the country's exports increased by 19% y/y (and by 26% y/y to EU countries) while in the rolling 12 months the exports advanced by 13% y/y (+17% for the exports to the EU) to €2.24bn.

The local currency’s strengthening over the past two years contributed to the sharp rise of the imports and net imports of goods: 17% y/y in May and 14% y/y in the rolling 12 months. The Moldovan leu traded some 20 versus the euro in May this year (to further strengthen in June to 19.5 versus the European single currency) from some 22.5 in May 2016. The local currency thus strengthened by nearly 9% per year over the past two years. This resulted in double digit strengthening of the local currency in real terms, given the positive (and high, at times) inflation during the two-year period.

The double digit growth of imports was magnified by the high base: exports are roughly twice as large as imports: €427mn in May and €4.47bn in the rolling 12 months.

Looking at the structure of imports as reported by the statistics office (January-May, expressed in US dollars), the 27% y/y expansion was supported by 30% more oil and gas imports (4.5pp contribution to the overall 27% y/y expansion), 50% more imports of electric and mechanical parts (3.1pp contribution) and 1.6 times more more imports of equipment for industry (2.0pp contribution). The imports of cars (+28% y/y) also contributed by 1.5pp.

The exports, reported on the same terms, were fueled by higher exports of grains (47.5% up y/y, 3.15pp contribution to the 28.5% overall increase of exports), fruits and vegetables (38% y/y, 3.7pp contribution) and vegetable oils (1.7 times up y/y, 1.9pp contribution). Re-exports of electric and mechanical parts also increased by 1.6 times and contributed 8.7pp to the overall rise of exports in the five-month period.

Data

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