„The experience of the states in the region suggests that the Chisinau authorities should focus on 2 objectives: providing liquidity and flexibility to fiscal obligations. Regarding liquidity, the government could offer a short-term credit line with 0% interest rate for the companies that find themeselves in difficulty. As to the fiscal obligations, a flexibility mechanism would be necessary so that the companies in difficulty could have the possibility to stagger and defer the majority of fiscal obligations throughout the first two quarters, in case an economic indicator, such as sales, decreases by more than a certain percentage…”
The global situation
"We are at war", said French President Emmanuel Macron on March 17. Indeed, most countries have announced the state of emergency and governments are mobilized as in a wartime in order to fight the spread of COVID-19. Although the humanitarian aspects of the problem are intensely publicized at the present time, we must also pay greater attention to the economic consequences that result or will result from the prolongation of the current crisis.
Financial markets usually try to anticipate global developments and usually lead economic indicators. The first signs of nervousness in financial markets came through January, with fears that China's epidemiological virus could have global effects by triggering a financial crisis. Two weeks ago, the financial markets have started collapsing because of the fear that a global recession is coming. Lately, we received confirmation that we will have a recession in the European Union, and the global economy will grow around 1.5% or less. Since 1980, the global economy has had only two years of economic growth below 1.5%: in 1982 and 2008.
Although global monetary policies have been greatly relaxed, investors’ sentiment has not improved. The reason is that providing liquidity remains crucial for the operational activity of businesses and banks, but it is not the solution to the crisis, because the financial system is much more solid than it was during the crisis of 2008. The current crisis requires other operating tools. Even after the launch of the enormous fiscal and quasi-fiscal incentives of 5-15% of the GDP of some countries, it was not possible to trigger investors’ optimism for the next quarters. Although economies need these monetary and fiscal incentives, there is the impression that only one thing can encourage economic actors – and it is the decrease in the number of newly confirmed cases.
The proposed economic measures differ from one state to another. As the 2008-2009 crisis has shown how difficult the economic recovery is, the developed countries are pursuing the strategy of compensating at least 2/3 or more of the losses encountered by enterprises and households. For this reason, the United States, the United Kingdom, Germany, France, Denmark and other countries offer state guaranteed loans with 0% interest rate in the amount of 10-15% of GDP, defer fiscal obligations for at least 2 quarters, offer thousands of dollars/euros directly to households, pay the wages of those in technical unemployment, etc. Of course, these countries can afford such measures because the central banks can offer unlimited liquidity and governments can borrow either directly from the financial markets or indirectly through the central bank, which purchases large amounts of government bonds on the secondary market.
Economic impact on the Republic of Moldova
The coronavirus has no borders and Moldova was not bypassed by this pandemic. Figure 1 compares the cumulatively confirmed cases from the date of the first case detection on a logarithmic scale. Although at first glance the growth rate of cases in Moldova is more alarming than in countries such as Romania, Ukraine and other Western European states, it seems to be slightly more moderate than the number of global cases, except for China. Several states have implemented different forms of restricting the spread of the virus. China has shown that the combination of social distancing and isolation seems to be the only and most viable solution. However, several states implement different strategies. Singapore uses surveillance cameras to identify suspects, South Korea tests people massively and proactively, the UK chooses the time when to impose drastic measures, Italy imposes strict self-isolation rules. In general, the governments of Europe are following the same set of measures, but some states have the luxury of delaying the imposition of draconian measures trying to strike a balance between the health system's ability to cope with the pandemic, the degree of risk for the spread of the virus and the economic cost of the virus quarantine. Unfortunately, the Republic of Moldova, in tandem with other less developed states in the region, does not have the flexibility not to go into national quarantine because the cost of infecting the relatively elderly resident population, under the conditions of a fragile health system, is higher than the economic cost of quarantine.
Figure 1. Number of persons infected with COVID-19. Source: World Health Organization.The economic impact of coronavirus on the Moldovan economy will be quite significant. Considering that the forecasts of economic growth of the countries of the region were revised by 2-3 percentage points, it would not be a surprise if the real GDP of Moldova would only increase by 2% or less in 2020. The Moldovan Leu depreciated around 2.2% against the US dollar between January 17 and March 19, which represents only 22% of the total depreciation between August 2008 and March 2009. Relatively sufficient foreign reserves, just over US $ 3 billion or over 170% of adequate reserves as defined by the IMF, play a vital role. However, an economic downturn in the European Union will reduce both exports and remittances, putting more pressure on the national currency. Analyzing currency developments in other emerging countries in Figure 2, the leu may depreciate by another 2-3% against the dollar.
Figure 2. Currency depreciation on January 17, 2020 as a proportion of the depreciation between August 2008 and March 2019. Source: Central banks.
Recommendations for the government
The experience of the states in the region suggests that the Chisinau authorities should focus on two objectives: providing liquidity and flexibility to fiscal obligations. Regarding liquidity, the Government has already announced several measures, including providing commercial banks with the possibility to reschedule mortgage loans for individuals and incentives for commercial banks to provide more advantageous loans, including by a potential reduction in the main policy rate. In addition, the government could also provide a short-term credit line with 0% interest rate for businesses in difficulty. This facility could be financed by domestic borrowings in case the central bank reduces the rate of minimum required reserves and purchases governemnt bills/bonds from commercial banks. In addition, this could be accompanied by the deferral of payments of all interest during the state of emergency for both depositors and debtors of commercial banks.
The government also announced some fiscal relaxation measures such as postponing until April 25, 2020 the declaration and payment of income tax for 2019 by farmers and SMEs, reducing the VAT rate from 20% to 15% for HORECA starting from May 1, 2020, etc. These measures should also be accompanied by a flexibility mechanism whereby companies in difficulty have the opportunity to stagger and defer the majority of fiscal obligations throughout the first two quarters, in case an economic indicator, such as sales, decreases by more than a certain percentage. This flexibility can be financed from the account of other budget lines or in the worst case from the account of investments. The latter could be offset by external loans from the IFI, IMF, other governments or even the issuance of a eurobond. Because the economic effects will be felt for a long time, it is imperative for the government to focus on launching infrastructure projects in order to relaunch the economy when there are signs that the number of confirmed global cases iscollaping.
Dumitru Vicol, Mihai Mogildea
- Dumitru Vicol is an emerging markets strategist at an American bank in London. He was involved in advocacy and development projects of financial instruments in Moldova. He is a graduate of the London School of Economics (UK).
-Mihai Mogildea works as a Team Leader of the Europeanisation program, within the Institute for European Policies and Reforms (IPRE). He is a graduate of the master's program in European Political and Administrative Studies at the College of Europe (Bruges).
This op-ed was published in the framework of the project ”We and Europe: Assessing EU – Moldova relations through innovative media and analytical products”, implemented by the Institute for European Policies and Reforms (IPRE), in cooperation with IPN and Radio Chisinau and with the support of Konrad Adenauer Foundation. Views expressed in this op-ed do not necessarily correspond with the position of the donor.