Moldova Commercial New Digest

Moldova Commercial New Digest

March, 2007

Author: Iulian Bogasieru, BISNIS Representative, U.S. Embassy Chisinau, Moldova

This report summarizes press reporting on business developments in the Republic of Moldova for the month of March 2007.

BUSINESS CLIMATE AND ECONOMIC TRENDS

1. Industrial output was down 13.9% in the first two months of 2007 as compared with the similar period in 2006, totaling MDL 3,325.1 million (USD 257.5 million), according to the National Statistics Bureau. The industry continued the 2006 downward trend as a result of an unprecedented recession in the country’s wine industry after Russia slapped a ban on Moldovan wines on March 27, 2006. In January-February 2007, the wine output represented a fifth of the similar 2006 level, while distilled alcoholic beverages were just a fourth of the output a year earlier. Other declining sectors were tobacco items, -36%, paper and cardboard, -11%, production and distribution of electricity and heating, -8%, and shoe-making, -3%. Food and beverage industry dropped 37% overall in January-February, 2007. Positive trends in other industries were not sufficient to compensate for the decline. Among the growing sectors were stone cutting and finishing, +380%, cement and gypsum, +250%, mining industry, +200%, paints and varnishes, + 57%, and pharmaceuticals, +47%.

2. In January, Moldova's exports rose 10.5% year on year to USD 73.7 million after a 3.6% decline in all of 2006, according to the National Statistics Bureau. Imports were up 40.6% at USD 124 million, widening the trade gap to USD 124 million from USD 74 million a year earlier. January exports were driven by vegetal products, textiles and clothing which accounted for almost 47%, while food products, wine and tobacco dropped to 12.9% from 33.5% in 2006. Import growth was driven by energy resources, machinery, textiles, chemicals, transport equipment and metals. Exports to EU were up 38.3% year on year; exports to CIS, on the other hand, dropped 31.2%. The leading export destinations were Romania with USD 12.3 million, Italy with USD 10.1 million and Russia with USD 9.3 million. Moldova projects a USD 1.94 billion trade deficit for 2007. The country's trade gap widened significantly to USD 1.642 billion in 2006 mostly due to a ban on imports of Moldovan wines imposed by Russia. Around 80% of Moldova's wine exports used to go to Russia before the ban.

3. Moldova’s inflation continued to slow down in February by dropping 0.2 percentage points to 0.7% from January’s 0.9%, according to the National Statistics Bureau. Cumulative inflation for the first two months was 1.6% in contrast to 3.3% in 2006. Prices for food products grew 0.4%, non-food items 0.6% and services 1.3%. Both IMF and the Moldovan Government have projected 10% inflation for 2007.

4. Foreign direct investments (FDI) in Moldova totaled USD 358.75 million in 2006, up from USD 266.52 million in 2005, representing a record figure in the four-million nation’s recent history, according to preliminary data from the central bank, the National Bank of Moldova. Investments in companies charter capital represented USD 126.29 million, reinvested revenues USD 43.27 million and loans from non-resident parent companies USD 189.19 million. The total stock of FDI in Moldovan economy grew to USD 1,284.27 million, so that FDI per capita represented USD 359 million.

5. Remittances sent by Moldovan workers abroad through bank transfer systems continued to grow in 2006, representing USD 854.57 million at the year end, up 25.1% from 2005, according to the National Bank of Moldova. The increased transfers of foreign currency helped compensate for the country’s gaping trade deficit, highlighting Moldova’s growing reliance on remittances.

6. Moldovan Ministry of Economy and Trade expects the country's economic growth to accelerate to 5% in 2010 from 4.0% projected for 2007 and consumer price inflation to ease to 5.5% from 10% forecast for end-2007, according to SeeNews. The Ministry said the country would target to raise the share of industry and services in GDP and to increase its exports-to-imports ratio. The country's inflation would stand at 8.7%, 6.9% and 5.5% in 2008-2010, respectively. Moldova ended 2006 with a 14.1% inflation. Fixed assets investments are seen up by an average 10% annually by 2010. The rise is expected to lead to creation of new jobs, better competitiveness of products abroad and to widening of the production base. Moldova's economy, one of the poorest in Europe, was hit in 2006 by two external shocks. A doubling of the price of Russian natural gas and a lingering wine imports ban imposed by Russia shook the Moldovan economy, fueling inflation and disrupting the country's trade balance.

INTERNATIONAL ASSISTANCE AND PROJECTS

7. In March, Japan granted USD 2.52 million to support the development of small businesses in Moldova, according to SeeNews. This grant will be the third under Japanese non-project aid to Moldova aimed to help small businesses in Moldova buy equipment. Equipment purchased under this program is offered to Moldovan companies on lease. Japan has so far granted Moldova USD 5.88 million under the program launched in 2005. Forty-three companies have already purchased equipment worth USD 4.5 million under the program. The equipment is purchased from China, Poland, Ukraine, Bulgaria, Netherlands and Russia.

8. In March, the government of Sweden approved a new strategy for development and cooperation with Moldova for 2007-2010, envisioning annual assistance of 11 million euros, according to Infotag. The aim is to help Moldova with its reforms and European integration. Aid will be given primarily to improve national management, make the local countryside more competitive and lessen the vulnerability of the power sector.

BANKING, FINANCE AND INSURANCE

9. Moldovan commercial banks' loan portfolio totaled MDL 14.1 billion (USD 1.12 billion) at the end of February, up 38% from 2006, according to Moldova’s National Bank. At the same time, the commercial bank’s deposit portfolio grew 31.5% to MDL 14.9 billion (USD 1.18 billion). The average interest rate was 11.02% on loans denominated in foreign currency and 18.32% on loans in Moldovan lei.

10. On March 16, 2007, finance company ProCredit Moldova, part of international ProCredit group, announced intentions to be transformed into a bank, according to SeeNews. An application for a bank license was submitted to the Moldovan central bank. Procredit Moldova is part of a network set up in 2001 by international financial institutions to support the growth of small and medium-sized private enterprises in developing countries. Procredit Moldova, established in 2004, was operating as a financial company due to high risk profile of the country. ProCredit Moldova has 19 offices across the country and employs 265 people. Moldova currently has 15 commercial banks, of which three are owned by foreign investors, including Italy’s Gruppo Veneto Banca, France’s Societe Generale Group and Austria’s Erste Bank. Another Austrian bank, Raiffeisen Bank, which opened a representative office in 2006, is also expected to start operations in Moldova.

11. On March 19, 2007, the European Bank for Reconstruction and Development (EBRD) lent USD 1.0 million to Moldovan microfinance institution Microinvest for on-lending to small- and medium-sized enterprises, according to an EBRD press release. The funding will support Microinvest’s aim to further extend the scope of its operations and to diversify its portfolio. This is the first loan to Microinvest and it will support the company’s expansion and diversification. The finance will be accompanied by technical cooperation funding of up to $100,000 which will be mainly used to strengthen management capacity, train lending officers and improve IT systems. Microinvest was set up in 2003 to provide loans directly to micro-entrepreneurs with a focus on rural areas. EBRD’s loan to Micrionvest comes under the Non-bank Microfinance Institutions Framework for Early Transition Countries (ETC), which aims to strengthen microfinance institutions in Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Mongolia, Tajikistan and Uzbekistan. For the full text of the press release, please see www.ebrd.org/new/pressrel/2007/070319.htm.

12. Moldovan insurance companies reported revenues of MDL 559.6 million (USD 44.7 million) from insurance premiums in 2006, up 35% from 2005, according to BASA. Companies paid MDL 191.3 million (USD 15.2 million) in indemnities in 2006. Non-life insurance dominates in total value of policies, with life insurance accounting for some 12%. Moldova has a total of 33 insurance companies, of which Moldasig and Australia-owned QBE ASITO are the largest.

ENERGY

13. Spain’s Union Fenosa, owner of three Moldovan electricity distribution companies, reported USD 8 million in net profit for 2006, its first profit since the group privatized the companies in 2000, according to SeeNews. The company expects 2007 revenues to go up to USD 157.1 million, which should keep the company profitable. It plans to invest MDL 260 million in its power transmission lines in 2006, up 35% from investments made in 2006. Union Fenosa plans to ask the National Energy Regulator ANRE to raise electricity prices for final consumers by 20%. In February, Moldova doubled the price at which Moldova's power distribution companies buy electricity from local power plants to match the increased prices for Russian gas, the primary fuel of Moldovan power plants. Russian gas giant Gazprom raised the price for 2007 to USD 170 per 1,000 cubic meters from the USD 160 which Moldova paid in 2006. Union Fenosa plans to merge its three distribution companies by the end of 2007.

IT/TELECOMMUNICATIONS

14. Moldova’s government-run fixed line telecom operator Moldetelecom announced March 1, 2007 the commercial launch of its CDMA2000 3G mobile subsidiary Unité, according to Prime Tass. Moldtelecom invested around USD 31 million in rolling out the mobile network using equipment from China's Huawei. Moldtelecom started operating the CDMA2000 network in 2005, but provided only wire line services using this technology. In June 2006, the operator received a license allowing it to start offering CDMA2000 mobile services. Unité plans to sign up 40,000 users to its mobile network by the end of 2006. Moldtelecom controls 99.5% of Moldova's fixed-line market. At the moment, two GSM operators, Voxtel and Moldcell, provide mobile services in Moldova. Cypriot-Moldovan company Eventis Mobile recently obtained a GSM license and is expected to start operations by the end of the year. Interdnestrcom, a CDMA operator, operates in Moldova's breakaway region of Transnistria, without a license from the country’s telecom regulator.

15. In 2006, the number of Internet connections more than doubled to 459,900, pushing up the Internet penetration rate to 13.55% from 6.59% in 2005, according to Moldova’s National Agency for Telecommunications and Informatics (ANRTI). Sales in the sector jumped 50.3% to MDL 196.2 million (USD 15.3 million), while investments in new equipment grew 16.8% to MDL 80.5 million (USD 6.3 million). Internet connections via mobile networks totaled 366,300, up 126% from 2005, ADSL connections numbered 16,600, up 165% and dialup 71,900, up 41.8%.

16. In 2006, mobile phone subscribers numbered 1.358 million, up almost a quarter from 2005, according to ANRTI. The mobile telephony penetration rate rose to 39.6% at the end of 2006 from 32.2% a year earlier. The combined revenue of the two active GSM mobile operators, Voxtel and Moldcell, went up 38% to MDL 1.89 billion (USD 147.4 million). Voxtel, the country's first mobile operator, accounted for 70% of the total. ANRTI expects investments in the sector would double in 2007 to around MDL 800 million (USD 62.4 million) from MDL 439.4 million (USD 34.3 million) in 2006.

17. The number of fixed line phone subscribers grew almost 10% in 2006 to 1.181 million from 929,400 in 2005, according to ANRTI. Fixed telephony penetration rose to 29.7% in 2006. According to Moldova’s national IT strategy, by 2001 the country is set to reach the European rates of fixed telephony penetration of 35% and mobile telephony penetration of 45%. ANRTI projects a decrease in the pace of growth of fixed telephony due to a vibrantly developing mobile sector and increased access to Internet. The agency’s experts believe that the market saturation level will be reached once fixed line subscribers number 1.3-1.4 million. In 2006, Moldova had 42 fixed line licensees, of which only 16 were operational. Moldtelecom remained a de facto monopoly with a 98.64% share of the market, the balance being split among Moldovan Railways, a state-owned company, and a host of private operators, including RISCOM, ARAX-IMPEX, SICRES, Telcom Tehnologies, STARNET and Telemedia Group.

TRANSPORTATION

18. Freight traffic by Moldovan railway, road and air carriers was up 7.9% year-on-year at 2.1 million tons in January-February 2007, according to the National Statistics Bureau. The railway accounted for 80.5% of all freight traffic operated by carrier companies. Carriers transported primarily ferrous metals (31.6%), construction materials and cement (21.9%), and grains (16.5%).

19. Moldova's flag air carrier Air Moldova launched scheduled direct flights from the country's capital Chisinau to London on March 27, according to SeeNews. Air Moldova will fly the route twice a week, on Tuesdays and Fridays, using an Airbus A320 aircraft. The flight offers the possibility to travel faster, cheaper and more comfortably. Passengers will no longer need to go through formalities in transit airports and get transit visas. Air Moldova, the biggest carrier in the country, handles almost half of the air passenger traffic in the country of four million people. It flew 23,086 passengers in January, up by 19.8% on the year. The company operates flights to 10 destinations, of which the most popular are Istanbul and Moscow.

COMPANY FOCUS, PROJECTS AND TENDERS

20. Moldova has published the 2006 list of top 50 exporters drawn on customs declarations, according to Infotag. The list has changed dramatically as a result of the Russian ban on Moldovan wine imports and the new customs rules requiring Transnistrian companies to get clearance from Moldovan customs and register with the Moldovan central authorities. In 2005, a quarter of the listed exporters were wineries; in 2006, their number shrank to 9. Topping the 2006 list is Rybnitsa-based steel producer MMZ accompanied by other Transnistrian companies –Tirotex, Electromash, and Moldavkabel – jointly comprising a third of the country’s exports. Analysts believe 2007 should see the increased share of Transnistrian exporters. In stark contrast to the ailing wine sector, Moldova’s light industry is in its heyday, with as many as 19 exporters from the sector to make the top 50.

21. Alvim-Auto, official distributor of South Korean car maker KIA Motors in Moldova, will invest USD 6.7 million to expand its domestic distribution network, according to SeeNews. The timeframe for investments will depend on market developments. New car sales in Moldova rose 39% in 2006 to 5,478 vehicles, with the Romanian Dacia Logan topping the list.

22. The Austrian-German concern Strabag, one of the leading providers of construction services in Central and Eastern Europe, plans to build a road construction material plant in Moldova, according to Infotag. Strabag maintains representative offices in 30 countries of the world; its technologies allow building roads within a record short period of time at competitive prices with 5-year guarantee.

23. Czech Republic's Skoda, a subsidiary of Germany-based Volkswagen AG, has received a contract to provide the Moldovan capital Chisinau with trolleybuses, according to Infotag. The automaker is setting up a Moldovan assembly line using Czech parts in Chisinau. It will initially assemble 50 vehicles with a total value in the range of USD 8 million to USD 12 million. Serial production is scheduled to commence during June 2007.

24. Moldova's BitSoft Grup became official distributor of Kerio Technologies, U.S. producer and supplier of Internet security software, on the territory of Moldova, according to Infotag. Kerio Technologies targets medium-size corporate networks and has WinRoute family product as its most popular software firewall solutions. BitSoft also represents in Moldova the products of NERO and WinRar.

REGIONAL CORNER: TRANSNISTRIA

25. Inflation in Moldova's breakaway region of Transnistria quickened to 2.8% in February from 2.65% in January, according to SeeNews. This brought cumulative inflation for the first two months in the region to 5.52%. Food prices went up 1.5%, non-food prices 0.9%. Public services appreciated by 9.75%. Transnistria, a sliver of land on the left bank of the river Dniestr in Eastern Moldova, has been seeking independence since the breakup of the Soviet Union.

26. Transnistria’s industrial output went up 27.2% in the first two months of 2007, totaling USD 121.7 million, according to SeeNews. The output of the power generating sector through February doubled from a year earlier. The output of the main industrial sector of the region, the ferrous metallurgy, rose by 6.3% on the year.

27. Moldovan Metallurgical Plant (MMZ) in the Transnistrian city of Rybnitsa plans to produce 950,000 tons of steel and 836,600 tons of rolled stock in 2007, according to www.metalloprokat.ru. In 2006, the plant manufactured 675,500 tons of steel and 639,000 tons of rolled stock, compared with 1.05 million tons of steel and 890,000 tons of rolled stock in 2005. The enterprise has an average annual processing capacity of 1.3 million tons of scrap metal. The production decrease in 2006 was the result of a temporary suspension of the plant's operation. The plant claimed it incurred losses of over USD 15 million due to the Moldovan-Ukrainian agreement that came into force in March 2006 that all Transnistrian exports and imports must receive customs clearance in Moldova. In spite of this MMZ posted a profit of USD 1.15 million for 2006. MMZ was by far Moldova's largest exporter in 2006, according to a list made public by Moldovan authorities recently.

28. Transnistrian authorities sold a local steel structures manufacturing company, the Mechanical Engineering Plant, for USD 125,800 to local trading firm Dnestrmetalsoyuz, according to SeeNews. The buyer pledged to invest USD 140,000 in the plant based in the town of Dubasari by 2010 and to repay its debt of USD 16,740. Transnistria plans to get USD 13.5 million from the sale of state-owned assets in 80 companies in 2007, down from the privatization revenue of USD 38 million it received in 2006. Moldovan officials have issued warnings earlier that privatizations in Transnistria are illegal without Chisinau’s formal approval.

The U.S. Embassy appreciates feedback on this report. Please share comments and suggestions with:

BUSINESS INFORMATION SERVICE FOR THE NEWLY INDEPENDENT STATES (BISNIS)

U.S. Embassy Chisinau

str. Mateevici 103

Chisinau MD 2009, Moldova

Tel. +373 22/40-89-05

Fax/voice mail + 373 22/40-89-62

Email: Iulian.Bogasieru@mail.doc.gov

cc: Irina_Mitchell@ita.doc.gov

For more information on Moldova, visit BISNIS online at http://www.bisnis.doc.gov/bisnis/country/moldova.cfm

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