Annual Report 2017

Annual Report

2017

National Bank of Moldova 1 Grigore Vieru Avenue

MD-2005, Chis, inau˘ Tel.: (373 22) 822 606 Fax: (373 22) 220 591 web: http://bnm.md

ISBN 978-9975-4353-2-1 ISBN 978-9975-3211-7-4

The report was compiled using the latest statistical data held by the National Bank of Moldova, the National Bureau of Statistics, the Ministry of Economy and the Ministry of Finance.

Also, were used data provided by international organizations and central banks of neighboring countries.

Computation of some statisitcal data was conducted by the National Bank of Moldova.

Foreword by the Governor of the National Bank of Moldova (NBM)8

1 External environment 12

1.1 Global economy, ﬁnancial and commodity markets...... 12

1.2 Evolution of important economies...... 14

1.3 Evolution of the neighbouring countries’ economies and the main trading partners.. 15

2 Economy of the Republic of Moldova 16

2.1 Real sector...... 16

2.2 Evolution of inﬂation...... 23

2.3 Public sector and tax policy...... 28

2.4 International accounts of the Republic of Moldova in 2017 (provisional data)...... 30

3 Monetary Policy of the National Bank of Moldova 38

3.1 Monetary policy objective...... 38

3.2 Monetary policy decisions...... 38

3.3 Monetary policy achievements during 2017...... 39

3.4 Monetary and foreign exchange conditions...... 42

3.5 Monetary market...... 47

3.6 Forex market...... 53

4 Banking supervision 62

4.1 Evolution of the banking sector...... 62

4.2 The NBM supervisory activity...... 70

4.3 Banking sector risks’ assessment...... 74

4.4 Fighting money laundering and terrorist ﬁnancing...... 75

4 5 Payment System 77

5.1 Payment systems regulation and supervision...... 77

5.2 Licensing, regulation and supervision of payment services providers and of electronic money issuers...... 77

5.3 Automated interbank payment system...... 78

5.4 State securities book-entry system...... 79

5.5 Cashless payment tools...... 79

6 Cash operations 83

6.1 Evolution of currency (banknotes and coins in circulation)...... 83

6.2 Cash issuing, withdrawal and processing...... 84

6.3 National currency counterfeiting...... 86

6.4 Issuance of jubilee and commemorative coins and banknotes...... 86

7 Activity related to modiﬁcation of the legal and regulatory framework 87

7.1 Prudential regulation, regulation of accounting evidence in banks...... 87

7.2 Foreign Exchange Operations Regulation...... 90

8 External activity of the NBM 92

8.1 International Collaboration of the Republic of Moldova...... 92

9 Internal activity of NBM 101

9.1 Corporate Governance of the National Bank...... 101

9.2 The strategic plan of the National Bank of Moldova...... 105

9.3 Management and organization...... 106

9.4 Internal audit...... 107

9.5 Information technology...... 107

9.6 Human resources management...... 108

10Analysis of the ﬁnancial situation for 2017 111

10.1General considerations...... 111

10.2Available proﬁt for distribution...... 111

10.3Capital and reserves...... 113

11External communication 115

A Statistical tables 124 List of abbreviations

AIPS Automated Interbank Payment System

ARSS Automated remote service systems

BAAM BIS Asset Management Asset Allocation Module

BES Book-Entry System of Securities

BIS Bank for International Settlements

BSCEE Group of Banking Supervisors from Central and Eastern Europe

BSTDB Black Sea Trade and Development Banlk

CBN Central Bank of Netherlands

CEFTA Central European Free Trade Agreement

CHC Construction of housing cooperatives

CIS Commonwealth of Independent States

CPI Consumer Prices Index

CSD Central Securities Depository

DNS Designated-Time Net Settlement System

DvP Delivery versus Payment

EBRD European Bank for Reconstruction and Development

ECF Extended Credit Facility

EFF Extended Fund Facility by IMF

EU European Union

EUR European Single Currency

FoP Free of Payment

FSVC Financial Sevices Volunteer Corps

GB Government bond

GDP Gross Domestic Product

HHI Herﬁndahl-Hirrschmann index

IAD Internal Audit Department

ICT Information and communication technology

IMF International Monetary Fund

IOSCO International Organization of Securities Commisions

IPPI Industrial production price index

LCR Liquidity Coverage Ratio

MDL Moldovan leu

NBC National Bank Certiﬁcates

6 NBM National Bank of Moldova

NBR National Bank of Romania

NBS National Bureau of Statistics of the Republic of Moldova

NSFR Net Stable Funding Ratio

OPEC Organization of the Petroleum Exporting Countries

OSCE Organization for Security and Co-operation in Europe

REER Real effective exchange rate of the national currency

RM Republic of Moldova

RTGS Real-Time Gross Settlement System

SAA Asset allocation approach

SDR Special Drawing Rights (XDR)

TRC Total Regulatory Capital

USA The United State of America

USAID United States Agency for International Development

USD U.S. dollar

7 Foreword by the Governor of the National Bank of Moldova (NBM)

The activities carried out by the NBM in 2017 were in line with the reforming

strategy embraced by the Bank in 2016, among the main goals of which can be listed the stabilisation of monetary conditions, the strengthening of the banking sector and the improvement of the national legislative and regulatory framework. These objectives aim at preventing the recurrence of law violations that resulted in a bank fraud during 2012 -2014 and triggered the ﬁnancial crisis that followed. A catalyst to the implementation of these reforms is the Agreement signed by the Republic of Moldova with the International Monetary Fund (IMF) on 7 November 2016.

In 2017, the NBM, in cooperation with the country’s authorities, successfully fulfilled its commitments made to the IMF, the latter having declared as successful the first and the second reviews of the progresses achieved in programme implementation, the fact that was confirmed in the IMF decisions of 1 May and 20 December 2017.

Developments that took place on the international market produced mixed effects on the Moldovan economy and, consequently, on the monetary policy of the NBM. On the one hand, a positive evolution of global economy (+3.7% in 2017) created favourable conditions for economic growth in the Republic of Moldova. In the European Union – the main trading partner of our country – the economic growth reached 2.5% and the historically high unemployment rate has decreased. In the East, after two consecutive years of recession, the economy of the Russian Federation grew by 1.5% in 2017. On the other hand, the increase in global demand was the main cause of the rise in international commodity prices, including food and energy. A faster rise in oil prices was partially driven by the cut in extraction quota approved under the agreement of the Organisation of Petroleum Exporting Countries (OPEC).

Against this background, the Republic of Moldova recorded a robust economic growth as well as a temporary increase in domestic consumer prices.

• Thus, in 2017, the gross domestic product (GDP) grew by 4.5%, being driven by the increase in domestic consumption and agricultural production output. The economic growth, recorded in the main countries of emigration of Moldovan citizens, increased the volume of remittances, which in turn contributed to the increase in the purchasing power of local consumers. In the second half of the year, a revival of industrial activity and a strong growth of exports were also recorded.

• In 2017, the average annual growth rate of consumer price index (CPI) recorded 6.6%, 0.2 p.p. higher than in the previous year. Annual inflation of consumer prices rose from 3% in January to 7.3% in December 2017, being driven by the rises in energy prices, food prices and tariffs for regulated services. However, annual core inflation continued to fluctuate within the inflation target range, recording an average level of 4.8%. At the time of drafting this report, the annual consumer price inflation fell to 3.7%, according to April 2018 statistics.

In 2017, as forecasts suggested a steady decline of the inflation rate, the NBM maintained its policy of lowering the base interest rate, yet at a slower pace than in 2016: from 9.0% in early 2017 to 6.5% at the end of the year. At the same time, in order to absorb the liquidity surplus and improve the transmission mechanism of monetary policy, the NBM increased the minimum level of required reserves held in Moldovan lei from 35% to 40%. The minimum level of required reserves held in freely convertible currencies (FCC) was maintained at the same level of 14%. The NBM’s monetary policy, the decline of inflation projections as well as the favourable conditions existing on the money market led to a significant improvement in the level of borrowing by the

8 Ministry of Finance on the domestic capital market. Thus, in 2017, the average interest rate on government securities (GS) recorded 6.7% compared to 15.8% in 2016.

The liquidity surplus, recorded in the system, was largely the result of the increased inﬂow of foreign currency remittances to Moldovan individuals, totalling 1.2 billion U.S. dollars, which represents a growth of 11.2%, compared to the previous year. As a result, during 2017, the Moldovan lei strengthened by 14.4% against the US dollar and by 2.3% against the euro. The appreciation of the Moldovan lei against the U.S. dollar was partially driven by the weakening of the U.S. currency against the euro, which fell from 1.0454 at the beginning of the year to 1.1935 against the euro in December 2017. Therefore, in order to prevent the excessive volatility and appreciation of the Moldovan lei, the NBM, throughout 2017, intervened on the forex market by purchasing the equivalent of 434 million U.S. dollars. As a result, the ofﬁcial foreign currency reserves reached a record level of approximately 2.8 billion U.S. dollars by the end of 2017, thus amply ensuring the equivalent of 5.5 months of imports of goods and services.

Along with the measures aiming to stabilise monetary conditions, the NBM has taken decisive actions for strengthening the banking sector. To this end, the NBM conducted targeted inspections to check the quality and transparency of the banks’ shareholders, veriﬁed related party transactions, as well as performed asset quality assessments. Full-scope on-site inspections have been conducted and completed at seven out of the eleven licensed banks. Those inspections uncovered and eliminated the main uncertainty sources affecting the banking sector, whereas the applied remedial measures, including those targeting capital retention, have signiﬁcantly increased the sector’s resilience. Thus, during the reporting period, capitalisation and liquidity of the banking sector reached 31% and 55%, respectively. The implementation of prudential supervision measures helped to restore the stability, transparency and credibility of the banking sector, both on the internal and the external market.

For the ﬁrst time in the last ten years, a reputable foreign investor entered the Moldovan banking market. In November 2016, Banca Transilvania (the second largest commercial bank by assets in Romania) together with the European Bank for Reconstruction and Development (EBRD) announced its intention to acquire 39.2% of shares in BC "VICTORIABANK" S.A. The deal was closed in January 2018, thus clearing the way for the NBM to end the intensive supervision of one of the three systemic banks, which operate under the special supervision regime since 2015. In cooperation with international experts, the NBM developed a strategy for the sale of the blocked shares of the other two banks, to ensure their stability and good governance. The Parliament of the Republic of Moldova backed the strategy of attracting foreign investors by amending the Law on the Administration and Privatisation of Public Property, the updated version of which entered into force on January 1, 2018. The legislative amendments provide the possibility of State interference, under prescribed conditions, in the purchase and sale of the shares issued by systemic banks to reputable investors. At the time of drafting this report, an international consortium ﬁled a formal request with the NBM to acquire a stake of 41.09% in BC "MOLDOVA - AGROINDBANK" S.A.

On January 1, 2018, a new Law on Banking Activity, which was adopted on October 6, 2017, was finally enacted. It has a major role for the Moldovan banking system as it aligns the national legislation with the EU Directives and introduces the best international practices (also known as "Basel III" standards) in the field of prudential supervision. The law has been drafted during 2015-2017 in cooperation with experts from the central banks of Romania and the Netherlands under the European Twinning programme. In order to allow licensed banks to adapt gradually to the new rules, the law provides for a 2-year transition period. During this time, the NBM will issue about 30 regulatory acts to align the local regulatory framework with the new banking law. The impact study, which was carried out by the NBM based on financial statements as of 30 June 2017, confirms that all banks comply with the new prudential requirements. In order to prevent a possible erosion of own funds before the implementation of the new rules, the NBM recommended to a number of banks to refrain from paying out profits for 2017.

In 2017, the aggregate proﬁt of the banking sector recorded approximately 1.5 billion Moldovan lei, having increased by 8.6%, compared to 2016. The balance of bank loans, expressed in MDL, continued to decrease, though at a slower rate, having dropped to 33.5 billion lei in December 2017, thus recording a decrease in value of 3.7%, year-on-year. This apparent decrease can be partly explained by the effect of the exchange rate difference, as approximately 40% of loans were extended in foreign currencies, which have depreciated against the Moldovan lei. At the

9 same time, the annual volume of the newly extended loans increased by 8.9%, compared to 2016, amounting to 24.5 billion lei. The annual growth rate of the new loans extended in domestic currency reached approximately 20%. The positive dynamics of lending was driven by lower average interest rates and increased demand from individuals. The evolution of the lending activity will continue to depend on the revival of demand generated by the corporate sector. The balance of non-performing loans recorded 18.4%. Based on the recommendation of the NBM, the licensed banks created additional reserves and ensured an 80% coverage rate of non-performing loans in December 2017. Banks continued to take deposits, the balance of which reached 59.9 billion lei at the end of 2017, thus having increased by 9%, year-on-year. Corporate deposits recorded the fastest growth rate, having increased by over 18% in one year. The deposit structure, analysed by currencies, denotes a steadily increasing conﬁdence placed by local population and economic agents in the domestic currency: as of December 2017, 57.2% of deposits were placed in MDL, compared to 53.5% as of December 2016 and 42.4% as of September 2015, in the midst of the ﬁnancial crisis.

The increased conﬁdence of the population in the Moldovan lei and the stability of the exchange rate allowed the NBM to launch, in June 2017, the project to introduce in circulation metal coins with denomination of 1 lei and 2 lei. After an in-depth analysis of cash circulation in the Republic of Moldova and of existing international practices, the project was extended to include coins with denomination of 5 lei and 10 lei. Under this project, the NBM organised public consultations with consumers, economic agents, local and central authorities. New metal coins were put into circulation on February 28, 2018. The introduction of metal coins will allow the NBM to generate savings in production costs, which are estimated at approximately 300 million lei in 20 years.

Without prejudice to its fundamental objective and its core competencies, the NBM pursues to optimise spending. The increase of the minimum level of required reserves held in Moldovan lei from 35% to 40% had as its corollary objective the reduction of the monetary policy expenditures. At the same time, a signiﬁcant increase in the volume of certiﬁcates issued by the NBM had a reverse effect. Revenues gained from foreign currency transactions recorded a decrease, being driven by the appreciation of the Moldovan lei. As a result, in 2017, the NBM recorded a loss of 95.31 million lei, which decreased by 64%, compared to 2016. At the end of 2017, the NBM’s statutory capital of 2.35 billion lei accounted for approximately 5.1% of total monetary bonds.

The year 2017 was the first fully operational year of the NBM’s Supervisory Board. It consists of seven members, of which four members are independent advisors who do not hold executive positions at the NBM. The Supervisory Board had an intensive year having held 10 meetings during the year. Three independent members of the Supervisory Board form the Audit Committee, which monitors the financial reporting process, the efficiency of the internal control system, the activity of the Internal Audit Department, as well as performs other duties that ensure the NBM’s effective supervision of the banks. During 2017, the Executive Board has held 77 meetings at which 369 decisions were examined and approved.

In 2017, in order to improve the decision-making process, to streamline business processes and to eliminate potential conﬂicts of interest, the NBM reorganised a number of departments according to the best international practices. Simultaneously, the NBM reduced the number of managerial positions by 4%, compared to 2016, and launched a strategy aiming at reducing the number of support positions as opposed to core activity functions. In cooperation with a foreign consultancy company, the industry leader on international market, the NBM has launched a reform of the human resources management system. The bank’s internal reform and reorganisation were meant to strengthen the institutional and human capacities of the NBM in order to provide a proactive and high-quality public service.

We are determined to continue strengthening the banking sector and promoting its increased transparency, as well as to implement reforms in other areas, such as monetary policy, ﬁnancial stability, payment systems, improving the quality of the domestic currency among others. These goals were included in the NBM’s Strategic Plan for 2018-2020. The new strategy aims at consolidating the achievements of 2017 and focusing efforts in areas that require further improvement. A key objective of the new strategy is to enhance external communication and ﬁnancial education of population through media, web page publications, and social networking.

10 Looking at the tasks ahead, there is still plenty to do. However, 2017 has certainly represented a year of signiﬁcant breakthrough in the consolidation of the banking sector, which today is increasingly regarded by population as more safe and reliable.

Sergiu Cioclea

11 Chapter 1

External environment

Chart 1.1 GDP comparative evolution in selected economies (%)

1.1 Global economy, 7 ﬁnancial and 6 commodity markets 5 4 3

Global economic activity continued to improve 2 in 2017. According to IMF estimates, global 1 economic activity accelerated by 3.7%, which 0 represented a 0.5 p.p. improvement compared -1 to 2016. Economic growth was broad-based, US JP GB EZ DE FR ES IT RO CN CIS RU UA with significant economic recovery registered 2016 2017 in Europe and Asia. Advanced economies grew by an average of 2.3%, compared to 1.7% Source: IMF, World Economic Outlook Update – January 2018, recorded in 2016. The acceleration of Bureau of statistics of the concerned countries economic growth in developed economies has been fuelled by stimulative measures, such as Overall, in 2017, the U.S. dollar depreciated "quantitative easing policies" promoted in against other international currencies. In recent years by many countries. Among December 2017, the U.S. dollar index (USDX)1 advanced economies, the highest growth rate fell to its three-year low of 91.8%. The impact was recorded in the euro area, 2.5%. Growth in of the presidential election in November 2016 the euro area was fuelled by higher internal was followed by the difficulties encountered consumption and increased confidence among with the U.S. Congress’s adoption of the tax consumers, producers and investors in the reform and the protectionist position of the ability of the European community to President Donald Trump. Only in October 2017, overcome challenges and carry out structural after a consensus was reached to adopt tax reforms. Within the euro area, economy has reforms, the U.S. dollar appreciated gradually grown by 2.2% in Germany, by 1.8% in France, against other international currencies. by 3.1% in Spain and by 1.5% in Italy. The U.S. economy has grown by 2.3%, compared to The Federal Reserve System (the Fed) 1.5% in 2016. A slower growth rate was continued tightening its monetary policy, recorded in the United Kingdom (1.7%) having increased interest rates three times following diminishing capital in the economy during 2017. At the same time, the Fed’s on the background of uncertainties generated measures did not contribute to the by Brexit (Chart 1.1). appreciation of the U.S. dollar as its decisions to raise interest rates were anticipated by the Emerging and developing economies grew, on financial markets. The Fed’s tightening of the average, by 4.7% in 2017. This growth rate monetary policy still contrasts with represented a 0.3 p.p. increase compared to ultra-stimulating monetary policies promoted 2016. China’s economy grew by 6.8% in 2017. by other advanced economies (Chart 1.1). After two consecutive years of economic recession, the Russian Federation’s economy In 2017, the diverging monetary policies of the grew by 1.5%. Higher oil prices and absorption Fed and the ECB caused the European single of economic shocks generated by sanctions currency to appreciate, on average, by 2.0% imposed on Russia by the EU and the U.S. against the U.S. dollar. The uncertainties have helped it overcome an economic surrounding Brexit negotiations have downturn. Against the background of an improving economy of the Russian Federation, 1USDX is an index calculated using the weighted the economy of the CIS countries grew, on geometric mean of the U.S. dollar against a basket of currencies: the euro – 57.6%, the Japanese yen – 13.6%, average, by 2.2% in 2017 (Chart 1.1). the pound sterling – 11.9%; the Canadian dollar – 9.1%, the Swedish krona – 4.2%, the Swiss franc – 3.6%.

12 contributed to the depreciation of the British consecutive years of decline. The main factors pound against the U.S. dollar, on average, by that caused the increase were the depreciation 4.7%. Also, the Canadian dollar depreciated of the U.S. dollar and the increase in against the U.S. dollar by an average of 2.1%, international oil prices, which are used as a due to the U.S. President’s protectionist benchmark for other price indices, as well as messages and the intention to renegotiate the growth in global demand. Stimulative policies NAFTA agreement (Table 1.1). promoted during the last quarters also contributed to these developments. Thus, in 2017, the average price of Urals oil reached Table 1.1: Apreciation (-)/depreciation (+) of currencies in 2017 53.1 U.S. dollars/barrel, this represented a (%) 26.9% increase compared to 2016. The USD 2017/ increase in the international prices for oil also 2016 determined a slower decline in import prices Advanced economies for natural gas supplied from the Russian EUR -2.0 Federation. In 2017, the average import price JPY 3.1 GBP 4.7 of natural gas from the Russian Federation was CHF 0.0 165.5 U.S. dollars/1000 m3, thus having CAD 2.1 decreased by 14.5% compared to 20162. SEK -0.2 International prices on the main food groups BRICS economies BRL -8.4 have risen, on average, by 8.1% in 2017 RUB -13.0 (Chart 1.3). INR -3.1 CNY 1.8 Chart 1.2 USDX evolution in the context of Fed monetary ZAR -9.5 policy Neighbouring economies and main trading partners MDL -7.2 UAH 4.1 1.4 104 RON -0.2 1.2 102 BYR -2.9 TRY 20.8 1.0 100 Source: websites of concerned central banks, NBM calculus 0.8 98 0.6 96 Most currencies of emerging economies 0.4 94 appreciated against the U.S. dollar. Thus, in 2017 the Russian rubble appreciated, on 0.2 92 average, by 13.0%, the South African rand – by 0.0 90 9.5%, the Brazilian real – by 8.4%, and the 1/15 1/16 1/17 Indian rupee – by 3.1%. On the other hand, the The average effective federal funds rate FRS (%) Chinese yuan depreciated against the U.S. USDX (right scale) dollar by 1.8% during 2017. This depreciation Source: Fed, Bloomberg was registered on the background of an increase in the CNY/USD exchange rate by Chart 1.3 The annual average growth rate of world price 4.7%, recorded in December 2017, as indexes (%) compared to December 2016. Regional currencies recorded mixed developments, the 30 26.9 Romanian leu and the Belarusian rubble 20 appreciated against the U.S. dollar, on 8.1 10 average, by 0.2% and 2.9%, respectively, 0 while the Ukrainian hryvnia and the Turkish lira -1.5 depreciated against the U.S. dollar, on -10 -20 average, by 4.1% and 20.8%, respectively. The -18.7 -18.4 -14.5 -30 negative evolution of the Ukrainian hryvnia -24.4 -32.1 reflected negative dynamics maintained in the -40 economy, despite a large inflow of foreign -50 -47.5 financial aid. The depreciation of the Turkish 2015 2016 2017 lira reflects, to a large extent, the increase of Oil (Urals) FAO index Natural gas the current account deficit and the consequences of the stimulative monetary Source: Ministry of Economy of Russian Federation, FAO, ANRE policies promoted in the previous years (Table 1.1). The increase in oil prices during 2017 was The year 2017 was marked by an increase in 2NBM, preliminary figures international commodity prices after two

13 determined by the provisions of the agreement by 3.0% in euro area and by 3.3% in the signed by the OPEC countries on 30 November European Union. Strong exchange rate of the 2016, as well as the agreement signed on 10 European single currency contributed to the December 2016 with 11 non-OPEC countries, increase in imports and exports by 9.7%, and to reduce oil production output in the first half 7.1%, respectively. The decline of of 2017. Subsequently, at the OPEC meeting unemployment rate to 8.6%, recorded in held on 30 November 2017, the agreement December 2017, is another indicator of the was extended through the end of 2018. Thus, revival of European economies and the the OPEC oil supply in 2017 remained almost effectiveness of structural reforms unchanged (+0.1%), compared to 2016, implemented during the previous years. having recorded 39.3 mbd. Worldwide, oil Optimistic macroeconomic data determined supply in 2017 represented 98.0 mbd, up 0.8% the ECB to reduce its asset purchases from 60 compared to 2016. As global oil demand to 30 billion euro, starting January 2018 (Table reached 98.5 mbd, up 1.6% compared to 2016, 1.2). Although monetary policy measures the international oil market recorded an undertaken by the ECB over the last few years average deficit of 0.5 mbd (Chart 1.4). have greatly contributed to improving inflationary outlook, reaching its 2.0% inflation Chart 1.4 Global oil supply and demand (milion barrels per target in the medium term still remains a day) challenge for the ECB.

96.7 Table 1.2: The evolution of selected indicators in neighbouring 2015 economies, main trading partners in 2017 (%) 95.4 Euro Romania Russian U- 97.2 area Federation kraine 2016 GDP 2.5 7.0 1.5 2.2 96.9 CPI, 12/17/ 1.3 3.3 2.5 13.7 12/16 98.0 CPI, average 1.5 1.3 3.7 14.4 2017 98.5 annual Industrial 3.0 8.2 1.0 0.4 93.0 94.0 95.0 96.0 97.0 98.0 99.0 production Constructions 2.4 -5.4 -1.4 20.9 The world oil supply The world oil demand Export* 7.1 9.1 25.8 19.0 Import* 9.7 12.2 24.1 26.4 Unemployment 9.1 4.9 5.2 9.5 Source: U.S. Energy Information Administration (EIA) Source: Eurostat, NIS of Romania, Federal Statistics Service of Russia, State Statistics Service of Ukraine *Data on foreign trade with goods

After the UK decided to exit the EU, economic 1.2 Evolution of important growth continued to slow down throughout 2017. GDP grew by 1.7%, having recorded a economies slower growth rate compared to 2016. Slower growth caused by a fall in real wages affected private consumption growth rate and In 2017, the U.S. gross domestic product grew uncertainties associated with Brexit leading to by 2.3%, a 0.8 p.p. improvement compared a decrease in investments. A negative trend in to 1.5% in 2016. The acceleration of the U.S. labour productivity remains a concern for the economic growth was reflected in the data on UK economy, being partly attributed to the wage growth, acceleration of inflation growth increase in the number of low paid jobs. In rate and low level of unemployment. In 2017, 2017, for the first time after the Brexit vote, unemployment rate gradually declined from unemployment rate fell to 4.3%, partly driven 4.8% in January 2017 to 4.1% in December by the reduction of the flow of immigration. 2017. Against this background of increased oil The consumer price index (CPI) recorded an prices and domestic consumption, consumer annual growth rate of 3.0% in the fourth prices in the U.S. recorded a slight increase with quarter of 2017 and 2.7% for the year. Major an annual average of 2.1%. These outcomes contributors to the CPI growth were the rise in determined the Fed to increase interest rate prices for clothing, food and fuel. In November three times in 2017. 2017, the Bank of England conducted its first increase, since Brexit, of its refinancing rate, In the reporting year, euro area economy grew by 25 basis points to 0.5% (Chart 1.6). The by 2.5%, having recorded its highest economic Bank of England kept its inflation target at growth since the 2008-2009 global financial 2.0%. At the same time, the Bank of England crisis. Industrial production grew on average, decided to maintain the stock of corporate

14 bond purchases at 10 billion pounds and the 1.3 Evolution of the stock of government bond purchases – at 435 billion pounds. These quantitative adjustments neighbouring are part of a program aimed to stimulate countries’ economies economic activity and represent the total volume of acquisitions carried out by the Bank and the main trading of England. partners

Chart 1.5 Proﬁtability rates for state securities with maturity of 2 years (%) Romania 2.0%

1.5% In 2017, Romanian economy grew by 7.0%, having recorded one of the highest economic 1.0% growth in the European Union. This signiﬁcant 0.5% increase was driven by the growth of industrial

0.0% production by 8.2%, on average. Annual inﬂation rate reverted to the target set by the -0.5% National Bank of Romania in the second half of -1.0% 2017. The supply factors had a predominant 1/17 7/17 1/16 2/17 3/17 5/17 6/17 8/17 9/17 7/16 4/17 2/16

3/16 5/16 impact on consumer prices. Thus, in December 6/16 8/16 9/16 4/16 11/17 11/16 12/17 12/16 10/17 10/16 EUR USD GBP 2017, consumer prices rose by 3.3% compared to December 2016, the annual average Source: Bloomberg inﬂation rate having recorded 1.3% (Table 1.2).

Russian Federation China’s economy grew 6.8% in 2017, its growth rate increased by 0.1 p.p. compared to In 2017, the Russian Federation economy 2016, thus exceeding the Chinese grew, on average, by 1.5% after two government’s anticipated growth rate of 6.5%. consecutive years of economic decline. This Economic performance has been fuelled by output was achieved due to rising oil prices exports against the background of rising global and the absorption of shocks generated by demand, in particular for electronic equipment. external economic sanctions. The delay in the At the same time, the growth rate of implementation of internal structural reforms investments in fixed assets dropped to 7.2% in has held back its economic potential. Thus, 2017 compared to 8.1% in 2016. The growth during 2017, industrial production increased of other important sectors, such as retail sales, by an average of 1.0%, retail trade – by 1.2%, declined to 10.2%, whereas industrial and exports and imports – by 25.8% and production recorded an increase of 6.6%. By 24.1%, respectively. In the context of the end of 2017, annual inflation in China excessive deceleration of the annual inflation recorded 1.8%, a slower growth of consumer rate in 2017, the Central Bank of Russia price index was mainly attributed to the fall in decreased its base rate six times from 10.0% food prices. to 7.75% (Table 1.2).

Chart 1.6 Base rates in USA, EU and UK (%) Ukraine

2.0% Although in 2017 Ukraine’s gross domestic product increased by an average of 2.2%, the 1.5% economic outlook remains challenging as the country’s economic growth is too slow to 1.0% return to the pre-crisis level of 2015. In 2017, industrial production increased by 0.4%, 0.5% agricultural production decreased by 2.7% and construction activity grew by 20.9%. At the 0.0% same time, exports and imports increased by 1/17 7/17 1/16 2/17 5/17 3/17 7/16 6/17 8/17 9/17 4/17 2/16 3/16 5/16 6/16 9/16 8/16 4/16 11/17 11/16 12/17 12/16 10/17 10/16 19.0% and 26.4%, respectively. In 2017, EUR USD GBP consumer prices rose signiﬁcantly, the annual average inﬂation rate recording 14.4% (Table Source: central banks 1.2).

15 Chapter 2

Economy of the Republic of Moldova

agricultural sector, as evidenced of an increase in the "consumption of goods and services in kind" component. At the end of the 2.1 Real sector year, there was an acceleration in the growth rate of the "procurement of consumer goods" component. Government final consumption Gross domestic product decreased by 0.1%, compared to 2016. However, in 2017, gross fixed capital formation increased by 5.3%, compared to 2016. At the In 2017, GDP grew by 4.5%, registering a same time, the "inventory" component has similar growth rate to that of 2016. In the first generated a positive contribution of 1.7 p.p. to half of 2017, the economy of the Republic of GDP growth. The evolution of economic Moldova recorded a lower annual growth of activity in 2017 was significantly diminished by 2.8%. Economic growth accelerated in the the increase in imports by 11.4%, compared to second half of the year, with GDP growing in 2016. The increase in imports was caused the third and fourth quarters by 5.4% and both by an increase in domestic demand and 6.4%, respectively. Favourable weather appreciation of domestic currency. conditions, recorded in 2017, contributed to an increase in agricultural output and a high Chart 2.2 Contribution of economic sectors (p.p.) to the productivity of the agricultural sector. GDP growth (%) 6 Chart 2.1 Contribution of demand components (p.p.) to the 5 GDP growth (%) 4 3 15 2

10 1 0 5 -1 -2 0 -3 2014 2015 2016 2017 -5 Net taxes on products Other services Transportation and comunication Construction -10 2014 2015 2016 2017 Trade Industry Consumption of households Export Agriculture GDP growth rate Gross fixed capital formation Import Source: NBS, NBM calculus Consumption of public administration GDP growth rate If we examine the major factors that Source: NBS, NBM calculus contributed to GDP growth, we conclude that the agricultural sector and net product taxes On the demand side (Chart 2.1), a pickup in had the largest positive contribution (Chart economic activity in 2017 was largely 2.2). Thus, the gross value added from determined by an increase in exports of 12.7%, agriculture increased by 7.9%, compared to which contributed 5.5 p.p. to the GDP growth. 2016. At the same time, net product taxes This contribution was mainly attributed to a grew by 8.6% in the reporting year, generating higher output of the agricultural sector in the a contribution of 1.3 p.p. to GDP growth. second half of the year. At the same time, a Positive contributions were generated by an significant contribution (4.2 p.p.) to the increase in gross value added from trade, economic growth in 2017 was generated by an industry and transport and storage by 7.0%, increase in final household consumption of 3.0% and 6.2%, respectively. At the same time, 4.9%, compared to 2016. In the first half of the gross value added from construction and the year, its evolution was rather moderate, information and communications sectors reflecting a modest domestic demand. increased by 4.3% and 3.0%, respectively, Subsequently, in the second half of the year, compared to 2016. consumption growth was generated by the

16 Chart 2.4 Evolution of the household disposable income (%, versus the same period of the previous year) and Household consumption contribution of components (p.p.)

In 2017, final household consumption rose by 10 4.9%, recording a growth rate of 1.3 p.p. 8 higher than in 2016. These dynamics were mainly determined by the increase in the 6 consumption of consumer goods, which rose 4 by 4.9%, generating a contribution of 3.4 p.p. 2 to the annual growth rate of final household consumption (Chart 2.3). At the same time, 0 the annual growth rate of natural consumption -2 2014 2015 2016 2017 amounted to 6.8%, resulting in a contribution Other income Social welfare benefits of 1.1 p.p., being supported by the positive Remittances Individual non-agricultural activity Individual agricultural activity Paid activity evolution of the agricultural sector. In the Disposable income - total Disposable income, real terms reference period, expenditure on services rose by 1.7%, generating a contribution of 0.4 p.p. Source: NBS, NBM calculus to the annual growth rate of final household consumption. recording a level of 13.5% or 7.0 p.p. superior to that of 2016 (Chart 2.5). Chart 2.3 Contrubution of components (p.p.) to the household final consumption growth (%) Chart 2.5 Annual rate of gross capital formation (%) and 5 components contribution (p.p.) 4 15 3 10 2 1 5 0 0 -1 -2 -5 -3 2014 2015 2016 2017 -10

Consumption in kind -15 Expenditures for services procurement 2014 2015 2016 2017 Expenditures for goods procurement Final consumption of households Gross fixed capital formation Stock variation Source: NBS, NBM calculus Gross capital formation

Source: NBS, NBM calculus The positive evolution of household consumption in 2017 was supported by the It should be noted that, unlike 2016, the increase in disposable income. Thus, during acceleration of the annual rate was supported the reporting period, the annual growth in the by both fixed capital investments and stock disposable income of the population reached change components. Thus, the increase in 9.0% or 3.7 p.p. above the 2016 level (Chart stock change component was mainly driven by 2.4). These dynamics were largely determined a positive agricultural output recorded in 2017, by income obtained from salaries and social whereas fixed capital investments were benefits, which increased by 11.7% and 15.3%, channelled in "construction" and "machinery respectively, compared to 2016. At the same and equipment" sectors. time, income obtained from non-agricultural individual activity decreased by 9.7% during Analysing the evolution of investments in fixed the reference period. The annual growth rate assets by sources of financing, it is clear that of the disposable income of the population, in their return to positive values was mainly real terms, represented 2.2%, being 3.2 p.p. supported by the investments of public higher than in 2016. administration (Chart 2.6). At the same time, in 2017, investments made by companies and individuals generated a negative impact, Investments although lower than in 2016 if registered on a net basis. In 2017, the annual rate of gross fixed capital formation accelerated, compared to 2016, thus The revival of the investment activity was

17 mainly driven by internal factors. Thus, the decrease in the average yield per hectare. At stabilization of the exchange rate, the the same time, in 2017, compared to 2016, a decrease in lending rates for new loans, record change in farmers’ preferences for higher harvests recorded over the last two years, yielding crops (rape, sugar beet, sunﬂower, combined with the public administration corn, vegetables) was noticed, thus replacing efforts, contributed to the increase in the lower yielding crop such as wheat. investments in 2017. The reduction of production output in the Chart 2.6 Investments in long-term tangible assets (%) and livestock sector (-2.1%) was determined by the contribution of founding sources (p.p.) negative evolution of milk production (-3.6%)

6 as well as cattle and poultry (-2.8%). At the 3 same time, the increase in the production of eggs by 5.0% has offset some of the negative 0 effects generated by the decrease in milk and -3 meat production. -6 -9 Chart 2.8 Evolution of industrial production (%, versus the same period of the previous year) and components’ -12 contribution (p.p.) -15 2014 2015 2016 2017 8 State budget Budgets of administrative-territorial units 6 Means of the economic agents and of the population

Foreign investors' means 4 Other sources Investments in long term tangible assets 2 Source: NBS, NBM calculus

Chart 2.7 Global agricultural production (%, versus the -2 same period of the previous year 2014 2015 2016 2017 Water supply, sewerage, waste management and remediation activities Production and distribution of electricity and heat, gas, hot water and conditioning air 20 Manufacturing industry 15 Mining and quarrying industry Industrial production 10 5 Source: NBS, NBM calculus 0 -5 -10 Industrial production -15 -20 2014 2015 2016 2017 The industrial production output for all forms Animal production of ownership increased by 3.4%, in real terms, Plant production as compared to 2016 (Chart 2.8). This increase Global agricultural production was mainly attributed to the growth of the Source: NBS, NBM calculus production output in the "manufacturing" sector by 4.5%. At the same time, a decrease in the industrial production output was recorded in such sectors as mining and production and supply of electric and thermal Agricultural production energy, gas, hot water and air conditioning by 3.7% and 1.7%, respectively. After an increase in agricultural production, In the manufacturing industry, the most recorded in 2016, the output of global signiﬁcant increases were recorded in the agricultural production, recorded in the following industrial sectors: manufacturing of reporting year, increased by 8.6%, compared electrical equipment (39.4%), manufacturing to 2016 (Graﬁcul 2.7). of rubber and plastic products (16.4%), manufacturing of motor vehicles, trailers and This evolution was mainly determined by the semi-trailers (12.0%) and processing of wood, increase in the vegetable production output by manufacturing of wood and cork products, 13.1%. It should be noted that 2017 was a except furniture; manufacturing of articles of favourable year for all agricultural crops, straw and other plant weaving materials except for potatoes, which recorded a 3.8% (11.4%).

18 Freight shipping Wholesale trade

In 2017, rail, road, river and air transport In 2017, the turnover generated by wholesale companies carried 23.8% more freight, businesses as their main activity increased by compared to 2016 (Chart 2.9). 19.9% (in current prices), as compared to 2016 (Chart 2.11). At the same time, the turnover In 2017, out of the total volume of freight of B2B enterprises providing services recorded shipped, 71.4% was shipped by road, 27.9% an increase of 8.8% (in current prices) over the by rail, 0.8% by river, and 0.01% by air. A same period, compared to 2016. Wholesale signiﬁcant increase in freight shipping was trade included activities of resale of goods in determined by the increase in the volume of large quantities. Sales intermediation activities, freight carried by rail (37.9%), by road (19.3%) both on domestic and external markets, were and by air (2.2-fold), in annual terms. At the also attributed to the wholesale trade. same time, the amount of ﬂuvial cargo Chart 2.10 Evolution in real terms of internal trade (%, shipped declined, in annual terms, by 0.6%. versus the same period of the previous year)

Chart 2.9 Evolution in real terms of transport of goods 9 (%, versus the same period of the previous year) and components’ contribution (p.p.) 6 3 30 0 20 -3

10 -6 -9 0 2014 2015 2016 2017

-10 Retail trade Trade with services 2014 2015 2016 2017

Air freight Fluvial Source: NBS Auto Rail Total transported goods Chart 2.11 Evolution of wholesale trade (%, versus the same period of the previous year), current prices Source: NBS

Retail trade 15

In 2017, the total turnover generated by retail 10 sales businesses decreased by 4.6%, compared to 2016. At the same time, the total turnover 5 generated by businesses providing services as their main activity recorded a decrease of 0 0.4%, in annual terms (Chart 2.10). Retail 2014 2015 2016 2017 sales did not include sales of motor vehicles, Wholesale trade B2B services motorcycles and their spare parts, sales of agricultural products by individuals, sales of grains, seeds, metals, crude oil, chemicals for Source: NBS industry, iron and steel, industrial machinery and equipment, sales of food and beverages for consumption on the premises and sales of packaged foods, renting of personal and household goods to the general public.

19 Foreign trade Exports

Exports by countries (Chart 2.12) registered a The year 2017 marked a notable revival of positive evolution during 2017, mainly foreign trade3 of the Republic of Moldova4.A attributable to an increased demand from EU rich agricultural harvest, which has been countries. Exports to countries classified as recorded over the last two years, a revival of "the rest of the world" generated a positive the external demand as a result of the contribution to the annual growth rate, acceleration of economic activity in the main however, it was well below export figures to partner countries, which was associated with EU countries. Exports to the Russian the increase in the disposable income of the Federation (RF) increased by 9.2%, however, population (increase in wages, remittances, as a share of total exports, they declined to a social benefits), can be considered the main historical low of 10.5%. Statistical data factors that have determined the dynamics of regarding exports to the CIS countries do not foreign trade. As a result, in 2017 compared to provide clear evidence of a revival of trade 2016, exports, expressed in U.S. dollars, with the countries in the region. increased by 18.6%, while imports by 20.2%.

Chart 2.14 Evolution of exports annual rate (%) and Chart 2.12 Evolution of exports annual rate (%) and contribution by origins (p.p.) contribution by categories of countries (p.p.) 30 30 25 25 20 20 15 15 10

10 5

5 0

0 -5 IV/16 I/17 II/17 III/17 IV/17 -5 Export of domestic goods IV/16 I/17 II/17 III/17 IV/17 Reexport EU CIS Rest of the world Exports Exports

Source: NBS, NBM calculus Source: NBS, NBM calculus

By category of goods (Chart 2.13), a notable Chart 2.13 Evolution of exports annual rate (%) and acceleration of the annual export rate in 2017 contribution by groups of goods (p.p.) was mainly determined by the increase in 30 exports of agricultural products. Thus, record 25 crops in agriculture, recorded in 2016 and 20 2017, coupled with an increased EU demand 15 for these products, created the prerequisites

10 for a steady export growth in 2017. Exports to

5 the EU countries increased by 19.9%, compared to 2016. 0

-5 IV/16 I/17 II/17 III/17 IV/17 At the same time, an increase in exports of Other goods vehicles, optical devices and sound recording Vehicles, optical instruments, sound recorders and reproducers Metal, stone and ceramic articles and transmission devices, driven by positive Textiles and clothes Chemical and wood products developments that took place in the respective Mineral products industrial sectors, especially free economic Foodstuff and animal products, beverages and fats Exports' annual growth rate zones, contributed to the positive dynamics of Source: NBS, NBM calculus the annual export rate.

It should be mentioned that a notable increase 3The chapter contains quarterly data on the evolution in exports during 2017 was driven by exports of foreign trade of the Republic of Moldova, expressed in of local goods. Re-exports have also positively thousands of U.S. dollars. 4The detailed analysis of the foreign trade is presented contributed to the evolution of exports, yet had in chapter 2.4. a lower net impact.

20 Imports Labour market

During 2017, imports volume rose with most Labour force trading partners. The major contribution (about 50%) to the evolution of Moldovan imports was Despite an increase in economic activity, generated by the EU. Imports from the CIS which was more notable in the second half of countries and the rest of the world recorded 2017, the annual rate of both economically lower contributions (Chart 2.15). active and the employed population recorded negative values. Thus, the economically active Chart 2.15 Evolution of imports annual rate (%) and population in 2017 recorded a decrease of contribution by categories of countries (p.p.) 1.1%, compared to 2016. A similar situation 25 can be observed in the case of the employed

20 population, which dropped by 1.0%, compared to 2016. 15 Chart 2.17 Annual growth rate of employed population (%, versus the same period of the prevous year) and its 10 formation by national economy sectors (p.p.)

4 5 3

0 2 IV/16 I/17 II/17 III/17 IV/17 1 Rest of the world CIS EU Imports 0

Source: NBS, NBM calculus -1 -2

-3 2014 2015 2016 2017

Analysing imports by category of goods (Chart Other activities Social services* 2.16), the increase in the annual import rate Transportation and communication Trade Construction Industry during 2017 was mainly driven by the Agriculture Employed population Active population evolution of imports of vehicles, optical Source: NBS, NBM calculus devices and sound recording and transmission *Public administration, defence, education, health, social services devices, chemicals products, wood processing products, articles manufactured from metals, Chart 2.18 Evolution of unemployment and employment stones or ceramics, and mineral products. It rates (%) should be noted that a signiﬁcant growth rate 43 5.1 of imports, recorded lately, was determined by 43 4.9 42 4.7 the revival of the household consumption as a 42 result of the increase in the disposable income 41 4.5 of the population. 41 4.3 40 4.1 40 3.9 Chart 2.16 Evolution of imports annual rate (%) and 39 componets’ contribution by groups of goods (p.p.) 39 3.7 38 3.5 25 2014 2015 2016 2017

20 Employment rate (left scale) Activity rate (left scale) 15 Unemployment rate

10 Source: NBS, NBM calculus

0 At the same time, in 2017, given the structure IV/16 I/17 II/17 III/17 IV/17 Other goods of the national economy, the negative Vehicles, optical instruments, sound recorders and reproducers Metal, stone and ceramic articles dynamics of the employed population was Textiles and clothes Chemical and wood products mainly determined by a 5.0% decrease in the Mineral products Foodstuff and animal products, beverages and fats number of workers employed in the Imports' annual growth rate agricultural sector (Chart 2.17). Negative, yet Source: NBS, NBM calculus smaller, contributions were generated, on the one hand, by the fall in the population occupied in the industrial sector, construction and transportation and communications. On the other hand, the negative impact generated

21 by these sectors was partly mitigated by the average salary increased by 13.5% and 11.3%, growth of the population employed in trade respectively. In the reporting year, the annual and public sector by 4.6% for both sectors. growth rate of average salary recorded 5.2%, in real terms (Chart 2.20). The average real Chart 2.19 Wage bill in economy and average number of salary grew by 4.4% in the real sector and by employees (%, versus the same period of the previous year) 6.5% in the public sector.

-1

-4

-7 2014 2015 2016 2017 In nominal terms In real terms Average number of employees

Source: NBS, NBM calculus

Chart 2.20 Real average wage (%, versus the same period of the previous year)

7 6 5 4 3 2 1 0 -1 2014 2015 2016 2017

Total economy Public sector Real sector

Source: NBS, NBM calculus

In 2017, the unemployment rate registered a level of 4.1%, being slightly lower (by 0.1 p.p.) than that recorded in 2016. At the same time, the activity rate of economically active population recorded 42.2%, being 0.4 p.p. lower than in 2016, whereas the employment rate dropped to 40.5%, having decreased 0.4 p.p., compared to 2016 (Chart 2.18).

Personal income

In 2017, the payroll fund in the economy increased by 12.9%, compared to 2016, whereas, deﬂated by CPI, it rose by 5.9%. At the same time, the average number of employees in the national economy has reduced by 4.9%5 (Chart 2.19).

The average salary in the national economy increased by 12.1%, compared to 2016. In the public and real sectors of the economy the

5NBM ﬁgures based on the quarterly preliminary data.

22 its retention above the inflation target interval in the second half of the year was mainly determined by an increase in tariffs for a 2.2 Evolution of inflation number of regulated services and atypical weather conditions that triggered an increase in prices for fruits and vegetables, thus having Consumer Price Index (CPI) generated inflationary food price pressures (Chart 2.23).

In 2017, the annual average CPI rate amounted Chart 2.23 CPI evolution (%) and subcomponents’ to 6.6%, recording a level 0.2 p.p. higher than contribution (p.p.) in 2016. In the first half of 2017, the annual 8 inflation rate recorded a prominent upward 7 trajectory, increasing from 2.4% in December 6 2016 to 7.4% in May 2017, thus having crossed 5 the interval of 5.0% 1.5 p.p. stipulated in the 4 medium-term monetary± policy strategy. 3 2 Chart 2.21 Annual rate of CPI and of core inflation (%) 1 0

15 -1 14 -2 13 1/17 7/17 2/17 3/17 5/17 6/17 8/17 9/17 4/17 11/17 12/17 12/16 12 10/17 11 Foodstuff products Regulated prices Fuel 10 9 Core inflation CPI 8 Source: NBS, NBM calculus 7 6 5 At the same time, the respective inﬂation 4 3 trajectory was supported by the impact of the 2 adjustment of excise duties on some product 1/17 7/17 1/16 2/17 3/17 5/17 7/16 9/17 6/17 8/17 4/17 2/16 3/16 5/16 9/16 6/16 8/16 4/16 11/17 11/16 12/17 12/16

10/17 categories as well as by the effect of a low 10/16

CPI Core inflation Inflation target base period in 2016. The inflationary pressures associated with the aforementioned factors Source: NBS, NBM calculus were partially mitigated by the appreciation of the domestic currency in 2017, but also by a Over the next three months, the annual persistent low aggregate demand. As a result, inflation rate remained at the level of 7.3%. in 2017, the annual rate of core inflation After having reached its maximum value of recorded a relatively stable evolution, largely 7.9% in October, it slightly declined to 7.3%, oscillating around the inflation target. In the by the end of 2017, still recording a level context of the rising international oil prices, situated above the upper limit of the interval. fuel prices have had a positive, yet minor, impact on the annual CPI rate in 2017. Chart 2.22 Annual rate of inflation subcomponents (%)

15 12 Core inflation 9 6 During 2017, core inflation recorded values 3 significantly below those of total inflation, 0 remaining close to the inflation target. It is -3 worth noting that this inflation excludes the -6 transient effects on the CPI and largely reflects 1/17 7/17 2/17 5/17 3/17 6/17 9/17 8/17 4/17 11/17 12/17

12/16 the inﬂationary pressures associated with 10/17 Foodstuff products prices excess demand. Core inﬂation continued to Regulated prices remain within the target range for more than a year. Fuel prices

Source: NBS However, in 2017, the annual rate of core inflation recorded a slightly upward trajectory, The upward trajectory of the annual inflation rising from 4.5% in December 2016 to 5.5% in rate, recorded in the first half of the year, and December 2017.

23 Given a persistent low domestic demand, the by the increase in cigarette prices (26.8%), above trend has been supported by a series of education and training (9.2%), clothing (ready- sectoral shocks. Thus, core inflation pressures to-wear clothes - by 6.2%, knitwear - by 4.5%), were building over 2017, being generated, in footwear (6.3 %). the first part of the year, by a number of fiscal policy decisions adopted for 20176 and were further supported by the adoption of additional Food prices regulations on the minimum sales price for cigarettes7, which resulted in a sharp increase in their prices. During 2017, the annual rate of food prices recorded a significant upward dynamic, having In 2017, the annual core inflation was mainly risen from 2.8% in December 2016 to 9.7%. fuelled by rising prices for such The upward dynamics of the annual rate was subcomponents as cigarettes, clothing, mainly driven by higher contributions footwear, public catering, education and generated by subcomponents, such as fresh training, the latter as a result of the rise in fees vegetables, potatoes, fresh fruits and meat, for nurseries and kindergartens that could be meat products and canned meat (Chart 2.25). attributed to the measures taken in order to increase the level of funds allocated for Chart 2.25 Components’ contribution (p.p.) to the annual children’s nutrition in educational institutions8 growth of food prices (%)

(Chart 2.24). 11 10 9 Chart 2.24 Components contribution (p.p.) to the annual 8 growth rate of core inflation (%) 7 6 5 6 4 3 5 2 1 4 0 3 -1 1/17 7/17 2/17 3/17 5/17 6/17 8/17 9/17 4/17 11/17 12/17 12/16 2 10/17 Grain mill products Vegetables Potatoes 1 Fresh fruits Meat and meat products Fish and fish products 0 Milk and dairy products Eggs Sugar 1/17 7/17 2/17 3/17 5/17 6/17 8/17 9/17 4/17 11/17 12/17 12/16 10/17 Beverages Fats Others Cigarettes Clothing Footwear Construction materials Statistical differences Foodstuff products prices Furniture Household items Daily household maintenance Transport means, auto parts Source: NBS, NBM calculus Cultural services Education and learning Public alimentation Personal use items Others Statistical differences Core inflation The evolution of food prices in 2017 was affected by the snowfalls on 20-21 April and by Source: NBS, NBM calculus the August drought, thus creating unfavourable weather conditions for growing At the same time, the inflationary pressures fruits and vegetables. Besides, inflationary were partly mitigated by the fall in prices for pressures have built as a result of some vehicles and spare parts, this fall being caused sectoral shocks that have affected the prices by the appreciation of the domestic currency. for meat and a number of imported products. Thus, in 2017 compared to 2016, the average The rise in fresh meat prices has been driven official exchange rate of the Moldovan leu by price increases implemented in some of the recorded an appreciation of 7.2% against the importing countries from the region and by the US dollar and 5.6% against the European bans imposed on the import of meat from single currency. Ukraine (due to outbreaks of swine fever). The sale price increases that were recorded for At the end of 2017, the annual dynamics of some categories of fresh vegetables and fruits core inflation was determined, to a large extent, could be attributed to the increase in their 6http://lex.justice.md/index.php?action=view&view= import prices. Besides, the impact of atypical doc&lang=1&id=368094 weather conditions, recorded in the spring of 7 Article 9 of the Law on State Budget for 2017, no. 2017, was felt in the second half of the year 279/2016 (Official Monitor of the Republic of Moldova, 2016, no. 472-477, article 943) through a steady increase in prices for fresh 8Decision on the implementation of the provisions of fruits. At the same time, the impact of the the Parliament Decision no. 45/2017 on the Report of aforementioned inflationary factors was the Special Committee on the Efficiency of the Legislative mitigated by the appreciation of the exchange Framework on Child Nutrition in Preschool and Educational Institutions, published in the Official Monitor no. 429-433 rate, as well as by good harvests recorded for (6352-6356) other crops.

24 At the end of the year, in December 2017, the can be partly attributed to the appreciation of annual dynamics of food prices was largely the domestic currency against the US dollar driven by rising prices for vegetables (39.4%), and the euro, as a large part of these prices meat and meat products (8.1%), fresh fruits depend on the MDL/USD and MDL/EUR (22.6%), potatoes (27.6%). exchange rates. At the same time these developments can also be attributed to a series of policy adjustments implemented in this sector. In 2017, minor contributions to the Regulated prices annual price changes of regulated services were generated by the dynamics of prices for In the ﬁrst nine months of 2017, the annual transportation services (Chart 2.26). growth rate of regulated prices recorded a strong upward trend, rising from (-1.1%) in December 2016 to 7.5% in September 2017. Fuel prices Subsequently, it reversed its trend, slightly decreasing to 6.1% in December 2017 (Chart2.26). In 2017, the annual growth rate of fuel prices was characterised by an increased volatility. Chart 2.26 Components’ contribution (p.p.) to the annual Thus, in the ﬁrst two months of the year, the growth of regulated prices (%) annual growth rate of fuel prices recorded a 9 strong upward trajectory, increasing from 1.6% 8 7 in December 2016 to 12.9% in February 2017, 6 5 being mainly driven by oil price developments 4 recorded during that period. 3 2 1 Chart 2.27 Components contribution (p.p.) to the annual 0 growth of fuel prices (%) -1 -2 13 -3 -4 11 12/16 2/17 4/17 6/17 8/17 10/17 12/17 9 Rent in the state dwellings House maintenance expenses Electricity Gas 7 Central heating Medicines 5 Ambulatory medical services Transport services Distance communication services Insurance 3 Statistical differences Regulated prices Source: NBS, NBM calculus 1 -1

The trajectory recorded in the first half of the -3 1/17 7/17 2/17 3/17 5/17 6/17 8/17 9/17 4/17 year was largely determined by the pressures 11/17 12/17 12/16 10/17 generated by higher tariffs on medical Gas from cylinders Earth coal Fuels services, starting with February 2017, once with the update of the Single Registry of Tariffs Firewood Oil fuel Fuel prices for Medical Services9. It was last modified in Source: NBS, NBM calculus 2011; as a result, the price changes implemented in 2017 were significant. At the In this way, in the first quarter of 2017, the same time, the upward trend of the annual average price of Urals oil recorded values growth rate of regulated prices was supported 63.2% higher than those at the beginning of by the adjustment of tariffs for electricity, 2016, thus triggering a considerable central heating, hot water supply, water intensification of pressures generated by fuel supply and sewerage services10 implemented prices on the domestic market (Chart 2.27). in the first half of 2017. A relatively stable trend of the annual growth rate of regulated At the same time, a smaller contribution was prices, recorded during the autumn, and its generated by the adjustment of excise duties slight decrease in the last two months of the on petroleum products in early 2017. year was generated by a gradual decrease in Subsequently, given a gradual easing of oil medicines prices as well as a lack of further price pressures on the international markets significant tariff adjustments for regulated and a steady trend towards appreciation of the services. Such medicines price developments domestic currency against the US dollar, the annual growth rate of fuel prices recorded a 9 http://lex.justice.md/md/341845/ downward trajectory on the local market, 10https://monitorul.fisc.md/official_magazine_rm/ in-monitorul-oficial-de-maine-24-martie-vor-fi-publicate-\ falling to 5.9% in July 2017. In August, the urmatoarele-documente-oficiale.html annual growth rate of fuel prices briefly soared

25 up to 9.8%, having reverted to its downward Chart 2.29 Annual rate of IPPI (%) and its components’ trend shortly after that, recording a rate of contribution (p.p.) 5.1% at end of 2017. This evolution was driven 4.0 by the appreciation of the domestic currency 3.5 against the US dollar, which has mitigated the 3.0 inﬂationary pressures associated with oil prices on the international markets, but also 2.5 by the easing of pressures generated by the 2.0 propane gas component. During 2017, a 1.5 positive impact on the annual growth rate of 1.0 fuel prices was also exerted by the evolution of 0.5 prices for ﬁrewood component. Coal prices generated a minor contribution to the 0.0 1/17 7/17 2/17 5/17 3/17 6/17 9/17 8/17 4/17 11/17 12/17 12/16 evolution of fuel prices in 2017. 10/17 Mining and quarrying industry Manufacturing industry Energetic sector IPPI Source: NBS, NBM calculus Industrial prices

industries. Price developments in these In the ﬁrst half of 2017, the annual industrial industries may be attributed to a good production price index (IPPI) recorded a slightly agricultural harvest recorded in the second upward trajectory. Since September, however, half of 2017. At the same time, the decline in its trajectory resumed a downward trend. In the annual growth rate of energy prices can be December, the annual IPPI recorded 2.3%, attributed to the high base effect (the fading being 1.7 p.p. lower than in August 2017 and of the effect created by the increase in fees for 0.5 p.p. lower than in December 2016. central heating and hot-water supply at the end of 2016). Thus, in the fourth quarter of 2017, it recorded a growth rate of 2.9% or 1.0 p.p. lower than in the third quarter of 2017. A downward trend of the annual IPPI was driven by the evolution of prices for products traded on both the internal and external markets (Chart 2.28).

Chart 2.28 Annual rate of IPPI (%)

1 1/17 7/17 2/17 3/17 5/17 6/17 9/17 8/17 4/17 11/17 12/17 12/16 10/17

Annual rate of industrial prices products Annual rate of prices of products delivered on the domestic market Annual rate of prices of products delivered on the foreign market

Source: NBS

The analysis of the annual IPPI evolution, by main sectors, suggests that a signiﬁcant decline in its growth was driven by price developments in the manufacturing and energy sectors (Chart 2.29).

The growth of the annual IPPI slowed down, being driven by the fading away of inﬂationary pressures generated by the food and beverage

26 sunﬂower seeds (-12.5%) and rape (-4.8%). At the same time, there was a notable increase in Construction prices prices for fruits and berries (33.6%), a development that may be attributed to atypical weather conditions, recorded in the During 2017, the annual growth rate of spring of 2017, which affected mainly these construction prices recorded a downward product categories. trajectory. Thus, in the fourth quarter of 2017, it dropped to 7.0%, having decreased by 1.9 Prices for livestock products declined as a p.p. compared to the fourth quarter of 2016 result of a drop in prices for poultry meat (Chart 2.30). (-14.2%) and beef (-4.9%). At the same time, the prices for pork increased by 9.1%, as a Chart 2.30 Evolution of construction price index (%, compared to the similar period of the last year ) result of the bans imposed on its import following the outbreaks of swine fever recorded on the territory of Ukraine. It should 9.5 be noted that the prices for eggs also recorded 9.0 a slight increase of 2.1%, whereas the price of milk practically remained at the level of 2016 8.5 (0.1%). 8.0

7.5

7.0

6.5

6.0 IV/16 I/17 II/17 III/17 IV/17

Source: NBS

Producer prices of agricultural products

In 2017, producer prices of agricultural products decreased by 2.1%, compared to 2016. This development was driven by the fall in prices for both vegetable products (-1.9%) and animal products (-3.0%) (Chart 2.31).

Chart 2.31 Producer prices of agricultural products (%, versus de previous year )

35 30 25 20 15 10 5 0 -5 -10 2014 2015 2016 2017 Producers prices for agricultural products Producers prices for plant products Producers prices for animal products

Source: NBS

The evolution of prices for vegetal products was mainly determined by the decrease in prices of beans (-23.9%), vegetables (-21.6%),

27 ﬁnancial organizations and donor countries is an important contribution to economic recovery and reform initiatives. It is vital for 2.3 Public sector and tax the process required to modernize and policy relaunch the economy of the Republic of Moldova.

In the reference year, the state budget State budget execution expenditures totalled 54 524.1 million lei, recording an increase of 12.5%, compared to In 2017, state budget indicators confirmed the 2016 (Chart 2.32). Of the total expenditures, optimization of tax administration. Following the highest share was spent on social the increase in public revenues, on the one protection (35.0%), 17.8% being allocated for hand, and a slower increase of public education and 13.3% – for health care. In expenditures, on the other hand, the budget terms of GDP, public expenditures accounted deficit diminished and recorded a value of 1 for 36.3% of GDP, having increased by 0.5 p.p., 144.7 million lei. According to the Ministry of compared to 2016. Finance, the revenue inflows to the state budget amounted to 53 379.4 million lei, It should be mentioned that 18 086.5 million recording an increase of 16.2%, compared to lei (up 14.5%, compared to 2016) were 2016 (Chart 2.32). In terms of GDP, in 2017, transferred, during 2017, from the state the accrued revenues increased by 1.6 p.p., budget to the State Social Insurance Budget compared to 2016, accounting for 35.5% of (SSIB), the Mandatory Health Insurance Fund GDP. (MHIF) and to the local budgets (LBs). The largest share of budget allocations was Chart 2.32 Indicators of national public budget channelled to the local budgets, around 52.8%, followed by the allocations made to the SSIB, % mil.lei 20 4 000 around 32.8%, the MHIF having received

15 3 000 smaller ﬁnancing accounting for 14.3% of total allocations. 10 2 000

5 1 000 In this context, in 2017, the execution of the 0 0 state budget resulted in a deﬁcit of 1 144.7 -0.8 -5 -1.8 -1.7 -2.2 -1.8 -1 000 million lei. In terms of GDP, the deﬁcit -10 -2 000 accounted for 0.8% of GDP, having decreased

-15 -3 000 by 1.0 p.p. compared to the level of 2016. The sources of ﬁnancing of the state deﬁcit -20 -4 000 2013 2014 2015 2016 2017 included net external loans amounting to 2 Deficit (right scale) Deficit/GDP 349.3 million lei, accounting for 1.6% of GDP Revenues Expenditures (down 1.0 p.p., compared to 2016), internal

Sourse: Ministry of Finance, NBM calculus debts and loans amounting to 1 071.3 million lei, and a negative contribution of ﬁnancial assets amounting to 271.4 million lei, minus The largest part of budget revenues accrued 0.2% of GDP (down 0.4 p.p., compared to from taxes and fees collections, accounting for 2016). At the same time, the state account a share of 64.6% (34 476.0 million lei) in total balances increased by 2 004.5 million lei, budget revenues. Social insurance compared to the beginning of the year. contributions and compulsory insurance premiums accounted for 29.1% (15 514.0 million lei), whereas the share of other revenues and grants recorded 4.5% (2 380.6 State debt million lei) and 1.9% (1 008.8 million lei) of total budget revenues. At the end of 2017, the state debt of the Republic of Moldova amounted to 51 660.3 During the reporting year, Moldova received million lei, accounting for 34.4% of GDP. The ﬁnancial assistance for budget support in the state debt increased by 874.5 million lei or by form of foreign grants amounting to 1 008.8 1.7% due to the increase of the internal state million lei, an amount 26.5% smaller than in debt balance by 1 058.9 million lei, whereas 2016. In terms of GDP, foreign grants the balance of the external state debt accounted for 0.7%, 0.3 p.p. smaller than in decreased by 184.4 million lei. As a share of 2016. The assistance provided by international GDP, state debt diminished as a result of a

28 stronger evolution of the national economy the internal state debt service there were (Chart 2.33). In 2017, the share of internal appropriated funds in the amount of 1 571.1 state debt in GDP decreased by 0.9 p.p., million lei (up 7.4%, compared to 2016), out of whereas the share the external debt, which: 808.2 million lei were appropriated for recalculated in lei, decreased by 2.3 p.p. the payment of interest and coupons on government securities issued on the primary As of 31 December 2017, the state debt market, 618.2 million lei accounted for interest constituted 56.3% of external debt and 43.7% paid on government securities issued in 2016 of internal debt. for the execution by the Ministry of Finance of the payment obligations derived from state The balance of the external debt, expressed in guarantees no. 807 of 17 November 2014 and foreign currency, as of 31 December 2017, no.101 of April 1, 2015, which amounted to increased by 16.1%, compared to January 1, 13.3 billion lei, as well as 144.7 million lei were 2017, and amounted to 1 700.7 million U.S. appropriated for the payment of interest on dollars. The external state debt, expressed in government convertible securities. MDL, decreased during the reporting year by 0.6%, largely due to the appreciation of the domestic currency, totalling 29 081.8 million lei. Public sector debt

Chart 2.33 State debt as a share of GDP (%) As of 31 December 2017, the balance of the 40 37.6 public sector debt decreased by 851.4 million 34.4 35 lei or by 1.4%, compared to the end of 2016

30 27.3 and recorded 58 451.7 million lei. 24.5 21.7 25 23.4 19.3 20 According to operating statistical data on GDP 21.4 15 16.8 18.2 in 2017, the share of public sector debt in GDP, 10 as on 31 December 2017, accounted for 38.9%, 15.9 15.0 recording a decrease of 4.9 p.p., compared to 5 6.6 6.3 5.9 the end of 2016. 0 31/12/13 31/12/14 31/12/15 31/12/16 31/12/17 External public debt expressed in MDL The decrease of the public sector debt balance Internal public debt at the end of 2017, compared to the end of Total public debt 2016, was determined, in particular, by the decrease of the NBM debt balance by 1 320.5 Sourse: Ministry of Finance, NBS, NBM calculus million lei. Also, the balance of the direct debt of state enterprises decreased by 386.8 million At the end of 2017, the state debt recorded lei and the direct debt of administrative 22 578.5 million lei, having increased by 4.9%, territorial units (ATU) – by 18.6 million lei. At compared to the end of 2016. The increase in the same time, the state debt balance internal state debt by about 18.1% was the increased by 874.5 million lei, still accounting result of additional issues of government for the largest share of the total public sector securities on the primary market. In October debt (88.4%). 2017, MDL 50.0 million worth of one-year government securities were redeemed. These As of 31 December 2017, the external debt of securities covered payment obligations the public sector amounted to 1 998.8 million derived from State guarantees. As a result, at U.S. dollars (equivalent to 34 179.2 million lei) the end of 2017, the internal state debt or 58.5% of the public sector debt balance, consisted of government securities issued for whereas the internal debt of the public sector the execution of State guarantees (58.9%), amounted to 24 272.5 million lei (41.5%). government securities issued on the primary During 2017, the public sector debt market (32.0%) and government convertible diminished, being mainly inﬂuenced by the securities (9.1%). external debt of the public sector, which recorded a downward evolution of 3.8%. In 2017, 1 929.0 million lei (up 10.4%, compared to 2016) were appropriated from the state budget for the state’s debt service. The external debt service appropriations amounted to 357.9 million lei (having increased by 25.8%, compared to 2016). It should be mentioned that in order to support

29 compared to 2016. Growth in imports was mainly driven by the increase in final household consumption due to growth in real salaries and 2.4 International accounts remittances. The resumption of imports of of the Republic of electricity from Ukraine also contributed to the Moldova in 2017 increase in total imports. (provisional data) In 2017, the volume of foreign trade in goods (FOB-FOB) amounted to USD 6 284.48 million, up by 21.3%, compared to 2016. The Balance of payments11 trade balance deficit totalled USD 2 569.00 million, an increase of 23.0%, compared to In 2017, the current account balance of the 2016, as imports growth (+21.8%) exceeded Republic of Moldova’s balance of payments exports growth (+20.1%). recorded a deficit of USD 616.94 million, having increased 2.2-fold, compared to 2016 The ratio of foreign trade deficit in goods to GDP (Table A.1). In terms of GDP, it recorded -7.6% recorded 31.6%, having increased by 0.8 p.p., (-3.4 p.p. compared to 2016) (Chart 2.34). The compared to 2016. The coverage of imports of current account deficit can be attributed to goods and services through exports recorded foreign trade in goods, the negative balance of 58%. which grew by 23.0%, whereas other components recorded increasing surplus During 2017, the total volume of goods, both balances. exported and imported, increased compared to 2016 figures. The prices of the exported goods Chart 2.34 The current account – main components decreased in the first half of 2017 and increased in the second half of the year, mil. USD % whereas the prices of the imported goods kept 3000 20 increasing starting with the second quarter of 15 2000 2017 through the end of the year. The 10 1000 5 exchange ratio in foreign trade in goods

0 0 recorded a slight decrease during the ﬁrst

-5 three quarters of 2017, having eventually -1000 -4.2 -7.2 -7.6 -10 increased in the fourth quarter. -2000 -15 -3000 -20 The FOB-based value of exports of goods in 2015 2016 2017 the balance of payments recorded USD Secondary income (left scale) Primary income (left scale) 1 857.74 million (+ 20.1% compared to Services (left scale) Goods (left scale) 2016)12. Current account (CC)(left scale) Balance CC / GDP (right scale)

Source: NBM In the reporting year, the structure of exports of goods (excluding processed or otherwise modiﬁed goods), by geographical region, In 2017, exports of goods and services denotes that 58.6% of goods were shipped to amounted to USD 3 110.43 million, having EU countries, 25.4% – to the CIS countries, and increased by 19.9%, compared to 2016, as a the remaining 16.0% of exports were destined result of the positive impact generated by the for other countries (Chart 2.35). In 2017, demand from the main trading partner exports to the European Union continued to countries (both from the CIS and the EU), grow (+25.3% compared to 2016). This which have recorded economic growth. At the increase was mainly driven by the increase in same time, a negative impact on exports had exports to: Romania – by 21.5%, Germany – by the appreciation of the domestic currency 37.6% and Poland – by 47.0%. Exports to the against the U.S. dollar and the euro, which has CIS have also recorded a rising trend (+11.9%) affected the exports’ competitiveness on the as a result of the increase in exports to: Russia foreign market. – by 9.3%, Ukraine – by 31.9% and Belarus – by 6.3%. The increase in exports to other Imports of goods and services amounted to countries (+20.7%) was driven by a 2-fold USD 5 364.14 million, an increase of 20.2%, increase in exports to Turkey (which can be 11A complete analytic presentation of the evolution of attributed both to Turkey’s economic growth international accounts and their indicators in dynamics can be accessed at http: //bnm.md/en/content/conturile- 12Unlike NBS data, statistics on foreign trade in goods internationale-ale-republicii-moldova- published by the NBM in the balance of payments contain pentru-anul-2017 -Data-interim-material. a series of adjustments.

30 and the entry into force (as of 01.11.2016) of Chart 2.36 The import of goods in 2017, by geographical the bilateral Free Trade Agreement), to Serbia – area, CIF prices (%) 2.9-fold, and China – by 29.7%.

Analysing exports by product category, Other agricultural products continued to hold the countries largest share of 59.7%, exports of alcoholic 16.3% beverages increased by 17.3%, compared to 2016. In addition, an increase in exports of machines and appliances was recorded (up by CIS European 74.1%, mainly due to a 2.6-fold increase in 28.7% Union 55.0% exports of cabling and wire), furniture (up by 13.7%), chemicals (up by 8.3%), textiles and textile articles (rising by 5.3%) and other.

The FOB-based value of imports of goods in the balance of payments reached USD 4 226.74 Source: Developed by the NBM based on NBS data (database of customs declarations, except for the goods for/after processing million (+21.8% compared to 2016). with no change in ownership, selections on import (CIF prices) by country of delivery) Chart 2.35 The export of goods in 2017, by geographical Note: NBS show import by country of origin. area (%)

Chart 2.37 The import of energy products and electricity (USD, million, CIF prices)

Other 800 countries 700 16.0% 600 500 European CIS 400 Union 25.4% 300 58.6% 200 100 0 2015 2016 2017

Others Gasoline Coal Source: Developed by NBM based on NBS data (database of Natural gas Diesel Electricity* customs declarations, except for the goods for/after processing with no change in ownership) Source: Developed by the NBM based on NBS data (database of customs declarations, except for the goods for/after processing The structure of imports (excluding goods with no change in ownership) * Import net imported for processing and other type of remaking, according to the country of origin), by geographical region, shows that the largest growth was largely driven by the resumption share belongs to the European Union – 55.0%, of electricity imports from Ukraine, a 2.9-fold followed by the CIS countries – 28.7% and increase in imports of coal and of other energy other countries – 16.3% (Chart 2.36). products: gasoline – by 20.6%; diesel fuel – by 28.4%, whereas the import of natural gas In the reporting year, the main categories of (in gas form) have recorded a 16.5% decrease imported goods were mineral products, (Chart 2.37). accounting for a share of 17.5% (up by 22.9%), agricultural products (with a 16.1% increase The balance of services surplus grew to USD attributed to the rise in imports of sugar and 315.29 million. It was driven by the increase in cigarettes), machines and appliances (up by exports by 19.7%, compared to 2016, whereas 30.6%), chemicals (up by 14.0%), common the imports of services increased by 13.2%. metals and metal articles (up by 25.7%), The ratio of the surplus of services to GDP transport vehicles and equipment (up by amounted to 3.9%, having increased by 0.7 27.0% as a result of the increase in imports of p.p., compared to 2016 (Table A.2). cars and tractors). A signiﬁcant increase was recorded in exports In 2017, the import of energy products and of travel services (by 28.2%), in particular for electricity amounted to USD 746.59 million, personal travel (+27.5%), transportation increasing by 23.5% compared to 2016. This

31 services (by 16.9%) (driven by the increase in (having decreased as GDP share, compared to the volume of foreign trade in goods), in 2016, yet having increased by 13.2% in particular air transportation (+27.9%). Exports absolute value). The growth of personal of raw materials processing services have also remittances was mainly driven by the increase increased considerably (+27.8%), this increase in remittances from the EU countries (+24.9% can be largely attributed to the new direct compared to 2016), as well as from other investments made in the manufacturing of countries. wiring and accessories for the automotive industry, as well as exports of IT services (by Chart 2.38 The ﬁnancial account by functional categories (million, USD) 55.9%).

600 Analysing the structure of foreign trade with 400 services, one can note that the largest share, 200 both in terms of receipts and payments made 0 -200 for the services, recorded in 2017, was held by -400 -214.56 transportation services 32.8% and 36.9%, -600 -458.05 -569.77 respectively. The exports and imports of travel -800 services accounted for 24.9% and 32.6%, -1,000 -1,200 respectively. The services of processing raw 2015 2016 2017 materials accounted for 15.1% of total service Reserve assets exports in 2017. Other investments Portfolio investment and financial derivatives Direct investment In 2017, the surplus of primary income Financial account increased by 10.9%, compared to 2016, amounting to USD 510.80 million (Table A.3). Source: NBM Note: (+) net outflows, (-) net capital inflows. The amount of compensation paid to resident employees for work performed for non-resident employers increased by 17.6%, reaching USD Capital account recorded a negative balance 839.56 million. The effect of the increase was, of USD 30.41 million, resulting from the net however, mitigated by the concurrent increase outflows of private capital (USD 44.46 million) in outflows of investment income (+36.2%), in and inflows of foreign assistance destined to particular dividend income of foreign direct public administration for financing investment investors, which increased 2.3-fold, totalling projects (USD 14.05 million). USD 134.58 million. The ratio of the primary income to GDP recorded 6.3%, having As a result of the current and capital decreased by 0.5 p.p., compared to 2016. transactions carried out by Moldovan residents with non-residents during 2017, the net The surplus balance of secondary income financing needs (representing the sum of remained virtually unchanged (+0.2%), balances of current and capital accounts of the compared to 2016, amounting to USD 1 125.97 balance of payments) increased 2.1-fold, million. Although personal transfers received compared to 2016, amounting to USD 647.35 from abroad by Moldovan residents increased million, accounting for 8.0% of GDP (compared by 6.6%, amounting to USD 800.10 million, the to 4.5% in 2016). volume of technical assistance and grants, received by all sectors under international In 2017, the financial account recorded net cooperation programmes, decreased by 15.3%, capital inflows of USD 569.77 million, resulting compared to 2016, having dropped to USD from the net increase in national external 183.73 million (Table A.4). In terms of GDP, the liabilities by USD 622.38 million due to actual balance of secondary income accounted for transactions, whereas the residents’ external 13.8% of GDP, having decreased by 2.8 p.p., financial assets increased by USD 52.61 million compared to 2016. (Chart 2.38, table A.5).

Personal remittances received by residents The increase in financial assets was of the Republic of Moldova (an indicator determined by the increase in the NBM’s calculated additionally to the balance of official reserve assets by USD 531.20 million payments), which reflect the value of net and the net increase in assets of the licensed employee compensation (excluding the banks, held in the form of cash and deposits, residents’ travel expenses and taxes paid by USD 168.18 million. abroad), personal transfers and capital transfers between households, reached USD At the same time, the assets of the population, 1 559.21 million, accounting for 19.2% of GDP held in the form of cash and deposits, have

32 decreased by USD 552.96 million, as well as the Development – USD 3.33 million, the Council assets of resident economic agents from other of Europe Development Bank – USD 2.90 sectors, held in the form of trade credits and million, and the Government of Poland – USD advances extended to foreign trading partners, 0.21 million. which decreased by net amount of USD 92.77 million. Chart 2.40 Direct investment: net incurrence of liabilities, disaggregated by instruments (million, USD)

The increase in liabilities was driven, in 250 particular, by trade credits and advances 216.14 208.46 extended to residents by non-resident partners 200 in the net amount of USD 288.92 million. 150 90.97

Chart 2.39 The external loans (net incurrence of liabilities), 100 inﬂows and reimbursement by maturities (million, USD) 50

500 415.40 415.12 0 400 327.75 -50 300 2015 2016 2017 Debt instruments

inflows 200 124.74 107.24 Reinvestment of earnings Equity other than reinvestment of earnings 100 24.71 Net incurrence of liabilities 11.65 19.44 7.94 0 -5.98 -4.93 -5.87 -100 Source: NBM

-200

-300 During 2017, the structure of external loan reimbursement -308.71 -305.17 -309.95 repayments, by institutional sector, was the -400 2015 2016 2017 following: non-financial corporations, households and non-profit institutions – USD Long-term Short-term Net 99.08 million; public administration – USD Source: NBM 74.58 million (of which USD 26.31 million for credits and loans extended by the IMF), the Liabilities in the form of external loans NBM – USD 61.54 million (credits and loans amounted to a net value of USD 107.24 million extended by the IMF), other financial (total loans – USD 423.06 million, of which companies – USD 53.56 million, the long-term loans – USD 415.12 million, deposit-taking companies – USD 27.06 million. short-term loans – USD 7.94 million; loan repayments – USD 315.82 million, of which Liabilities also rose, due to a net increase in long-term loans – USD 309.95 million and direct investment, by USD 208.46 million (net short-term loans – USD 5.87 million) (Chart inflows roughly doubled compared to 2016) 2.39, Table A.6). (Chart 2.40).

The external financing was received by: public The increase in net inflows of foreign direct administration, including local governments – investment (FDI) was less driven by the USD 200.97 million, followed by non-financial establishment of new enterprises (the net corporations, households and non-profit value of new equity holdings in the capital of institutions recording drawdowns of USD 89.22 Moldovan enterprises amounted to USD 39.23 million, other financial corporations – USD million), but rather by reinvestment of profits 68.22 million, licensed banks – USD 47.38 by existing enterprises (USD 86.81 million) and million, NBM – USD 17.27 million. the accumulation of net debt to foreign direct investors as a result of intra-group lending In 2017, creditors of the public administration, (USD 82.42 million) (net debt repayments were including local governments, were: the recorded in 2016). Government of Romania – USD 100.90 million, the International Monetary Fund – USD 26.47 In 2017, portfolio investment recorded net million, the International Development inflows of USD 1 million due to a decrease in Association – USD 20.70 million, the external financial assets in the form of debt International Bank for Reconstruction and instruments of licensed banks, whereas Development – USD 19.43 million, the financial derivatives recorded net inflows of European Investment Bank – USD 17.51 USD 0.43 million as a result of the foreign million, the European Bank for Reconstruction exchange swap trading between the licensed and Development – USD 9.53 million, the banks with non-resident banks. International Fund for Agricultural

33 Chart 2.42 The indicators of ofﬁcial reserve assets adequacy of the Republic of Moldova (million, USD)

International investment position of the 3000 Republic of Moldova as of 31 December 2017 2500

2000

1500 As of 31.12.2017, the international investment position of the Republic of 1000

Moldova maintained its previous trend, 500 recording a net debt of USD 3 954.33 million, 0 which increased by 30.3% compared to the 2015 2016 2017 end of 2016 (Table A.7, Chart 2.41). Compared Reserve assets 3 months of goods and services imports to the end of 2016, the stock of ﬁnancial 100% of short-term external debt 20% of M2 assets increased by 8.3% and the stock of 150% din (30%STD + 15%AAP + 5%M2 + 5%eX) ﬁnancial liabilities – by 17.0%. Source: NBM Chart 2.41 International investment position in dinamics, Note: STD – short-term debt (by original maturity), OPC – other end of period (million, USD) portfolio commitments, M2 – broad money, eX – export of goods and services.

6000 4000 calculated at the daily exchange rate), the 4990.74 2000 4476.33 4608.75 exchange rate ﬂuctuation of the reference

0 currencies against the U.S. dollar (USD 67.67 million) and by ﬂuctuations in prices of -2000 -2963.03 -3034.13 -3954.33 securities and monetary gold (USD -1.54 -4000 million). -6000 -7439.36 -7642.88 -8000 -8945.07 The volume of ofﬁcial reserve assets met all

-10000 adequacy criteria: 2015 2016 2017

Assets Liabilities Net investment position • To cover at least 3 months of imports of goods and services (covered 6.3 months Source: NBM of actual imports);

The evolution of the debit balance of the • To ensure full coverage of short-term international investment position during 2017 external debt (covered 160.4%); was determined by the fluctuation of the exchange rates of the reference currencies • To ensure 20% coverage of M2 (covered against the U.S. dollar (USD -484.95 million), 90.5%); the net effective transactions with To ensure 100-150% coverage of the non-residents (USD -569.77 million), price • amount: 30% of short-term debt + 15% fluctuations of financial instruments (USD of other portfolio commitments + 5% of -63.43 million), whereas other changes (USD M2 + 5% of exports of goods and services 197.95 million) pulled the debit balance of the (covered 331.7%) (Chart 2.42). international investment position downwards. All these changes resulted in a total deterioration of the position at the end of 2017 In the structure of external liabilities, other by USD 920.20 million. investments continue to hold the largest share (57.4%), followed by direct investments The largest share in the external financial accounting for a share of 41.4%. assets was still held by reserve assets (56.2%). During 2017, the stock of official reserve The total stock of liabilities in the form of direct assets increased by 27.1%, compared to the investments, accrued at the end of 2017, was beginning of the year, amounting, as of estimated at USD 3 701.74 million (up by 31.12.2017, to USD 2 803.26 million, thus 21.9%), the share of equity and shareholdings returning to its pre-crisis level (2013). (including reinvested earnings) accounting for 50.3%, debt instrument holding a share of The stock of official reserve assets was 49.7% (Chart 2.43). The composition of debt determined by net inflows of assets in the instruments was mixed, loans extended by balance of payments (USD 531.20 million, foreign direct investors amounting to USD 1

34 132.17 million, trade credit commitments to Chart 2.44 The external debt to GDP ratio (%) foreign direct investors having recorded USD 100 137.06 million, and other debts to foreign 93.7 92.1 direct investors – USD 569.67 million. 85.8 80 Chart 2.43 Direct investmens, liabilities, main components, 67.6 65.8 stock* end of period (million, USD) 61.2 60

4000 40 3500 26.1 26.3 24.6 3000 1838.9 20 2500 2015 2016 2017 1724.54 2000 1781.17 Gross external debt, total / GDP Public and publicly guaranteed external debt / GDP 1500 Non-guaranteed private debt / GDP 1000

500 Source: NBM 1198.91 1312.97 1862.84 0 2015 2016 2017 NBM – 3.8%, other ﬁnancial companies – 1.8%, Equity and capital participation Debt instruments households – 0.4%.

Source: NBM As of 31 December 2017, the direct *Stocks calculated using balance value government debt to multilateral creditors amounted to USD 1 345.81 million, having The main economic sectors that attracted increased by 10.8%, compared to 31.12.2016. foreign investments were: financial and The largest share in the stock of government insurance activities (26.1% of the direct debt to multilateral creditors was held by: investments in the form of equity capital) and International Development Association – manufacturing industry (25.3%). 45.4%, International Monetary Fund – 22.0%, European Investment Bank – 14.0%, International Bank for Reconstruction and External debt of the Republic of Moldova Development – 6.3%, The International Fund as of 31 December 2017 for Agricultural Development – 4.9%, the European Bank for Reconstruction and Development – 4.9%, the Council of Europe Gross external debt of the Republic of Moldova Development Bank – 2.5%. Liabilities to increased by 11.8%, compared to the bilateral creditors amounted to USD 354.86 beginning of the year, and recorded, as of million, having increased by 41.7%, compared December 31, 2017, USD 6 973.70 million to 31.12.2015. In the structure of the (Table A.8). government debt to bilateral creditors, the largest shares were held by Romania – 48.3%, The ratio of gross external debt to GDP was Japan – 16.4%, Russia – 13.1% and the USA – 85.8%, decreasing by 6.3 p.p. compared to 9.3%. 2016 (Chart 2.44). Analysing the debt structure by maturity The public and publicly guaranteed external (original maturity), most of the stock of gross debt reached USD 1 999.63 million (28.7% of external debt was accounted for by long-term total debt), having increased by 12.4%, debt (74.9%). As of 31.12.2017, the long-term compared to 31.12.2016, whereas the private external debt totalled USD 5 226.02 million) non-guaranteed external debt amounted to (+7.8% compared to 31.12.2016) (Chart 2.45). USD 4 974.07 million (71.3% of total debt), up by 11.6%. However, in 2017, a sharp rise in the short-term external debt (+25.9% as of Analysing the debt structure by institutional 31.12.2016) was recorded. This growth was sectors, statistics show that, as of 31.12.2017, driven by the increase in external liabilities in most of the external debt (36.6% of the total the form of trade credits and advances, which debt) was accounted for by non-financial place a relatively lighter financial burden corporations, followed by intra-group lending (compared to loans), as they are to be partially under the direct investment (including debt for settled (the share of advances received) the import of natural gas) – 26.4%, public through the delivery of goods or services. administration – 24.7%, licensed banks – 6.3%,

35 Thus, the short-term external debt amounted to USD 1 747.68 million and included: trade credits and advances (consisting of advances Relations between the National Bank on exports and deferred payments for imports, and the Government of the Republic of for both goods and services) – 76.3%, (term and Moldova sight) bank deposits placed by non-residents with licensed banks of the Republic of Moldova – 9.5%, other debt liabilities – 8.5%, intra-group Government debt to the NBM loans – 0.6%, other short-term loans – 5.2% (Chart 2.46). As of 31 December 2017, the government debt to the NBM in the form of government Chart 2.45 The external debt structure by maturities, end securities held in the NBM portfolio amounted of period (million, USD) to 15 354.6 million lei and consisted of: Government bonds (GB), issued and placed 7000 with the NBM on 4 October 2016 in order to 6000 1747.68 execute the obligations of the Ministry of 1249.59 1388.59 5000 Finance deriving from state guarantees no.

4000 807 of 17 November 2014 and no.101 of April 1, 2015 – 13 291.2 million lei. Treasury bills 3000 4854.62 4846.64 5226.02 (TB), held in the NBM’s portfolio following the 2000 conversion of loans previously received by the 1000 Ministry of Finance from the National Bank and

0 their subsequent reissue – 2 063.4 million lei. 2015 2016 2017

Long-term Short-term Government bonds were issued at the annual interest (coupon) rate of 1.4% for the maturity Source: NBM of 2-9 years, and at the rate of 5.3% annually for the maturity of 10-25 years.

Chart 2.46 The short-term external debt by types, as of 31.12.2017 Treasury bills, held in the NBM’s own portfolio as a result of the reissues performed during

Intra-group loans 2017, usually had a 91-day maturity and the 0.6% Other commitments Other loans interest rate ranging from 5.16%-7.69% per related to debt 5.2% year. The weighted average interest rate on 8.5% TBs, held in the portfolio at the end of 2017,

Cash and recorded 5.82% per year against 7.27% per deposits year recorded in 2016. 9.5%

Commercial loans and Government deposits placed with the advances National Bank of Moldova 76.3%

In 2017, the Ministry of Finance placed with the National Bank of Moldova term deposits Source: NBM in Moldovan lei with maturity ranging from 38 days to 730 days, in a total volume of 554.9 million lei. The NBM has accumulated sufficient reserve assets to fully cover the short-term external Compared to 2016, the volume of deposits debt. The coverage of the short-term external placed with the NBM has recorded a significant debt with official reserve assets represented growth, having increased more than 9-fold. 160.4%, having increased by 1.5 p.p., compared to the end of 2016. It should be mentioned that, in March 2017, the terms of placement of term deposits taken from the Ministry of Finance were modified. Thus, deposits are now accepted both for the purpose of managing cash resources held in the Treasury Single Account as well as for the purpose of ensuring the liquidity reserve to reduce the risk of refinancing the government debt or to provide funds for monetary policy implementation, at the weighted average

36 interest rate applicable on securities with respective maturity, placed at the last auction.

As of 31 December 2017, the balance of term deposits placed by the Ministry of Finance amounted to 508.9 million lei, being exclusively made up of deposits destined for the formation of the liquidity reserve. The average weighted rate on deposits in the balance recorded 7.56% annually, whereas the weighted average term to maturity – 613 days.

The NBM’s role in the public sector’s development

During 2017, the NBM supported the Government of the Republic of Moldova in the implementation of a series of public policies, meant to promote the welfare of Moldovan citizens.

In this respect, it is worth noting the NBM’s contribution to the elaboration of a series of documents of major importance for the country, including the Roadmap for Improving Competitiveness, the National Strategy for Investment and Export Promotion for 2016-2020, the Strategy for the Development of the Small and Medium-Sized Enterprises Sector for 2012-2020, the Consumer Protection Strategy for 2013-2020, the Strategy for the Reform of the Regulatory Framework for the Entrepreneurial Activity for 2013-2020, the Action Plan on the Implementation of the National Strategy for Preventing and Combating of Money Laundering and Terrorism Financing for 2013-2017, the Action Plan for the Implementation of the Strategy for the Development of the National Statistical System for 2016-2020, and others.

At the same time, the National Bank of Moldova constantly contributes to the fulfilment of the commitments made by the Moldovan authorities to international development partners, which refer to the NBM’s areas of competence. Given the above, the NBM participates in the achievement of the objectives set out in the National Action Plan for the Implementation of Association Agreement between the Republic of Moldova and the European Union during 2017-2019, the fulfilment of the commitments related to the Economic and Financial Policy Memoranda (MEFP, SMEFP) signed with the IMF, as well as contributes to the implementation of structural reforms under the Memorandum of Understanding, singed between the Republic of Moldova and the European Union on macro-financial assistance to the Republic of Moldova.

37 Chapter 3

Monetary Policy of the National Bank of Moldova

rate during 2017 by 2.5 p.p., having decreased it from 9.0% to 6.5% annually.

3.1 Monetary policy These decisions aimed at diminishing objective disinflationary expectations through strengthening the prospects of the inflation rate being kept within the range of 1.5 p.p. Pursuant to the provisions of the Law No. from the 5.0% target for subsequent± periods. 548-XIII of 21 July 1995 on the National Bank of Moldova, the NBM is the central bank of the Republic of Moldova and an autonomous public legal entity that establishes and promotes 3.2 Monetary policy monetary and foreign exchange policy in the decisions state. During 2017, the NBM operated in line with the provisions of the Medium-term monetary policy strategy, approved by the Council of Administration of the National Bank The intensification of the inflationary process of Moldova on 27 December 2012. at the beginning of 2017 was in line with the National Bank’s forecasts, based on which the According to the above-mentioned strategy, in annual inflation rate has had an upward order to ensure and maintain price stability, trajectory, rising above the limits of 1.5 p.p. ± the NBM set the inflation target, measured by of the inflation target range, up to the third the consumer price index, which is published quarter of 2017. Subsequently, the inflation monthly by the National Bureau of Statistics rate assumed a downward trend and (NBS) at 5.0% level with a tolerance range of positioned itself within the inflation target 1.5 p.p. ± interval, being driven by disinflationary pressures. By quantifying the macroeconomic situation, the trends and the forecasts of the The decisions of the NBM’s Executive Board medium-term macroeconomic indicators, the adopted in January-May 2017 on the intention short and medium-term inflation outlook in the to maintain the base rate at 9.0% per annum conditions of the risks and uncertainties took into account the existing inflation recorded in 2017, and in order to ease the forecasts, the previous monetary policy disinflationary pressures, the National Bank of decisions and the speed of the transmission of Moldova promoted a stimulating monetary the effects of these decisions in the economy. policy compared to 2016. At the same time, the conduct of monetary policy was affected In June 2017, the dynamics of macroeconomic by the complexity of the balance of risks, both indicators denoted the prerequisites for internal and external, a gradual intensification slowing down of economic activity and a of inflationary risks being recorded. lowering of the medium-term inflationary pressures in accordance with the NBM’s Thus, during 2017, the National Bank of forecasts. This fact, in combination with the Moldova has been gradually adjusting its appreciation, in real terms, of the domestic monetary policy in order to stimulate the currency, determined the members of the national economy through the creation of NBM’s Executive Board to reduce the base rate favourable conditions for lending. These applied to the main monetary policy measures were aimed at boosting domestic operations by 1.0 p.p., from 9.0 to 8.0% demand alongside ensuring a steady annually. adjustment of the domestic economic environment to the volatility and uncertainty Later, in August-December 2017, the NBM’s of the external environment. In this context, decisions aimed at gradually implementing a the members of the NBM Executive Board stimulating monetary policy. To this end, the decided to lower the monetary policy interest NBM has lowered the monetary policy interest

38 rate three times, by 0.5 p.p., eventually setting in 2017, including as a result of foreign a level of 6.5% annually. exchange interventions (foreign currency purchases) amounting to USD 433.8 million The NBM’s Executive Board decided to (7.8 billion lei), and determined an increased maintain the base rate at the same level of sterilization effort on the NBM’s side, the 6.5% through the end of 2017 based on the volume of these operations increasing assumption that the monetary policy signiﬁcantly, compared to the previous year measures, implemented by the NBM at the (Chart 3.1). beginning of the year, still needed time to spread through different transmission channels Chart 3.1 The evolution of daily balance of money market operations (million, MDL) in the national economy, including through the level of interest rates applied on loans and deposits extended/taken in domestic currency, 2000 thus further acting on inﬂation evolution. 0

-2000 It should be mentioned that in order to sterilize and adequately manage the liquidity surplus -4000 accumulated during 2017 and improve the -6000 mechanism of transmission of monetary policy decisions in view of ensuring an adequate set -8000 of monetary conditions aimed at achieving the -10000 proposed inflation target rate set for the 1/17 7/17 1/16 2/17 5/17 3/17 6/17 9/17 7/16 8/17 4/17 2/16 3/16 5/16 6/16 9/16 8/16 4/16 11/17 11/16 12/17 12/16 10/17 medium-term, the NBM gradually increased 10/16 the level of required reserves ratio of the NBC daily balance Repo operations daily balance means attracted in Moldovan lei and non-convertible currency by 5.0 p.p., up to the Source: NBM level of 40.0%. At the same time, the required reserve ratio of funds held in freely convertible Issuance of NBM Certificates currency was decided to maintain at 14.0% throughout 2017. The NBM has issued NBC through auctions, which were carried out twice per week in the first four months of the year and weekly since May. According to 2017 figures, the weighted 3.3 Monetary policy average rate on NBC recorded 8.11%, compared to 11.55% of the previous year. achievements during 2017 Reflecting a significant increase in the banks’ net positive liquidity, the volume of liquidity-absorbing operations doubled, compared to 2016, a condition that was also Monetary market operations, standing facilities reflected in the annual average volume of NBC and the required reserve mechanism stock, which rose from 2 959.0 million lei in continued to play a key role in the 2016 to 6 358.1 million lei in 2017. The implementation of monetary policy. Monetary developments in daily NBC balance followed a market operations were carried out at the regular pattern characterised by its decline at NBM’s initiative, the applied interest rate being the end of the reserve maintenance period and equal to the monetary policy rate, whereas a subsequent return to higher levels at the standing facilities were used at the bank’s beginning of the next period. The daily NBC discretion. At the same time, the NBM balance recorded its minimum value of 3 502.9 strengthened the restrictive character of the million lei at the beginning of May as a result required reserve mechanism by increasing by of the increase in the reserve requirement 5.0 p.p. the reserve requirement set for banks’ ratio set for the placements held in Moldovan liabilities in Moldovan lei, whereas maintaining lei and non-convertible currency, as well as the reserve requirement set for banks’ foreign due to a reduced frequency of NBC auctions currency liabilities at the level of the previous starting with May. The maximum amount of year. 9 207.2 million lei was recorded at the end of the year as a result of the stronger purchases Monetary market operations of foreign currency conducted by the NBM in August-October 2017. The excess liquidity, accumulated in the banking system at the end of 2016, increased

39 Lending activity Chart 3.2 The evolution of average monthly balance of overnight deposits and of average interest rate As of December 31, 2017, the credit exposure of the licensed banks to the National Bank of MDL, million % 1200 18 Moldova amounted to 0.1 million lei, being entirely accounted by loans extended to banks 1000 15 in 1992-2002 for lending the construction of 800 12 housing cooperatives (CHC). Compared to the 600 9 end of 2016, the balance of loans extended to banks decreased by 0.3 million lei. 400 6 200 3

The loan portfolio’s assessment, carried out in 0 0 December 2017, identified no write-downs for 1/17 7/17 1/16 2/17 3/17 5/17 6/17 8/17 9/17 7/16 4/17 2/16 3/16 5/16 6/16 9/16 8/16 4/16 11/17 11/16 12/17 12/16 10/17 loan losses. 10/16 Average daily balance Interest rate Standing facilities Source: NBM The conditions of operation of standing facilities (overnight deposits and loans), periods, in April and December, by a small established by the NBM, have ensured for number of banks, which failed to comply with banks an increased flexibility and efficiency of the reserve requirement regime. liquidity management.

During 2017, interest rates applied on standing However, the total amount of overnight loans facilities decreased, the overnight deposit rate extended by the NBM during 2017 was higher dropping from 6.00% annually at the beginning than in the previous year, amounting to 357 of the year to 3.50% annually at the end of the million lei, compared to 141.1 million lei in year, whereas the overnight loan rate fell from 2016. 12.00% to 9.50% annually. Required reserves Overnight deposit facility The required reserve mechanism continued to Banks have used the overnight deposit facility ensure the liquidity control and management mainly at the end of the reserve maintenance in the banking system. periods. The frequency of using the deposit facility was generally the same throughout the During 2017, against the background of a maintenance periods of the required reserves persisting excess of liquidity in MDL, recorded held in Moldovan lei. Thus, the average annual in the banking sector, and the potential balance recorded 1 058.0 million lei, having pro-inflationary risks it could generate, the increased by 420.1 million lei or 65.9%, NBM has increased the required reserve ratio compared to 2016. At the beginning of each of funds held in Moldovan lei and maintenance period, the amount of overnight non-convertible currency by 5.0 p.p. in two deposits placed with the NBM was steps, as follows: insignificant; however, it would increase later once the banks have fulfilled the reserve up to 37% of the calculation base for the requirement. The average monthly balance of • required reserve maintenance period of overnight deposits placed by banks recorded April 8, 2017-May 7, 2017; over 1 billion lei during January-November, whereas in December it fell to 693.1 million lei • up to 40% of the calculation base starting (Chart 3.2) as a result of the change in the with the required reserve maintenance liquidity management strategy implemented period of May 8, 2017-June 7, 2017. by one of the banks.

Overnight credit facility Given the above and as a result of the increased amount of placements made with As in 2016, the level of excess liquidity, which is the banks (Chart 3.3), the required reserves monitored in the banking system, determined held in MDL between December 8, the banks’ decreased demand for loan facility. 2017-January 7, 2018 amounted to 12 638.6 million lei, having risen by 25.6%, compared to In 2017, the overnight loan facility was used the end of the previous year (December 8, mainly at the end of the reserve maintenance 2016-January 7, 2017).

40 At the same time, during the last six years, applied on the required reserves held in MDL the NBM has not changed the foreign currency (the average rate on overnight deposit facility) reserve requirement ratio (US dollars and euro), decreased from 6.0% to 3.56% annually. maintaining it at the level of 14.0% of the calculation base. Intervention on the domestic foreign exchange market Chart 3.3 The evolution of attracted funds in MDL, required reserves in MDL and required reserves ratio In 2017, the National Bank of Moldova MDL, million % 35000 50 intervened on the domestic forex market only as a currency buyer to consolidate the ofﬁcial 28000 reserve assets, as a signiﬁcant surplus of foreign currency was recorded on the 21000 intrabank market. 40 14000 During the reporting period, the volume of net 7000 transactions carried out by the National Bank of Moldova on the interbank forex market in 0 30 Moldovan lei totalled, at value date, USD 436.31 million, including currency conversions 1/17 7/17 1/16 2/17 3/17 5/17 6/17 9/17 7/16 8/17 4/17 2/16 3/16 5/16 6/16 9/16 8/16 4/16 11/17 11/16 12/17 12/16 10/17 10/16 Required reserves in MDL in the form of purchases, carried out with the Attracted funds World Bank institutions, amounting to USD Required reserves ratio in MDL 2.54 million (Chart 3.5). Source: NBM

Chart 3.5 The evolution of the ofﬁcial exchange rate of Chart 3.4 The evolution of required reserves in USD and MDL/USD and the volume of daily transactions of the NBM EUR in 2017

units, million % 120 40 USD, million MDL/USD 24 20.5 100 35 20.0 20 80 30 19.5 16 19.0 60 25 18.5 12 18.0 40 20 17.5 8 20 15 17.0 4 16.5 0 10 16.0 0 15.5 1/17 7/17 1/16 2/17 3/17 5/17 6/17 9/17 7/16 8/17 4/17 2/16 3/16 5/16 6/16 9/16 8/16 4/16 11/17 11/16 12/17 12/16 10/17 10/16 1/17 7/17 2/17 5/17 3/17 6/17 9/17 8/17 4/17 11/17 12/17 Required reserves in USD 10/17 Required reserves in EUR Interbank NBM turnover Official exchange rate Required reserves ratio in USD/EUR Source: NBM Source: NBM

As of 31 December 2017, the required foreign exchange reserves held by banks at the NBM amounted to USD 70.7 million and EUR 118.5 million (Chart 3.4), recording an increase of 15.3% and 12.3%, respectively, compared to the end of 2016.

Pursuant to article 17(3) of the Law no. 548-XIII of 21 July 1995 on the National Bank of Moldova, for the share of required reserves exceeding 5.0% of the liabilities, based on which the required reserve level is calculated, the National Bank paid to banks interest amounting to 534.3 million lei, by 33.0% less than in 2016. NBM’s expenditures related to the required reserves decreased as a result of the NBM’s measures taken to relax the monetary policy through the base rate tool. In this context, during 2017, the interest rate

41 evolution, recording a growth rate of 1.1 p.p. lower than in 2016.

3.4 Monetary and foreign At the same time, the money supply (M314) exchange conditions recorded an annual growth of 9.3%, its growth rate having decreased by 0.9 p.p., compared to 2016 (Chart 3.7). Dynamic of monetary indicators Chart 3.7 The dynamics of components of M3 money supply (%, increase versus the same month of the previous year) Throughout 2017, monetary indicators maintained a positive trend. Thus, the average 30 growth rate of broad money supply recorded 25 20 8.7% in annual terms. Other monetary 15 aggregates recorded a similar behaviour 10 during the reference year. 5 0 -5 Money supply -10 -15 In January-December 2017, the money supply -20 13 1/17 7/17 1/16 2/17 5/17 3/17 9/17 6/17 7/16 8/17 4/17 2/16 3/16 5/16 9/16 (M2 ) increased by 14.1%, recording the 6/16 8/16 4/16 11/17 11/16 12/17 12/16 10/17 10/16 annual growth rate 4.1 p.p. lower than in 2016 M3 money supply Deposits in MDL (Chart 3.6). Starting with the second quarter of Deposits in foreign currency 2017, the M2 monetary aggregate has slowed down its annual growth, having reverted to an Source: NBM upward trend in the fourth quarter. Both components of money supply M2 have At the end of 2017, the growth rate of foreign recorded positive developments. Thus, currency deposits fell to -0.1%. Foreign domestic currency deposits and money in currency term deposits, recalculated in circulation increased, compared to 2016, by Moldovan lei, decreased by 276.7 million lei or 16.4% or by 4 783.4 million lei and by 10.3% by 1.7% per year, whereas sight deposits or 1 778.3 million lei, respectively. increased by 263.0 million lei or by 3.3%.

Chart 3.6 The evolution of components of M2 money supply At the end of 2017, the share of domestic (%, increase versus the same month of the previous year) currency deposits in total deposits amounted to 58.5%, whereas foreign currency deposits 30 accounted for 41.5%, having modiﬁed during 25 the reference year by 3.8 p.p. in favour of 20 domestic currency deposits. 15 10 5 In the structure of domestic currency deposits, 0 the share of term deposits in total deposits -5 placed in Moldovan lei recorded 54.2%, having -10 decreased by 8.7 p.p. at the end of December -15 2017 compared to the same period of 2016.

M2 money supply M0 monetary aggregate Lending market Balance of deposits in MDL During the reporting year, the growth rate of Source: NBM the total balance of loans in the economy, extended by the licensed banks, recorded The evolution of domestic currency deposits negative annual dynamics. This evolution was was characterised by a gradual slowing down of driven by the negative dynamics of the their growth rate, recording a minimum growth balance of corporate loans, accounting for a rate of 9.4% at the end of the third quarter; share of around 79.9%. At the end of 2017, the in the last quarter, however, their trend has balance of loans in the economy reduced its reverted to an upward one. Throughout the negative growth rate, compared to December year, money in circulation has had a uniform 2016 (-3.4% compared to -7.4%). The balance

13Money supply M2 includes money in circulation 14Money supply M3 includes money supply M2 and (M0), domestic currency deposits and money market foreign currency deposits placed by residents, recalculated instruments. in Moldovan lei.

42 of corporate loans recorded a negative growth should be noted that the volume of rate of 7.8%, which increased by 1.9 p.p. dollar-denominated foreign currency loans compared to the end of 2016. This evolution continued to grow and recorded positive was driven by the decrease in both domestic annual growth rates starting with October currency loans by 8.2% and foreign currency 2017 (Chart 3.9). loans, recalculated in domestic currency, by 7.4%. It is worth noting that the growth rate of Evolution of new granted loans the balance of retail loans remained positive In 2017, the annual volume of new granted throughout the year as a result of the revival loans recorded an increase, amounting to of both consumer and real estate loans (Chart 24 457.5 million lei, having risen by 8.9%, 3.8). compared to 2016. This evolution was driven by domestic currency loans, the volume of Chart 3.8 The balance of credits granted to the economy (%, increase versus the same month of the previous year) which grew by 19.7%, totalling 15 389.6 million lei (Chart 3.10).

30 Chart 3.10 The dynamics of volume and weighted average 25 interest rate of new credits granted in MDL 20 15 10 MDL, million % 5 1600 20 0 1400 -5 1200 15 -10 1000 -15 800 10 -20 600 400 5 1/17 7/17 1/16 2/17 3/17 5/17 6/17 8/17 9/17 7/16 4/17 2/16 3/16 5/16 6/16 8/16 9/16 4/16 11/17 11/16 12/17 12/16 10/17 10/16 200 Total Legal entities Individuals 0 0 1/17 7/17 1/16 2/17 3/17 5/17 9/17 7/16 6/17 8/17 4/17 2/16 3/16 5/16 9/16 6/16 8/16 4/16 11/17 11/16 12/17 12/16 10/17 Source: NBM 10/16 Note: The data do not include banks in liquidation Loans in MDL Weighted average interest rate

Chart 3.9 The dynamics of balance components of credits granted in economy (%, increase versus the same month Source: NBM of the previous year)

Chart 3.11 The dynamics of volume and weighted average interest rate of new credits granted in foreign currency 15

MDL, million % 5 1500 10 1250 0 8 1000 -5 6 750 -10 4 500 -15 250 2 1/17 7/17 1/16 2/17 5/17 3/17 6/17 8/17 9/17 7/16 4/17 2/16 3/16 5/16 6/16 9/16 8/16 4/16 11/17 11/16 12/17 12/16

10/17 0 0 10/16 Total In MDL 1/17 7/17 1/16 2/17 3/17 5/17 7/16 6/17 9/17 8/17 4/17 2/16 3/16 5/16 6/16 8/16 9/16 In foreign currency recalculated in MDL In foreign currency (USD) 4/16 11/17 11/16 12/17 12/16 10/17 10/16 Loans in foreign currency recalculated in MDL Weighted average interest rate Source: NBM

In terms of domestic currency loans, in 2017, Source: NBM the annual growth rate has mitigated the decline, so that the total balance of loans Domestic currency loans strengthened their granted in the economy did not change at the growth through the rise in both retail and end of December 2017, year-on-year (Chart corporate loans. The annual volume of 3.9). The negative annual growth rate of the corporate domestic currency loans increased total balance of loans granted in the economy by 15.2%, reaching 9 689.3 million lei and was driven by the evolution of foreign currency accounting for 63.0% of total domestic loans, recalculated in Moldovan lei, as a result currency loans. The volume of retail loans, of the appreciation of the domestic currency holding a share of 37.0% of total loans, against the main reference currencies. It increased by 28.0%, compared to 2016, totalling 5 700.3 million lei.

43 In 2017, compared to 2016, the volume of rate of 16.4%, by 6.4 p.p. lower than at the foreign currency loans, recalculated in lei, end of December 2016. The overall evolution of decreased by 5.6%, being mainly driven by the the balance of deposits was adversely affected appreciation of the domestic currency against by the evolution of foreign currency deposits, the main reference currencies, and recorded recalculated in Moldovan lei, which at the end 9 067.9 million lei (Chart 3.11). The largest of 2017 recorded a negative annual rate of share in total foreign currency loans was held 0.1%. It should be mentioned that the volume by corporate loans. In 2017, the total volume of US dollar-denominated deposits continued to of corporate foreign currency loans, grow and recorded positive annual growth rates recalculated in lei, decreased by 5.1% and since April 2017, reaching 16.7% per annum at recorded 9 003.1 million lei. the end of December 2017.

The developments recorded in loans sector Evolution of new attracted deposits during 2017 reﬂect the effects of a steady decrease in interest rates applied on new In 2017, the annual volume of new deposits domestic currency loans, being driven by placed with banks has recorded a downward monetary policy decisions implemented by the trend, having grown by 38 997.6 million lei, National Bank of Moldova. their volume decreasing by 17.6%, compared to 2016. The decline was driven by a notable Deposit market decrease in the volume of new domestic currency deposits, the total volume of which During 2017, the growth rate of the total declined by 23.0%, recording 24 755.7 million balance of deposits placed with the licensed lei (Chart 3.13). The largest share in the banks recorded positive annual dynamics. This volume of new domestic currency deposits was evolution was driven by the positive dynamics held by retail deposits. In 2017, the total of the balance of domestic currency deposits, volume of retail domestic currency deposits which accounted for over 58%. At the end of decreased by 24.8%, recording 18 092.8 2017, the year-on-year change in the balance million lei, corporate deposits decreased by of deposits decreased slightly, compared to 17.6% and totalled 6 662.9 million lei. December 2016 (8.9% vs. 9.8%) (Chart 3.12). Chart 3.13 The dynamics of volume and weighted average At the end of 2017, the balance of corporate interest rate of new term deposits attracted in MDL deposits recorded a growth rate of 23.4%, having increased by 8.2 p.p., compared to the 3500 MDL, million % 16 end of 2016. It should be mentioned that the 3250 3000 14 growth rate of the balance of retail deposits 2750 recorded positive values throughout the year 2500 12 2250 10 as a result of the evolution of sight deposits. 2000 1750 8 1500 Chart 3.12 The dynamics of balance components of 1250 6 attracted deposits (%, increase versus the same month of 1000 4 the previous year) 750 500 2 250 0 0 30 1/17 7/17 1/16 2/17 3/17 5/17 6/17 9/17 7/16 8/17 4/17 2/16 3/16 5/16 9/16 6/16 8/16 4/16 11/17 11/16 12/17 12/16 25 10/17 10/16 20 Deposits in national currency 15 Weighted average interest rate

10 Source: NBM 5

0 -5 In 2017, compared to 2016, the volume of new -10 foreign currency deposits, recalculated in -15 Moldovan lei, decreased by 6.3%, being mainly -20 driven by the appreciation of the domestic 1/17 7/17 1/16 2/17 3/17 5/17 6/17 8/17 9/17 7/16 4/17 2/16 3/16 5/16 6/16 8/16 9/16 4/16 11/17 11/16 12/17 12/16 10/17 10/16 currency against the main reference Total In MDL In foreign currency (recalculated in MDL) In foreign currency (USD) currencies, and totalled 14 241.9 million lei (Chart 3.14). The largest share in the volume Source: NBM of foreign currency deposits was held by retail deposits. In 2017, the total volume of retail In terms of the domestic currency deposits, foreign currency deposits, recalculated in in 2017, their annual growth rate has slowed Moldovan lei, decreased by 5.3%, recording down, so that the total balance of deposits, at 12 119.1 million lei; at the same time, the the end of December 2017, recorded a growth volume of corporate foreign currency deposits

44 decreased by 11.6% and totalled 2 122.8 recorded a level of 10.33% per annum, having million lei. decreased by 3.88 p.p., compared to 2016. This development was driven by the evolution Chart 3.14 The dynamics of volume and weighted average of interest rates on both corporate and retail interest rate of new term deposits attracted in foreign currency loans. The weighted average interest rate on new corporate loans, extended during 2017, recorded a level of 10.40%, having dropped by 2000 MDL, million % 3 3.67 p.p., compared to 2016. The weighted 1750 average interest rate on retail loans, extended 1500 in 2017, decreased by 4.26 p.p., falling to 1250 2 10.20% per annum, compared to 2016. 1000 750 1 A decline in the level of interest rates applied 500 on new foreign currency loans recorded a 250 slower dynamics. The weighted average 0 0 interest rate on foreign currency loans dropped 1/17 7/17 1/16 2/17 3/17 5/17 9/17 7/16 6/17 8/17 4/17 2/16 3/16 5/16 6/16 8/16 9/16 4/16 11/17 11/16 12/17 12/16

10/17 from 5.26% per annum, recorded in January 10/16 Deposits in foreign currency recalculated in MDL 2017, to 4.66% per annum in December 2017 Weighted average interest rate (Chart 3.11). In 2017, the weighted average rate on foreign currency loans recorded 5.01% Source: NBM per annum, having decreased by 0.89 p.p., compared to 2016. The rate decline was driven Interest rates applied on new deposits by the evolution in interest rates applied both and loans on new corporate loans, accounting for the largest share of total loans, and new retail During 2017, the Executive Board of the loans, extended in foreign currency. National Bank of Moldova carried out four consecutive cuts of the base rate applied to New deposits the main monetary policy operations. Following a downward trend set by the NBM’s Throughout 2017, following the downward base rate applied to the main monetary policy trend set by the NBM’s base rate applied to operations, the monthly weighted average the main monetary policy operations and as a interest rates on new deposits and loans result of the excess liquidity condition taken/extended during 2017 have also recorded in the banking system, the interest recorded a decline (Chart 3.15). Thus, the rates applied on new deposits recorded weighted average interest rate on new granted decreases both in case of domestic currency loans fell from 11.55% per annum, recorded in deposits and foreign currency deposits. January 2017, to 9.58% per annum in Interest rates on domestic currency deposits December 2017 (minimum value) (Chart 3.15). attracted by banking system have gradually declined to 5.19% per annum (December Chart 3.15 The average interest rate in MDL (%) 2017), recording a decrease of 1.61 p.p., compared to January 2017 (Chart 3.13). The 20 18 weighted average rate of domestic currency 16 deposits placed in 2017 recorded a level of 14 5.73% per annum, by 4.98 p.p. lower than in 12 2016. This evolution was driven by the interest 10 rate applied on retail deposits. The weighted 8 average interest rate on retail deposits in 2017 6 4 recorded 6.07% per annum, having decreased 2 2.1-fold, compared to 2016. 0 The average interest rate on foreign currency 1/17 7/17 1/16 2/17 3/17 5/17 6/17 9/17 7/16 8/17 4/17 2/16 3/16 5/16 6/16 9/16 8/16 4/16 11/17 11/16 12/17 12/16 10/17

10/16 deposits recorded a downward trend, having New loans New deposits NBM base rate dropped by the end of the year to 1.37% per annum (Chart 3.14). The weighted average Source: NBM interest rate on foreign currency deposits, placed in 2017, recorded a level of 1.63% per New loans annum, by 0.49 p.p. lower than in 2016. Average weighted interest rates applied on The weighted average interest rate on new both corporate and retail deposits recorded loans extended in domestic currency in 2017 virtually identical levels. The average rate on

45 corporate deposits fell to 1.62% per annum, eight quarters, as well as of the excess liquidity recording a level by 0.31 p.p. lower than in accumulated in the banking system. 2016. The weighted average interest rate on retail foreign currency deposits declined by During 2017, the interest rates on foreign 0.53 p.p. currency loans balance recorded developments similar to those of domestic Banking margin currency loans, though recording a smaller decline, reaching 5.15% per annum at the end In 2017, in the domestic currency segment, of 2017, thus having decreased by 0.59 p.p., following a notable decline in the interest rate compared to the end of 2016. This decrease applied on deposits, the banking margin, was also partly driven by the excess of foreign expressed in MDL, increased by 1.11 p.p., currency recorded on the market in the compared to 2016, recording a level of 4.60%. reporting period. In the foreign currency segment, the situation was opposite, the decline in the interest rate Following the downward trend set by the base applied on loans recording a faster dynamics rate applied to the main monetary policy than in case of deposits; as a result, the operations of the National Bank of Moldova, banking margin, expressed in foreign currency, the weighted average interest rates on the recorded an annual decline of 0.40 p.p., balance of deposits taken by the licensed dropping to 3.38% (Chart 3.16). banks continued their decline.

Chart 3.16 The evolution of banking margin on new Thus, at the end of 2017, the average interest operations in national and foreign currency (p.p.) rate on the balance of domestic currency deposits recorded 5.69% per annum, having 6 decreased by 2.83 p.p., compared to the end of 2016 (Chart 3.17). This evolution was 5 mainly driven by the decrease in the average interest rates on the balance of domestic 4 currency deposits placed by individuals, 3 whereas the decline in the corporate segment recorded lower dynamics. 2

1 At the end of 2017, the average interest rate 2014 2015 2016 2017 on the balance of foreign currency deposits Banking margin on operations in national currency recorded a new historical low, reaching 1.34% Banking margin on operations in foreign currency per annum in the reference period, having dropped by 0.85 p.p., compared to the end of Source: NBM the previous year. The annual decline was driven by a sharp fall in average interest rates Balance interest rates on the balance of retail deposits, whereas interest rates on corporate deposits recorded a During 2017, the average interest rates on the negligible decline during the year. balance of loans extended by licensed banks continued their downward trend, having Chart 3.17 The average interest rate of credit and deposit recorded, at the end of 2017, an average level balances (%) of 9.83% per annum (Chart 3.17) for domestic 18 currency loans (-1.97 p.p. compared to the 16 end of 2016). This decrease was driven by the 14 average interest rate on domestic currency 11.80 12 loans, largely as a result of the developments 9.83 10 recorded in the retail loans segment. The 8.52 8 developments were attributed to a notable 5.74 5.69 decrease in loan costs, which were also 6 4 5.15 recorded in the corporate segment, although 2.19 the average interest rate of the latter recorded 2 1.34 a smaller decline. 0 1/17 7/17 1/16 2/17 3/17 5/17 7/16 6/17 9/17 8/17 4/17 2/16 3/16 5/16 6/16 9/16 8/16 4/16 11/17 11/16 12/17 12/16 10/17 10/16 These developments reﬂected the effects of the Loans in national currency Deposits in national currency relaxation of the monetary policy, promoted Loans in foreign currency Deposits in foreign currency by the National Bank of Moldova in the last Source: NBM

46 Chart 3.18 The quantitative indicators of the primary market of SS (MDL, million)

20000 3.5 Monetary market 18701.7 18000 16233.4 16000 14000 12215.0 11821.5 Primary market of state securities 12000 10995.0 11250.4 10530.0 10292.5 10000 9254.9 8000 As a state agent responsible for the placement 6000 and administration of state securities (SS) 4000 through the Book-Entry System, the National 2000 Bank, in 2017, organised and carried out 193 0 auctions for SS placement. 2015 2016 2017 Indicative volume of issue Volume of supply Taking into account the inflow of external Allocated volume financing, mainly for budget support, coming Source: NBM from the European Commission, the World Bank, the Romanian Government and the IMF, the Ministry of Finance showed consistency in In 2017, the interest rate’s evolution on the its SS issuance policy, structure and volumes primary market of state securities was of SS sales at the beginning of 2017 as well as determined by the persistence of excess throughout most of the year. Thus, treasury liquidity in the banking sector, as well as by bills of 91-, 182-, 364-days maturity were several decreases in the monetary policy rate offered for sale in weekly volumes of 40.0, of the NBM. 60.0 and 70.0 million lei, respectively. The monthly weighted average rate on SS with Government bonds (GB) with 2-year maturity maturity of up to one year has reached its and floating interest rate were offered though maximum value of 7.94% annually in June, the monthly auctions during the year in having recorded its minimum values at the volumes similar to those of the previous year – beginning and at the end of the year (Chart 15.0 million lei. The intention of the Ministry of 3.19). Finance to increase the average maturity of SS as well as an increased investors’ interest for Chart 3.19 The monthly dynamic of indicators of the SS with a longer maturity resulted in the primary market of SS placement of bonds with 2-year maturity and fixed interest rates. They were put up for sale, % 2500 MDL, million 9 together with 3-year maturity bonds, in 7.84 7.94 7.52 2250 7.52 8 monthly volumes of 20.0 million lei for each 6.69 6.70 2000 6.37 6.36 6.26 7 5.89 5.94 maturity. 1750 5.69 6 1500 5 1250 4 In the first quarter of 2017, the Ministry of 1000 Finance created a cash buffer by issuing two 750 3 government bonds with 1- and 2-year maturity. 500 2 250 1 This reserve was meant to ease seasonal 0 0 pressures in order to provide the necessary 1/17 7/17 2/17 5/17 3/17 6/17 9/17 8/17 4/17 11/17 12/17 financing for the budget deficit. Also, it was to 10/17 Indicative volume of issue Volume of supply contribute to the decrease of the refinancing Allocated volume Interest rate and liquidity risks, thus increasing the efficiency of government debt management. Source: NBM

The decrease in the interest rate on SS placed Non-bank investors remained active on SS on the primary market affected the market due to the attractiveness of SS interest attractiveness of these investments. The ratio rates; however, volumes purchased by them between the volume of bids submitted and the during 2017 (1 833.5 million lei) diminished, offered supply, recorded throughout 2017, both as an absolute value (-312.3 million lei) decreased, having dropped to 1.5 (compared and as a share in the total volume traded with 1.7 in 2016). The Ministry of Finance (from 19.1% to 17.8%) as compared to 2016. managed to attract 10 293.0 million lei from The balance of SS purchased by non-residents the market, slightly below the projected amounted to 15.0 million lei at the end of amount of 10 530.0 million lei (Chart 3.18). 2017, having slightly increased compared to the end of 2016.

47 These developments were accompanied by Chart 3.22 The dynamic of nominal interest rates on SS positive changes applied to the structure of with the maturity up to one year (%) the newly issued SS: the share of 91-day SS has been signiﬁcantly decreased in favour of 27 GB with a 2- and 3-year maturity (Charts 3.20 24 and 3.21). Under these conditions, the 21 average maturity of issued SS recorded a 18 considerable increase (from 234 to 287 days). 15 12 Chart 3.20 The structure of SS issues by maturity in 2016 9 6 3 364 days T- 2 years GB 3 years GB 1/17 7/17 5/17 3/17 2/15 9/17 2/16 6/15 8/15 9/15 4/15 6/16 8/16 bills 4/16 11/15 11/16 12/17 12/15 10/17 91 days T- 12/14 1.07% 0.27% 10/16 40.42% bills 21 days T-bills 91 days T-bills 182 days T-bills 364 days T-bills 27.44%

Source: NBM

The average annual interest rate on SS with a maturity of up to one year, traded in 2017, 182 days T- recorded 6.69% annually, compared to 15.81% bills annually recorded in 2016. 30.80% The annual weighted average nominal interest Source: NBM rates on SS, traded over the last two years through primary market auctions, in the Chart 3.21 The structure of SS issues by maturity in 2017 maturity proﬁle, are presented in the table 3.1.

2 years GB 3 years GB 365 days GB 6.50% 1.54% 91 days T-bills Table 3.1: The annual weighted average nominal interest rates of 1.59% the state securities by maturities (%) 19.82% 2016 2017 91 days T-bills 16.14 6.45 182 days T-bills 15.55 6.71 364 days T-bills 15.54 6.80 SS with maturity up to 1 year 15.81 6.69 364 days T- 182 days T- 365 days SB - 7.28 bills bills 39.00% 31.55% 2 years SB 13.72 7.57 3 years SB 7.75 7.47 Source: NBM Source: NBM Analysed by yields recorded on the financial In 2017, SS interest rates recorded values market, SS interest rates, during the first two located mainly at the lower part of the rate months of 2017, were lower than interest rates corridor set by the NBM. The analysis of the applied on deposits taken by banks. Given the evolution of these rates in the maturity profile low investors’ interest in these investments, shows a reduced volatility, compared to 2016, SS interest rates recorded a leap in March, associated with a subunit difference invariably positioning themselves and hence oscillating recorded between them throughout the year within the corridor formed by interest rates (Chart 3.22). At the last SS auction held in on loans extended and deposits placed in the 2017, the average SS nominal interest rate for economy, through the end of the year. The gap 91-day maturity recorded a similar level of between the interest rates on loans extended 5.16% as at the end of the previous year. and deposits taken, specific for 2016, remained Interest rates for SS with 182- and 364-day unchanged almost throughout the entire 2017 maturity reached 5.93% and 5.98%, having (Chart 3.23). increased by 0.34 p.p. and 0.51 p.p., respectively, compared to interest rates The SS volume, placed on the primary market applied on SS with similar maturity, issued at through auctions, which were in circulation on the end of 2016. 31.12.2017, amounted to 7 544.7 million lei at

48 nominal value (Chart 3.24). At the on the secondary market of SS, as opposed to sale/purchase price, their value reached the previous year, when a reverse 7 223.9 million lei, recording an increase of development took place. Thus, in January, the 1 108.9 million lei at the end of the reporting weighted average rate recorded 5.63%, having year compared to the end of the previous year risen by the end of the year in December to (of which 508.9 million lei as liquidity reserve). 5.65% (Chart 3.25). Of SS in circulation on 31.12.2017, SS with a residual maturity of up to three months Chart 3.25 The dynamic of SS indicators traded on the secondary market accounted for 32.8%, from 3 to 6 months – 24.9%, from 6 to 12 months – 31.0%, over 1 year – 11.3%. 12 30

10 25 Chart 3.23 The evolution of interest rates on ﬁnancial market (%) 8 20

27 6 15

24 4 10 21 2 5 18 Weighted average interest (%) interest rate average Weighted

Volume traded of SS(MDL, million) Volume 0 0 15 1 2 3 4 5 6 7 8 9101112 Month of the year 12 2016 Volume 2017 Volume 9 2016 Interest rate 2017 Interest rate

6 Source: NBM 3 1/17 1/15 7/17 1/16 2/17 7/15 5/17 3/17 2/15 7/16 6/17 9/17 8/17 3/15 5/15 4/17 2/16 6/15 8/15 9/15 3/16 5/16 4/15 6/16 9/16 8/16 4/16 11/17 11/15 11/16 12/17 12/15 12/16 10/17 10/15

10/16 Analysed by maturity structure of SS traded Interbank credits/deposits Granted loans on the secondary market, the highest share, State securities Attracted deposits in terms of the frequency of transactions, was Source: NBM held by SS with maturity ranging from 28 days up to 91 days, whereas, in terms of the volume Chart 3.24 The dynamic of SS in circulation at the end of of transactions, the highest share was held by period (MDL, million) SS with maturity ranging from 91 days up to 182 days (Charts 3.26 and 3.27). 8000 7544.7 7000 6804.8 Chart 3.26 The structure of SS traded on secondary market 5916.5 by maturity in 2016 6000 5000 5.0% 4000 21.5% 46.8% 3000 2000 1000 0 2015 2016 2017

26.7% Source: NBM

Up to 28 days From 28 up to 91 days From 91 up to 182 days From 182 up to 364 days Secondary market of state securities Source: NBM In the reporting year, the turnover of the secondary market of SS recorded 43.3 million lei (in 2016 – 30.2 million lei), up 43.4% Activity of primary dealers on the state compared to the previous year, the bank-client securities market transactions accounting for the highest share (62.9%) in total SS transactions, as in the previous years. During 2017, 9 primary dealers operated on the SS market, which, in accordance with the Over 2017, a slight modiﬁcation in the agreements on the operation as primary weighted average interest rate was recorded dealers on the SS market, signed with the

49 NBM, ensured SS placement on the primary Chart 3.28 The structure of SS procurements on the market and secured SS liquidity on the primary market by category of participants secondary market. 100 3.4 3.9 3.1

The value of bids submitted for SS auctions 19.8 19.1 17.8 by the primary dealers, in 2017, amounted to 80 15 595.4 million lei, down by 1 895.6 million lei compared to 2016. 60

Chart 3.27 The structure of SS traded on secondary market 40 76.8 77.0 79.1 by maturity in 2017 20 6.4% 22.8% 0 18.5% 2015 2016 2017 Primary dealers Non-bank investors Participating banks

Source: NBM

Chart 3.29 The selling-buying transactions performed by the primary dealers on the secondary market (MDL, million)

52.3% 120 117.9 Up to 28 days From 28 up to 91 days 100 From 91 up to 182 days From 182 up to 364 days 80 Source: NBM 60 The volume of SS purchased by primary 40 26.7 27.2 dealers on the primary market diminished as 21.9 an absolute value, having recorded 9 825.7 20 16.1 7.0 million lei; however, as a share in the total 1.3 0 volume of traded SS, it slightly increased 2015 2016 2017 compared to the previous year, amounting to Bank-bank Bank-customer Customer-customer 96.9%.

Source: NBM The SS procurement, operated by primary dealers on their own behalf and account, grew to 79.1% of the total volume of traded SS, • operations related to the issuer (primary compared with 77.1% recorded in 2016 (Chart market, interest payment, redemption); 3.28). • operations on the secondary market (sale- The volume of transactions concluded by purchase, REPO, portfolio transfer); primary dealers on the SS secondary market in • monetary market operations conducted 2017 increased, both in the bank-bank by the NBM (final sale-purchase, REPO). segment and in the bank-client segment (Chart 3.29). At the end of 2017, 14 participants were Keeping record of securities through the registered in the BES, including 11 banks, the Book-Entry System (BES) of the NBM National Bank of Moldova, the Ministry of Finance, and the Deposit Guarantee Fund of The Book-Entry System (BES) of securities is a the banking system. system destined for the storage and settlement of state securities and certificates issued by the As of 31 December 2017, BES records NBM. reflected securities in the total amount of 32 159.5 million lei (at nominal value), which The system ensures the processing of: could be classified, by the issuer, as follows:

I. Ministry of Finance – SS in the total amount • transfer orders, as well as the ﬁnal and of 22 929.3 million lei, including: irrevocable settlement of securities transactions in this system;

50 • 7 544.8 million lei or 32.9% representing Chart 3.30 The structure of SS in circulation in the holders’ SS issued on the primary market through proﬁle as of 31.12.2016 auctions; National Bank 69.4% • 2 093.3 million lei or 9.1% representing SS transferred to the National Bank as a result of the conversion of loans, initially contracted from the NBM and subsequently re-issued;

• 13 291.2 million lei or 58.0% representing SS issued and delivered to the NBM under the Law no. 235 of 03.10.2016 on the government bonds issued for the Banks Other investors execution by the Ministry of Finance of 24.0% 6.6% the payment obligations derived from state guarantees no. 807 of November 17, 2014 and no. 101 of 1 April 2015. Source: NBM

Chart 3.31 The structure of SS in circulation in the holders’ II. The National Bank of Moldova – the NBM profile as of 31.12.2017 Certificates (NBC) issued through auctions for a total amount of 9 230.2 million lei. National Bank 67.0% Total amount of SS, recorded in the BES at nominal value, is classified by holders, as follows:

Banks:

• As of 31.12.2016 – 5 341.4 million lei Other investors Banks 6.0% 27.0% • As of 31.12.2017 – 6 191.4 million lei

Non-bank investors (including the Deposit Source: NBM Guarantee Fund of the banking system): • Operations on the primary market (new • As of 31.12.2016 – 1 463.5 million lei issues) – 186 883.6 million lei; • As of 31.12.2017 – 1 353.4 million lei • Redemption and interest payment by the Ministry of Finance for state securities at maturity – 18 666.0 million lei; The National Bank of Moldova: • Redemption of the NBM certiﬁcates at maturity by the National Bank – • As of 31.12.2016 – 15 446.5 million lei 164 900.6 million lei;

• As of 31.12.2017 – 15 384.5 million lei • Operations on the secondary market (sale- purchase of SS) – 43.3 million lei;

Thus, as of 31 December 2017, the share held • Pledging operations – 3 251.2 million lei. by the National Bank is still higher than that of other investors (Charts 3.30 and 3.31). Of total transfers made in the reporting year, The NBM certiﬁcates in the amount of 5 821.3 99.1% accounted for DvP transfers (Delivery million lei were recorded in commercial bank versus Payment) and 0.9% – for FoP transfers portfolios and 104.7 million lei in the portfolios (Free of Payment), the latter representing of other investors. transfers carried out between banks and the NBM when pledging securities as collateral to In 2017, the aggregate amount of 7 647 secure intraday/overnight loans, as well as transactions settled in the BES amounted to transfers performed between banks and their 373 744.7 million lei, of which:

51 clients in case of SS selling operations carried Interbank loan/deposit market out on the secondary market. (transactions in MDL)

Evolution of interbank market indicators In 2017, like in the previous year, banks were (in Moldovan lei) passive on the interbank loan/deposit market due to excess liquidity in the banking system. Reference interest rates applied on interbank market Thus, in the reporting year, transactions were recorded only in March and April, which were The evolution of the curve of CHIBOR/CHIBID performed by a small number of participants reference interest rates (calculated on the (3 banks) and for overnight maturity only. The basis of the indicative interest rates applied on volume of transactions amounted to 60.0 the funds placed/taken on the domestic million lei, compared to 272.0 million lei currency interbank market) was determined by recorded in 2016. the developments recorded in the base rate and the required reserves ratio (Chart 3.32). The average annual interest rate, following the downward trend set by the NBM monetary Chart 3.32 The evolution of reference rates on the policy rates, decreased by 7.29 p.p. compared interbank market and of NBM base rate (%) to the previous year, having recorded 9.00% per year.

24 22 20 18 16 14 12 10 8 6 4 2 0 1/17 1/15 7/17 1/16 2/17 3/17 5/17 7/15 9/17 7/16 6/17 2/15 8/17 4/17 3/15 5/15 2/16 9/15 3/16 5/16 6/15 8/15 4/15 9/16 6/16 8/16 4/16 11/17 11/15 11/16 12/17 12/15 12/16 10/17 10/15 10/16 CHIBID2W CHIBOR2W NBM base rate

Source: NBM

The CHIBOR yield curve recorded a signiﬁcant decline in January, having returned, after a long period of time, within the limits of the NBM rate corridor. Over the following months, the CHIBOR yield curve was broadly stable. However, the banks’ reaction to the monetary policy decision adopted at the end of April regarding the increase in the ratio of required reserves held in Moldovan Lei and in non-convertible currency was a ﬁrm one, the CHIBOR interest rates recording an increase. Following the decrease in the NBM base rate at the end of June, interest rates assumed a slightly downward trend, which have followed through the end of the year. Overall, reference rates have fallen by about 4 p.p. compared to the end of the previous year.

At the end of 2017, the CHIBOR 2W15 interest rate recorded 9.45% compared to 13.28% at the end of 2016.

15Reference rate calculated based on the quotes of contributing banks for 2-week term deposits in Moldovan lei placed with other banks.

52 Chart 3.34 Currency structure of the total turnover of foreign exchange transactions carried out against MDL on the domestic forex market in 2016 (%) 3.6 Forex market

4.6

Evolution of forex market in the Republic of Moldova

45.2 In 2017, the turnover of transactions carried 48.3 out against Moldovan lei (MDL)16 on the domestic forex market recorded increases, both in total volume and in the volume of each counterpart. USD EUR RUB Other currencies The total turnover of traded currencies against Moldovan lei amounted to USD 12 007.6 Sourse: NBM million, increasing by 12.5%, compared to the Chart 3.35 Currency structure of the total turnover of previous year (Table A.9). Foreign currency foreign exchange transactions carried out against MDL on purchases increased at a faster pace, the domestic forex market in 2017 (%) amounting to USD 6 061.7 million (+13.1%), whereas foreign currency sales totalled USD 4.7 5 945.9 million, rising by 11.9%, compared to 2016.

Chart 3.33 The turnover of foreign exchange transactions against MDL carried out on the domestic forex market, by 48.2 the settlement method (bank transfer or cash) 44.6

100% 90% 26.2 31.0 31.8 80% 70% 60% USD EUR RUB Other currencies 50% 40% Sourse: NBM 73.8 69.0 68.2 30% 20% 10% domestic forex market kept increasing, 0% eventually recording 31.8% (Chart 3.33). 2015 2016 2017 Foreign exchange market cash turnover As before, individuals preferred to apply to Foreign exchange market transfer turnover foreign exchange bureaux of licensed banks Sourse: NBM for foreign exchange services. In 2017, the volume of transactions carried out through The total volume of foreign exchange licensed banks recorded an increase of 7.1%, transactions increased, mainly driven by bank accounting for a share of 64.8% in the total transfer transactions, which rose by 11.1% to turnover of the cash forex market. Similarly, a USD 8 189.1 million. Among them, it is worth significant increase (35.2%) was recorded in mentioning a 13.1% increase in the turnover of the volume of transactions carried out through currency exchange transactions carried out by foreign exchange offices. legal entities, amid the revival of the foreign trade of the Republic of Moldova. An upturn in the trade with the EU countries as Besides, the increase in the volume of well as remittances from these countries remittances to Moldovan individuals has determined the growth of the euro share in the caused an increase in the turnover of the cash total turnover of the forex market by 3.0 pp., forex market by 15.6%. to 48.2% (Chart 3.35). Thus, for the first time, the single European currency surpassed the Thus, in 2017, the share of the cash forex US dollar (44.6%), becoming the most traded market’s turnover in the total turnover of the currency on the local market. Analysing the cash forex market by currency structure, one 16The amount does not include purchases/sales against MDL carried out between the NBM and the Ministry of can note that the largest share was also Finance. accounted for by the euro (Table A.10).

53 Alongside the increase in the volume of Chart 3.37 The number of transactions carried out against euros and US dollars on the intra-bank forex market transactions carried out in the euro, a through bank transfer, by the amount traded (showing the signiﬁcant increase in the number of these equivalent of amounts ranging from 10 000 to 100 000 US transactions was also recorded. Thus, the dollars) number of EUR/MDL currency exchange transactions carried out by legal entities rose by about 21.0%, compared to the previous 60 000 year, their share amounting to 64.0% (Chart 50 000 3.36). 40 000 Chart 3.36 Total number of currency exchange transactions carried out by legal entities, by currency 30 000

20 000 2016 2017 300 000 10 000-100 000 250 000 USD EUR 200 000 Sourse: NBM 150 000

100 000 Chart 3.38 The number of transactions carried out against euros and US dollars on the intra-bank forex market 50 000 through bank transfer, by the amount traded (showing the equivalent of amounts exceeding 100 000 US dollars) 0 2016 2017 EUR USD Other currencies

5000 Sourse: NBM 4500 4000 3500 Besides, the single European currency 3000 2500 prevailed in the low-volume currency exchange 2000 transactions (less than the equivalent of USD 1500 1000 100 thousand). At the same time, in 2017, the 500 number of euro-denominated transactions 0 2016 2017 2016 2017 2016 2017 increased, recording volumes of up to the 100 000-500 000 500 000-1 000 000 >1 000 000 equivalent of USD 500 000 and a similar USD EUR number of transactions to that carried out against the US dollar (Chart 3.38). Sourse: NBM

During the reporting period, as in 2016, the main source of currency supply for licensed The foreign currency sales of licensed banks banks represented legal entities, closely recorded similar dynamics to these of followed by the cash supply from individuals. purchases, reaching the equivalent of USD The foreign currency purchases from economic 5 321.5 million in 2017. The foreign currency agents, carried out against Moldovan lei demand came mainly from legal entities through bank transfers, recorded an annual (76.4% of total sales), the volume of sales to increase of 16.1%, whereas the cash corporate clients increasing by 11.4%, purchases from individuals (including through compared to 2016. However, a significant foreign exchange offices17) increased in increase was also recorded in the sales to smaller proportions - by 5.5%. Besides, the individuals, both in cash (including through volume of currency exchange transactions currency exchange offices) and by bank carried out on the interbank market also transfer. increased; however, these transactions continued to account for a negligible share in Given the above, in 2017, local banks recorded the total turnover. net sales of foreign currency to legal entities in the amount of USD 1 657.5 million, which All the above-mentioned factors contributed to were amply covered by net purchases of foreign the increase in purchases of foreign currency currency from individuals (including through against Moldovan lei, carried out by licensed foreign exchange offices), totalling USD 1 887.2 banks in 2017, to USD 5 341.8 million, rising million. by 10.2%, compared to the previous year.

17Purchases carried out by banks from foreign exchange The foreign currency surplus, including from ofﬁces accounted for USD 55.9 million other sources, was absorbed through the

54 NBM’s purchase interventions amounting to Chart 3.40 Currency structure of foreign currency assets, USD 433.8 million (Table A.11). at the effective exchange rate (%)

100% 90% Evolution of foreign currency assets and 80% 37.8 30.9 liabilities of licensed banks 70% 60% 50% During 2017, the balance of foreign currency 40% 67.8 liabilities on the balance sheet of licensed 30% 60.9 banks increased as a result of the rise in 20% placements made in personal foreign currency 10% accounts as well as in the volume of external 0% 31/12/16 31/12/17 loans received by local banks. As a result, the EUR USD Other currencies balance sheet assets also increased, especially the liquid assets (Chart 3.39). Sourse: NBM

Chart 3.39 Balance sheet assets, by asset type, at the effective exchange rate (in USD million) During 2017, the licensed banks’ foreign currency lending recorded a moderate rise. The share of the balance of foreign currency 1900 loans did not exceed 53.1% in foreign currency 1650 assets, recording at the end of the reporting 1400 year a share of 46.9%, down by 6.7 pp., 1150 900 compared to 2016. 650 400 A 5.8% growth of the balance of foreign 150 currency loans extended by local banks, -100 amounting to USD 803.0 million, can be solely 1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 Other assets (including adjustments and impairment losses) attributed to exchange differences resulting Loans attached Currency required reserves placed with NBM from the appreciation of the euro against the Loans in foreign currency Foreign availabilities US dollar on foreign markets. By excluding Sourse: NBM exchange differences, one can note that the evolution of the balance of foreign currency As of December 31, 2017, the balance of loans resulted in a 2.8% decline in the banks’ foreign currency assets18 on the balance sheet foreign currency lending, the balance of loans of licensed banks (extended loans, available extended in the US dollars, in particular, funds, required reserves, other foreign decreasing by 10.0% (Table A.12). At the same currency assets and currency-linked assets) time, the balance of loans extended in euros amounted to USD 1 712.5 million, increasing slightly increased, by 0.9%. In the currency by 20.9%, compared to the end of 2016. By structure of the balance of loans, a share of excluding the exchange rate differences slightly above two-thirds of total loans was resulting from the appreciation of the euro held by loans extended in euros, the rest of against the US dollar on foreign markets loans being extended in the US dollars. (henceforth - exchange differences), a lower growth of 11.2% was recorded. At the end of the reporting year, the portfolio of currency-linked loans (USD 68.5 million) Analysing foreign currency assets on the accounted for 4.0% of total foreign currency balance sheet by currency type, one can note assets of licensed banks. The balance of these that the single European currency loans increased by 12.9%, compared to strengthened its position by 6.9 pp., December 31, 2016, the increase being accounting for 67.8% (Chart 3.40). supported by the euro-linked loans.

Although the balance of foreign currency assets During 2017, banks tended to accumulate on the balance sheet increased, their share in excessive foreign currency liquidity in order to the total assets of licensed banks decreased ensure that their customers beneﬁt from by 2.0 pp., to 35.5%, whereas foreign currency smooth current settlements. At the end of the liabilities on the balance sheet fell by 2.7 pp., reporting year, the available foreign currency to 44.1% in total debts of the banking system. funds accounted for 40.7% of total foreign currency assets, occasionally recording even 18Excluding the adjustment position of assets in foreign currency. higher shares (43.3%) over the year. As of

55 December 31, 2017, the foreign currency Chart 3.41 Foreign currency liabilities on the balance sheet, at the effective exchange rate, by liability type (in balance of local banks totalled USD 697.6 USD million) million, increasing by 40.4%, year-on-year, or, by excluding exchange differences, by 29.8%.

The balances of all types of liquidity recorded 1800 increases, in particular, the balance of funds 1500 held in "Nostro" accounts opened in foreign 1200 banks (Table A.13). 900

600 At the end of 2017, the foreign currency balance of licensed banks had the following 300 structure: "Nostro" accounts opened abroad - 0 1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 66.5%, foreign currency cash - 17.9%, Other liabilities The means of foreign banks (loro and term deposits) placements abroad - 8.9%, overnight deposits - Credits received Deposits of individuals 6.5 % and foreign currency securities - 0.2%. Deposits of legal entities

Sourse: NBM Regarding the currency structure of available foreign currency funds held by local banks, as Chart 3.42 Currency structure of foreign currency of December 31, 2017, the largest share was liabilities, at the effective exchange rate (%) held by the euro - 66.5%, followed by the US dollar - 30.2%, the Russian rubble - 1.6% and 100% other currencies - 1.7%. 90% 80% 35.5 31.8 Following a steady increase in the volume of 70% foreign currency deposits placed with the 60% banks, the balance of foreign currency 50% required reserves, as of December 31, 2017, 40% 30% 63.9 67.6 totalled USD 212.1 million, increasing by 20% 23.5%, compared to the end of 2016, and 10% accounting for 12.4% of total foreign currency 0% assets on balance sheet. 31/12/16 31/12/17 EUR USD Other currencies

At the end of the reference year, the balance Sourse: NBM of foreign currency liabilities on the balance sheet of licensed banks amounted to USD 1 699.4 million, increasing by 20.5% or, In terms of currency structure, foreign excluding exchange differences, by 10.4%, currency accounts of non-bank clients of local compared to the end of 2016 (Chart 3.41). banks continued to be mainly This increase was mainly fuelled by euro-denominated. As of December 31, 2017, placements in euros, which grew by 27.3%, of compared to the end of 2016, the share of which 15.8 pp. were accounted for by positive euro-denominated accounts increased by 2.7 exchange differences resulting from the pp., reaching 66.9%, to the detriment of US appreciation of the euro against the US dollar dollar-denominated accounts, the share of on foreign markets. In terms of the currency which decreased almost in the same structure of foreign currency liabilities, as of 31 proportion, dropping to 32.3% (Table A.15). December 2017, the single European currency strengthened its position by 3.7 pp., In 2017, an increase was recorded mainly in accounting for 67.6% (Chart 3.42). the placements on personal foreign currency accounts, which grew by 20.7%, or, excluding Such basic liabilities as term deposits, various exchange differences, by 10.1%, thus deposits and current accounts of non-bank amounting to USD 1 057.1 million. The clients (hereinafter – foreign currency accounts strongest growth was recorded for of non-bank clients) continued to hold a euro-denominated personal deposits. In 2017, signiﬁcant share of 87.9% in the portfolio of individuals showed no preference for a foreign currency liabilities of licensed banks particular type of account, therefore (Table A.14). By the end of 2017, the balance placements on personal term deposits and of foreign currency accounts of non-bank other types of accounts (current accounts and clients totalled USD 1 493.4 million, increasing various deposits) increased almost equally. As by 17.7%, or, excluding exchange differences, of December 31, 2017, the banks’ foreign by 7.8%, compared to the end of 2016. currency debts against individuals accounted for 62.2% of their total foreign currency

56 liabilities on the balance sheet.

At the end of the reporting year, the balance of Evolution of nominal and real effective foreign currency accounts of non-bank exchange rates corporate clients (USD 436.3 million) recorded a share of 25.7% in total foreign currency liabilities on the balance sheet of licensed During 2017, the domestic currency banks, thus marking an increase of 10.9%, or, appreciated by 14.4% against the US dollar by excluding exchange differences, of 2.7%, and by 2.3% against the euro, compared to compared to the end of 2016, due to net the end of 2016 (Chart 3.43). inflows of the US dollars. Chart 3.43 Fluctuations in the official exchange rate of the domestic currency against the US dollar and the euro In 2017, foreign currency term deposits placed by non-bank clients (particularly individuals) MDL continued to be the main source of financing 25.0 for the banks’ foreign currency lending activity. 24.0 23.0 As of December 31, 2017, the balance of term 22.0 21.0 deposits recorded a share of 47.1% in total 20.0 19.0 foreign currency liabilities on the balance 18.0 17.0 sheet and covered almost entirely (99.6%) the 16.0 balance of foreign currency loans extended by 15.0 14.0 licensed banks. 13.0 12.0 1/17 1/15 7/17 1/16 7/15 3/17 5/17 7/16 9/17 3/15 5/15 9/15 3/16 5/16 9/16 11/17 11/15 In 2017, raising loans by licensed banks 11/16 The official exchange rate of MDL against USD exceeded loan repayments and, after three The official exchange rate of MDL against EUR consecutive year of decline, the balance of the Sourse: NBM loans raised increased by 26.6% (exchange differences excluded), amounting to USD Chart 3.44 Evolution of currencies of the main trading 158.6 million. However, the number of raised partners of the Republic of Moldova and other countries from the region against the US dollar, 31 December foreign currency loans remains low, especially 2017/31 December 2016 (%) in the case of loans raised from abroad, the balance of which at the end of 2017 recorded a level equal to 1/3 of the balance of loans PLN 17.0% CZK 16.9% raised in 2016. MDL 14.4% EUR 12.4% BGN 12.4% At the end of the reporting year, the licensed HUF 12.3% banks’ foreign currency liabilities on the RON 10.2% balance sheet against non-residents GBP 8.8% CNY 6.0% accounted for 11.0%, compared to 9.6%, as of RUB 4.4% 31 December 2016. CHF 4.3% BYN -0.9% UAH -2.9% The balance of contingent assets and liabilities TRY -7.8% held in foreign currency by licensed banks -10% 0% 10% 20% recorded, at the end of 2017, a decrease of Sourse: NBM USD 55.4 million or 46.9%, compared to 31 December 2016 (Table A.16). At the end of On average, the Moldovan leu appreciated 2017, contingent assets and liabilities in against the US dollar and the single European foreign currency recorded roughly the same currency by 7.2% and 5.6%, respectively, values, reflecting the local banks’ commitment compared to 2016. to carry out mainly currency-to-currency conversion operations. In 2017, the currencies of most major trading partner countries, accounting for significant The value of the total open (long / short) shares in the Moldovan foreign trade, foreign exchange position recorded by licensed strengthened their positions against the US banks at the end of 2017 increased by USD 8.3 dollar. According to the quotations at the end million, reaching a level of 2.21% in the total of the year, the Polish zloty and the Czech regulatory capital TRC. Compared to crown appreciated more strongly against the December 31, 2016, foreign currency positions US dollar than the Moldovan leu, their price increased in all currencies, yet mostly in the rising by 17.0% and 16.9%, respectively (Chart US dollar and the euro. 3.44).

57 At the same time, the real effective exchange coming from producers of cereal and oil rate19 (REER) of the domestic currency products, nuts and dried fruit, sugar, etc. At appreciated by 13.4%. The following countries the same time, economic agents that were particularly contributed to the strengthening, primarily involved in imports purchased 11.4% in real terms, of the Moldovan leu: Romania - more currency than in 2016. Foreign currency by 3.0 pp., Russia - by 2.3 pp. and Ukraine - by demand from energy importers increased by 1.5 pp. (Charts 3.45 and 3.46). 8.2%, only due to an increased demand from importers of oil / fuel products. In 2017, the exchange rate assumed a steady appreciation trend, as the situation in the forex Chart 3.46 The evolution of the REER of the domestic currency, calculated on the basis of shares held by market was similar to that of 2016, when currencies of the main trading partner countries, during economy recorded a signiﬁcant surplus of 12/2014 - 12/2017 foreign currency.

150% Chart 3.45 Contribution of Moldova’s main trading partner countries to ﬂuctuations of the REER in 2017 140%

Depreciation (-)/ Appreciation (+) 130% Romania Russian Federation 120% Ukraine Turkey Italy 110% Belarus Germany China 100% United Kingdom Switzerland Bulgaria 90% Austria 12/14 4/15 8/15 12/15 4/16 8/16 12/16 4/17 8/17 12/17 France Netherlands NEER REER Poland Hungary Czech Republic Sourse: NBM -0.6 0.0 0.6 1.1 1.7 2.2 2.8 p. p. Contribution, bilateral exchange rate MDL / foreign currency Chart 3.47 The currency structure of the net foreign Contribution, inflation differential currency supply from individuals (recalculated at a Contribution, real course constant exchange rate) Sourse: NBM

Economic growth in the host countries of 100% Moldovan labour migrants had positive 80% implications for foreign currency remittances from abroad, which, after two years of decline, 60% returned to positive values, increasing by 11.2%. As a result, the net foreign currency 40% supply from individuals, mainly of euros, grew by 4.8%, compared to 2016, amounting to 20%

USD 1 982.6 million (Chart 3.47). 0% I/17 I/15 I/16 II/17 II/15 II/16 III/17 IV/17 III/15 IV/15 III/16 In 2017, foreign trade operations also recorded IV/16 Other currencies RUB EUR USD an upturn, the growth rate of imports of goods (20.2%20) exceeding that of exports of goods Sourse: NBM (18.6%20). Given that the trade balance deﬁcit is not covered only through sources available Under these circumstances, the net foreign in the market (such as foreign currency currency supply from individuals exceeded purchases), but also through commercial loans, (119.6%), for the second consecutive year and foreign loans, etc., its deterioration by 21.8% in similar proportions, the net foreign currency did not put pressures on the local forex market. demand from economic agents. In this context, the net foreign currency demand from economic agents increased by as Unlike in 2016, in 2017, the condition of little as 5.2%, totalling USD 1 657.5 million. By foreign currency surplus was recorded disaggregating this indicator, it was observed monthly, except for February (Chart 3.48). In that economic agents that were primarily order to restore the market’s equilibrium and involved in exports sold 16.1% more currency to avoid unsustainable appreciation of the to banks, the supply of foreign currency mainly Moldovan leu, the NBM had to intervene on the market, roughly monthly, adjusting the volume 19 Calculated based on the share of main trading partners of its foreign currency purchases to the and the average exchange rates, December 2000=100. 20According to data published by the National Bureau of amount of surplus currency available on the Statistics. market. In 2017, the NBM purchased USD

58 433.8 million, thus improving the resilience of Chart 3.49 Evolution of ofﬁcial reserve assets presented as the foreign exchange reserves of the state. months of imports of goods and services (MBP6)

USD, million months of Speaking of seasonal trends, the net foreign import exchange supply from individuals retained its 3000 6.0 5.0 previous seasonal pattern, gradually 2500 increasing up to the third quarter when it 4.0 reached its peak level ever since 2014 of USD 2000 660.1 million. Atypical developments in supply 3.0 1500 were recorded in the fourth quarter of the year, 2.0 when foreign currency surplus kept persisting 1000 1.0 on the market. This development was determined, on the one hand, by stronger 500 0.0 purchases of foreign currency by banks from Official reserve assets (ORA) agricultural exporters and, on the other hand, ORA in months of import of goods and services by a lower demand from the energy importers, Sourse: NBM taking into account that some of them have accumulated the required amount of foreign amounting to SDR 12.4 million, while the currency in previous quarters. remainder was transferred to the Ministry

Chart 3.48 The coverage of the net foreign currency of Finance for budget support (ECF - SDR demand by supply and the evolution of the ofﬁcial rate 10.4 million, EFF - SDR 8.6 million);

• The Romanian Government disbursed the MDL/USD 200% 21 last two instalments, totalling EUR 90 180% 20 million, under the Agreement on the 160% 19 Reimbursable Financial Assistance in the 140% 18 120% 17 amount of EUR 150 million concluded 100% 16 with the Republic of Moldova in 2015; 80% 15 60% 14 • The European Commission allocated EUR 40% 13 36.3 million for budget support, destined 20% 12 to the implementation of the European 0% 11 Program for Agriculture and Rural 1/17 1/15 7/17 1/16 3/17 5/17 7/15 9/17 7/16 3/15 5/15 3/16 5/16 9/15 9/16 11/17 11/15 11/16 Development, the support of the police Coverage ratio, demand by offer Average exchange rate MDL/USD reform and the reform of public finance Sourse: NBM policy, as well as the implementation of the visa liberalization with the European Official reserve assets Union and the Agreement on the Deep and Comprehensive Free Trade Area. At the end of 2017, the amount of official • The World Bank, through its institutions reserve assets approached the record level of (IDA and IBRD), allocated funds in the 2013, having reached USD 2 803.3 million, amount of USD 31.1 million, most of thus increasing by 27.1%, compared to 2016 which represented loans destined to (Chart 3.49). support such projects as: “Improving the efficiency of the energy sector”, The amount of official reserves increased “Improving Competitiveness II”, following the NBM’s purchases of foreign “Rehabilitation of local roads”, currency as well as the financial assistance, “Competitive agriculture”, etc. At the equivalent to USD 202.9 million, received from same time, the World Bank disbursed the main development partners of the budget support to support reforms in the Republic of Moldova as a result of the education and health sectors as well as successful implementation in Moldova of the for the implementation of the IMF-funded economic and financial policy “Strengthening the effectiveness of the program. In this context: social assistance network” project;

• The European Investment Bank extended • The IMF disbursed the second and the loans totalling EUR 12.1 million to support third instalments totalling SDR 31.4 the implementation of such projects as: 21 million, of which the NBM received EFF “Livada Moldovei” (Moldova’s orchard), 21EFF - Extended Fund Facility, ECF – Extended Credit “Rehabilitation of streets and Facility. modernization of public lighting in

59 Chisinau municipality”, “Restructuring the reserves), according to their specific objectives viticulture and wine sectors”; and regulations, making this approach more effective in achieving the established goal. • IFAD continued to finance the “Inclusive rural economic and climate resilience The foreign reserves’ management is programme” (IFAD VI) through loans and conditioned by the evolution of global grants totalling USD 5.5 million. economy, the decisions of the major central banks of the world, especially of the monetary authorities of the US, the Eurozone and the UK, At the end of 2017, official reserve assets as well as by the shares held by the currencies ensured a sufficient coverage of imports of of these countries in the structure of official goods and services (around 5.5 months of reserve assets. imports22). For the foreign exchange reserves’ management the NBM chooses safe instruments, employed by other central banks, The management of foreign exchange such as: placements on correspondent reserves accounts (usually with other central banks), foreign currency term deposits and In accordance with art. 5, 16 and 53 of the Law placements in three classes of securities: on the National Bank of Moldova, the NBM supranational securities (issued by keeps and manages foreign exchange reserves supranational institutions), government of the state, carries out foreign exchange securities (issued by the US government, transactions by using foreign exchange governments of the EU Member States, other reserves, and maintains them at a level which high-rated state-guaranteed government is appropriate for the implementation of the issuers) and non-governmental securities monetary and foreign exchange policy of the (issued by high-rated agencies). state. The role of foreign exchange reserves is Chart 3.50 The structure of foreign exchange reserves, to ensure the credibility and financial stability by investment instruments, at the end of 2015-2017 (USD of the country, to honour payments related to million) the external liabilities of the state, and to cope with unpredictable exogenous shocks. 3000 12.3% When managing foreign exchange reserves, 2500 6.6% the NBM ensures the high level of security and 2000 the required level of liquidity of investments. 7.2% 47.9% 1500 54.3% The NBM’s investment policy is characterised 56.4% by prudence and aims to optimise profitability, 1000 39.8% provided that the investments’ liquidity and 500 39.1% security requirements are met. An essential 36.4% 0 element of the foreign reserves’ management 12/15 12/16 12/17 is the investment risk’s management, which Cash and placements on the correspondent account (including overnight) Securities is carried out through constraints and limits Term placements imposed on investments. Sourse: NBM

Table A.17 lists the main risks associated with A part of the foreign exchange reserves is the management of foreign exchange reserves managed externally by the World Bank. In and the methods used to mitigate them. accordance with the agreement on advisory and investment management services, signed Starting with July 2013, the NBM, under the between the International Bank for cooperation with the World Bank, began Reconstruction and Development (IBRD) and applying the strategic asset allocation the National Bank of Moldova on December 8, approach (SAA). The strategic asset allocation 2010 (extended by the decision no.168 of involves a long-term plan of action for asset December 30, 2015 of the Executive Board, management aimed at achieving optimal IBRD became the NBM’s consultant and levels of proﬁtability and risk. In the SAA mandatary for the management of a part of context, international reserves are divided into foreign assets accounting for 20% of the total three classes (current, liquidity and investment foreign exchange reserves. As of 31 December 2017, the share of the externally managed 22Calculated based on the latest forecasts available at the time of writing this report on the import of goods and assets accounted for 7.58% of total foreign services in 2018. exchange reserves.

60 In 2017, the portfolio of securities held to At the same time, the currency composition of maturity remained unchanged. As of 31 the official reserves falls within the established December 2017, the value of this portfolio deviation allowance of +/- 10% from the amounted to USD 411.53 million, accounting regulatory currency composition (Chart 3.52). for 14.70% of total foreign exchange reserves. According to the decision no. 286 of December In spite of the negative investment return 23, 2014 of the Council of Administration of rates on the short- and medium-term the NBM, with effect from January 1, 2015, the euro-denominated investment instruments, share of the held-to-maturity securities shall the foreign exchange management decisions not exceed 20% of total foreign exchange taken by the NBM led, in 2017, to a profit of reserves. USD 28.11 million, an average profit rate recording a level of 1.14%. Chart 3.51 The composition of foreign exchange reserves, as of 31 December 2017

Other GBP currencies 0.01% EUR 12.19% 14.20%

USD 73.6 %

Sourse: NBM

Chart 3.52 The regulatory currency composition, as of 31 December 2017

Other currencies GBP 5% 20%

EUR 10% USD 65%

Sourse: NBM

According to the data collected at the end of the reporting year, 47.9% of the reserves were invested in securities, 39.8% represent term deposits, and 12.3% are kept as cash and funds in corresponding accounts (Chart 3.50). Return on investment depends on market conditions, the exchange rate fluctuations and the prices of investment instruments. The evolution of the global economic environment and the prospects for the development of financial markets influenced the investment decisions and the currency composition of the reserves. In this context, the largest share in the foreign currency reserves structure was allocated to the US dollar - 73.6% (Chart 3.51).

61 Chapter 4

Banking supervision

respectively, being at the same level as at the end of the previous year.

4.1 Evolution of the At the same time, the loan portfolio decreased banking sector by MDL 1 288.0 million (3.7%) during the year, amounting to MDL 33 473.3 million. The reduction of the portfolio was influenced by the current challenging economic Banking sector, including core indicators developments that led to lower demand for credit as well as to a more risk-averse As of 31 December 2017, 11 banks licensed by approach by banks to potential borrowers. the National Bank of Moldova were operating in the Republic of Moldova, including 4 We note that, following the creation of the subsidiaries of foreign banks and foreign Credit Risk Register, the NBM daily monitors financial groups. the quality of the loan portfolio, including applications for loans etc., the banks being The total number of subdivisions of licensed motivated to be more cautious in accepting banks in the Republic of Moldova by the transactions and adequately assessing the 31.12.2017 constituted 794, of which 294 risks. branches and 500 agencies. Chart 4.1 Dynamics of main indicators for 31.12.2016 – 31.12.2017 The number of workers employed in the 80000 banking sector, as of 31 December 2017, 34 30.7 31.0 70000 29.8 29.7 represented 7 873 individuals. On average, 29.1 31 assets under management per each employee 60000 28 in the banking sector represented an amount 50000 25 of MDL 10.1 million, recording an increase of 22 40000 MDL 0.8 million (9.1%), compared to the end 18.4 17.6 17.4 19 of 2016. 30000 16.4 16.2 16 20000 13 The financial situation of the banking sector 10000 10 by the 31.12.2017 was satisfactory. The banks 0 7 are sufficiently capitalized, capital constituting 12/16 3/17 6/17 9/17 12/17 MDL 10 106.7 million, and the risk-weighted Total assets (MDL, million) TRC (MDL, million) Total loans (MDL, million) Total deposits (MDL, million) capital adequacy indicator reached a high level Risk weighted capital adequacy (%) Total cnon-performing loans/ Total loans (%) of 31.0% and is maintained by all banks. Both Source: NBM indicators have been on the rise compared to the end of 201623. Dynamics of main indicators A negative trend was also registered by is shown in the chart 4.1. non-performing loans, which grew by MDL 448.8 million (7.9%), compared to the end of The profit for the financial year ending on the previous year, and amounted to 31.12.2017 for the banking sector constituted MDL 6 151.5 million. The growth was MDL 1 480 million, recording an increase of conditioned both by the situation in the real MDL 116.7 million (8.6%), compared to the economy as well as by the requirements previous year. For the year 2017, the return on 24 25 imposed by the NBM on adequate coverage of assets and the return on capital , of the risks related to assets in banks’ balance sheets. licensed banks amounted to 1.8% and 11.1%, Banks continued to comply with prudential 23The data by 31.12.2016 throughout the text are liquidity requirements imposed by the NBM, adjusted according to the results of the external audit. which reveal the existence of adequate 24 Return on assets = annualized net income / average sources of funding for covering potential needs assets 25Return on capital = annualized net income / average in both the short and the long term. share capital The balance of deposits grew by MDL 5 058.3

62 million (9.2%) during the year 2017 up to MDL amount of MDL 354.5 million. At the same 59 896.9 million. time, the following factors inﬂuenced negatively the capital: the increase of the calculated but unrecorded amount for asset losses and conditional commitments by MDL Capital 132.9 million, the establishment by one of the banks of provisions for a litigation amounting Tier I capital is the basic component of the total to MDL 191.9 million, following external audit regulatory capital against which the minimal and the NBM inspections. size required to conduct ﬁnancial activities is As of 31.12.2017, banks reported the Tier I established. capital corresponding to the minimum required

Chart 4.2 Dynamic of capital and risk weighted capital capital (minimum required level MDL 200 adequacy for 31.12.2016 -31.12.2017 million). ≥

The total regulatory capital includes Tier I 10000 30.7 34 capital and Tier II capital (Tier II capital is 9000 29.1 31.0 29.8 32 8000 29.7 limited to a maximum of 100% of Tier I capital) 7000 30 minus participation quotas in the capital of 6000 28 5000 other banks, which hold the license of the 4000 26 National Bank of Moldova. 3000 24 2000 22 1000 The total regulatory capital compared to the 0 20 12/16 03/17 06/17 09/17 12/17 end of 2016 increased by MDL 860.4 million TRC (MDL mil.) 9294.1 9864.2 9563.8 10205.5 10106.7 (8.9%). The dynamics of the Tier I capital and of Tier I capital (MDL 9648.8 10234.1 9932.3 10590.6 10509.2 the total regulatory capital during the reporting mil.) Risk Weighted Capital period is represented in the chart 4.2. 29.8 29.7 29.1 30.7 31.0 Adequacy (%) The average of the risk-weighted capital Source: NBM adequacy ratio per sector amounted to 31.0%, recording an increase of 1.2 p.p. compared to the end of the previous year (Chart 4.2). By Tier I capital for the banking sector reached the the 31.12.2017, banks have met the value of MDL 10 106.7 million, increasing by risk-weighted capital adequacy ratio (the limit MDL 812.5 million (8.7%) compared to the end for each bank 16%). of 2016. ≥ Modiﬁcation of the capital structure of the

Chart 4.3 Dynamics of Tier I capital concentration in the banking sector based on its concentration on banking system of the Republic of Moldova by groups of groups of banks is presented in the chart 4.3. banks for 31.12.2016 – 31.12.2017 (%) The quota of Tier I capital of large banks in the total Tier I capital of the banking sector constituted 69.8%, increasing, compared to 100% 9.4% 9.2% the end of the previous year, by 1.6 p.p. 22.4% 80% 21.0% Respectively, the share of Tier I capital of 60% medium banks and of small banks decreased accordingly by 1.4 p.p. and 0.2 p.p. 40% 68.2% 69.8% 20% Of the total number of banks, four banks have 0% capital formed entirely from foreign 12/16 12/17 investments (of which two subsidiaries of

Small banks ( Assets < MDL 2000 mil.) foreign banks: BC “EXIMBANK-Gruppo Veneto Medium banks (MDL 2000 mil. ==MDL 7000 mil.) banks – have capital formed from foreign and domestic investments. Source: NBM In 2017, negotiations were initiated to acquire The increase of the Tier I capital was the share package issued by B.C. determined by obtaining proﬁt during the year “VICTORIABANK” S.A. On January 16, 2018, 2017 in the amount of MDL 1 480.7 million. Banca Transilvania together with the European The majority of banks have fully capitalized Bank for Reconstruction and Development their retained earnings, with the exception of purchased 39.2% of shares in the B.C. three banks that paid dividends in a total “VICTORIABANK” S.A.

63 It should be noted that the limit on the maximum size of assets by banks in the sector Assets and their quality is respected. The largest share of total assets of a bank in proportion to total assets in the banking sector belonged to B.C. "MOLDOVA - Total assets of the banking sector amounted to AGROINDBANK" S.A., constituting 27.9% (limit MDL 79 541.7 million, increasing 35%), followed by B.C. "Moldindconbank" byMDL 6 711.3 million (9.2%) compared to the S.A.≤ - 19.1% (Chart 4.5). end of the previous year. The primary source of financing assets are liabilities, which Chart 4.5 Assets concentration of the banking sector as at increased by MDL 5 722.2 million (9.5%), 31.12.2017 (%) mainly due to the increase of deposits attracted by MDL 5 015.4 million (9.1%) and BC „MOLDOVA - AGROINDBANK” S.A. 1.8% 1.8% 1.0% BC „Moldindconbank” S.A. of other borrowings by MDL 382.8 million 3.4% (65.0%). Another source for financing assets 3.7% B.C. „VICTORIABANK” S.A. 27.9% was capital, which grew by MDL 989.1 million 4.3% BC „MOBIASBANCĂ - Groupe Societe Generale” S.A. (7.8%) as a result of realizing a net profit 6.1% B.C. “EXIMBANK - Gruppo Veneto Banca” S.A. during the analysed period. B.C. „ProCredit Bank” S.A. „FinComBank” S.A.

B.C. „ENERGBANK” S.A. During the reference period, the share of assets 12.7% in GDP decreased from 54.0% to 53.5% (Chart BCR Chişinău S.A. B.C. „COMERŢBANK” S.A. 4.6). 19.1% BC „EuroCreditBank” S.A. 18.2% Concentration of banking sector assets is reﬂected in the chart 4.4. Source: NBM Chart 4.4 Dynamics of assets concentration of the banking system of the Republic of Moldova by groups of banks as of 31.12.2016 – 31.12.2017 (%) To evaluate the banking sector concentration in the Republic of Moldova, the Herﬁndahl-Hirschmann index was calculated26. 4.7% 4.6% The HH index is used as a possible indicator of 100% 18.7% 17.5% market power or of competition between 80% companies (the value of which does not exceed 10 000), based on the bank’s share of 60% assets in total assets in the banking sector. 77.9% 40% 76.6% This indicator is calculated as the sum of 20% squares of market quotas of all banks in the sector. In international practice, the following 0% division is used: 12/16 12/17 Small banks ( Assets < MDL 2000 mil.) Medium banks (MDL 2000 mil. ==MDL 7000 mil.) • HHI under 100 indicates a market with perfect competition; Source: NBM • HHI between 100 and 1 500 indicates an unconcentrated market;

The assets of the banking sector are primarily • HHI between 1 500 and 2 500 indicates a concentrated in the group of large banks. At moderate concentration; the end of 2017, 4 banks entered the group of large banks (B.C. "MOLDOVA-AGROINDBANK" • HHI over 2 500 indicates a high SA, BC "Moldindconbank" S.A., BC concentration. "VICTORIABANK" SA, BC "MOBIASBANCA-˘ Groupe Société Générale" S.A.). The share of banks’ assets in this group constituted 77.9% Thus, based on calculations performed and by 31.12.2017, increasing by 1.3 p.p. obtaining HHI = 1 723.7, we conclude that compared to the end of 2016. At the end of the banking sector of the Republic of Moldova the reporting year, the composition of the represents a moderate concentration. group remained unchanged compared to the 26Market concentration index, i.e. the extent to which a end of 2016. small number of enterprises represent a large part of the market.

64 The structure of the banking sector assets by Chart 4.6 Dynamics of assets, loans and deposits to GDP main components is shown in Table A.18. (%)

The structure of assets during the year 2017 90 80 increased (in descending order): 72.8 66.1 66.0 70 62.1 60.2 50.8 58.8 53.5 60 56.1 27 50.8 54.0 • cash and cash equivalents (mainly as a 47.6 49.6 53.5 50 45.1 43.3 43.2 43.7 result of increase of banks’ investments 41.5 38.5 40.0 39.8 41.0 40.6 37.3 40.3 in National Bank certiﬁcates and in state 40 36.5 29.7 38.9 39.4 37.2 39.7 31.2 35.5 securities, as well as of the increase in 30 40.3 25.8 37.1 26.8 30.9 32.6 24.0 22.5 “Nostro” deposits at the NBM and banks) – 20 by MDL 6 683.2 million (23.7%); 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 Total assets/GDP Total portfolio of loans/GDP • available for sale ﬁnancial assets - by MDL Total deposits/GDP 1 266.9 million (213.1%);

Source: NBM • other assets - by MDL 150.2 million (24.5%) Chart 4.7 Distribution of the loan portfolio according to the sector in which the borrower operates as at 31.12.2017 (%) • intangible assets - by 3.3 million lei (1.3%). Loans granted to commerce

Consumer loans

2.2% 1.8% 2.3% Loans to the food industry 3.9% At the same time, there have diminished: 4.7% Loans granted to the purchase/construction of 29.1% buildings 5.1% Loans granted to agriculture

Loans granted to manufacturing industry 5.8% • loans and receivables - by MDL 1 050.2 Loans for service sector

million (3.0%); Other loans 6.9% Loans granted to transport, telecommunications and • held-to-maturity investments - by MDL network development 12.4% Loans granted to non-bank financial sector 208.4 million (4.4%); 7.4% Loans granted to energy industry

7.9% 10.5% • tangible assets - by MDL 71.7 million Loans granted to individuals performing an activity (3.1%); Loans granted to construction sector

• fixed assets and disposal groups classified Source: NBM as held for sale - by MDL 46.0 million (8.8%); The gross loan portfolio (in accordance with • tax receivables - by MDL 15.9 million the prudential reports) as of 31.12.2017 (26.1%); constituted MDL 33 473.3 million, decreasing by MDL 1 288.0 million (3.7%) during the year, mainly due to the lack of demand for loans The main share in total assets is held by cash and of the more prudent approach applied by and cash equivalents, accounting for 43.8% banks to potential borrowers. At the same and is by 5.1 p.p. higher than at the end of time, the gross loan portfolio as share of GDP 2016 as a result of assets redirection. Loans decreased from 25.8% at 31.12.2016 to 22.5% and receivables amounted to - 43.4%, at 31.12.2017 (Chart 4.6). It is worth decreasing by 5.4 p.p. Investments held to mentioning that the decline in GDP ratios of maturity had a weight of 5.6%, decreasing by banking indicators was based on GDP growth, 0.8 p.p. and tangible assets - 2.9%, decreasing in real terms, by 4.6%, according to semi-final by 0.3 p.p. compared to the end of the data. previous year. The share of other items in total assets was insignificant. In the context of risk distribution, the largest 27Cash and cash equivalents - include cash, interbank share in the total loan portfolio was held by credits granted for a period of less than 3 months, including commercial loans - 29.1%. bank funds owed by banks, cash funds owed by the National Bank of Moldova, placements and overnight The detailed structure of the loan portfolio of credits , as well as the corresponding part of increased interest rate, state securities and securities issued by the the banking sector of the Republic of Moldova National Bank of Moldova, purchased with a maturity of according to the sector in which the borrower less than 3 months, including unpledged ones, as well as operates is shown in the chart 4.7. the required reserves in Moldovan lei. During 2017, non-performing loans

65 (substandard, doubtful and compromised) in result of write-downs calculated for loans in the absolute value increased by MDL 448.8 million banking sector amounted to 64.0%, ﬂuctuated (7.9%), constituting MDL 6 151.9 million, while between 20.0% and 88.0%. the share of non-performing loans in total credits increased by 2.0 p.p. compared to the Exposures of banks to related parties account end of 2016, constituting 18.4% by for insigniﬁcant share in total loans - 1.9% 31.12.2017. The share of net non-performing (average of the banking sector). The indicator loans in total regulatory capital decreased by calculated as a ratio between exposures to 1.0 p.p., constituting 17.9% by 31.12.2017. related parties and Tier I capital (the limit for each bank 20.0% of Tier I capital) by the The share of write-downs calculated for loan 31.12.2017≤ was respected by all banks losses in total loans by 31.12.2017 constituted (average for the banking sector was 6.3%). 14.8%, increasing compared to the end of 2016 by 1.4 p.p. The ratio between the sum of all “large” exposures and the Total Regulatory Capital Chart 4.8 Dynamics of the structure of loan portfolio of the banking sector of the Republic of Moldova according to the (TRC) limit for each bank 5 times of TRC) level of investment operations risk as of 31.12.2016 (%) was respected by all banks≤ (average for the banking sector - 0.3).

By the 31.12.2017, the indicator measuring 7.5% 2.9% the proportion of the largest ten net debts in 6.0% 32.5% the total loan portfolio and contingent liabilities (the maximum limit for each bank - 30% of total net loans) was respected by all banks (average for the banking sector - 21.9%).

51.1% The indicator of the total amount of the bank’s net exposures in foreign currency, expressed in Moldovan lei, of individuals, including those who perform entrepreneurial activity or other type of activity (the limit for each bank 30%

Source: NBM of the TRC) was respected by all banks.≤ The sector average of the above-mentioned Chart 4.9 Dynamics of the structure of loan portfolio of the indicator was 2.5%. The ratio of the total banking sector of the Republic of Moldova according to the amount of currency-linked net exposures other level of investment operations risk as of 31.12.2017 (%) than mortgages to individuals in the total regulatory capital (the limit for each bank 10% of the TRC) was also respected by all≤ Standard banks. The sector average of the 8.4% above-mentioned indicator was 0.6%. Supervised 4.3% 5.7% Substandard Loans granted to bank employees accounted Doubtful for MDL 293.2 million or 0.9% of the total loan portfolio and 2.8% of the total regulatory Compromised capital of the banking sector (the limit for each 26.7% 54.9% bank 10.0%). ≤ The ratio between the total value of investments in long-term tangible ﬁxed assets and TRC per sector constituted 22.1% (the Source: NBM limit for each bank 50%) and was respected by all banks. ≤ It is worth mentioning that the write-downs calculated for all assets and contingent The ratio of the total value of investments in liabilities as of 31.12.2017 constituted long-term tangible ﬁxed assets and MDL 6 600.6 million and the write-downs for participation quotas in the capital of legal impairment losses amounted to MDL 3 978.7 entities and TRC in the banking sector million, the difference registered being of MDL registered the value of 27.1% (the limit for 2 621.9 million. each bank 100%) and it was respected by all banks. ≤ The amount of write-downs for losses as a

66 The share of assets in foreign currency on the receivables, which amounted to MDL 3 813.2 balance sheet together with currency-linked million or 80.3%, decreasing by MDL 1 070.3 assets as of total assets constituted 36.8%. million (21.9%) compared to 31.12.2016. The proportion of liabilities in foreign currency on the balance sheet and of currency-linked Non-interest income amounted to MDL 2552.5 liabilities as of total assets accounted for 36.5%. million or 35.0% of total revenues, increasing The difference of 0.3 p.p. between the above- by MDL 161.9 million (6.8%) as compared to mentioned indicators shows that the exchange 31.12.2016. Total non-interest income rate risk, directly, cannot significantly influence accounted for a major part of revenues from the financial stability of the banking sector. taxes and fees amounting to MDL 1 574.0 million or 61.7%, recording an increase of MDL 153.5 million (10.8%). Incomes and profitability evolution Non-interest expenses amounted to MDL 3 955.6 million or 68.0% of the total By the 31.12.2017, the profit registered by the amount of expenditures, decreasing by 327.3 banking sector constituted MDL 1 480.7 million lei or by 7.6% compared to 31.12.2016. million, recording an increase of MDL 116.7 The largest share in non-interest expenditures million (8.6%), as compared to the end of the constituted the administrative expenses previous year, as a result of the decrease of (43.9%), increasing by MDL 120.3 million or by non-interest expenses by MDL 327.3 million 7.4% and registered MDL 1 737.6 million by (7.6%) (including impairment of financial 31.12.2017. assets not valued at fair value through profit or Chart 4.11 Incomes structure of the banking sector of the loss - by MDL 746.6 million (61.4%), as well as Republic of Moldova for 2017 (%) increase of non-interest income by MDL 161.9 million (6.8%), mainly from taxes’ and fees’ 3.1% income by MDL 153.6 million (10.8%) as a 11.6% result of increase in the number and volume of transactions performed through SAPI, SWIFT 11.5% payment systems and of the number and 52.2% volume of card transactions issued in Moldova. On the background of base rate decrease, interest expenditures have decreased by 21.6% MDL 1 097.0 million (37.1%). At the same Income from loans and receivables time, there was a decrease in income by Fee and comission income MDL 1 469.5 million (23.6%), constituting MDL Income from investments held to maturity Net gain on exchange differences 4 746.2 million or 65.0% of total revenues. The Other operating income dynamics of banks’ revenues and expenditures over the reported period is shown in the chart 4.10. Source: NBM

Chart 4.10 Income and expenses dynamics of the banking At the same time, the depreciation of ﬁnancial sector of the Republic of Moldova (MDL, million) for 2016- 2017 assets, which are not priced at fair value through proﬁt/loss method, amounted to MDL 469.6 million, decreasing by MDL 746.5 million 10000 8606 (61.4%) as compared to the end of the 8000 7299 2391 6000 2553 previous year, due to the decrease of the loan 4000 portfolio. 6216 2000 4746

0 -1862 The depreciation of non-ﬁnancial assets of the -2959 -2000 banking sector amounted to MDL 165.3 million, -4000 -3956 -4283 -6000 increasing by MDL 20.0 million (13.8%) as -5818 -8000 -7242 compared to the end of the previous year. -10000 12/16 12/17 Non-interest expenditures -4283 -3956 Non-interest incomes 2391 2553 Interest expenses amounted to MDL 1 862.4 Interest-related expenditures -2959 -1862 Interest-related incomes 6216 4746 million or to 32.0% of the total expenditure, decreasing by MDL 1 097.0 million or by 37.1% compared to 31.12.2016. Source: NBM The structure of the banking sector’s revenues In the interest income structure, the largest and expenditures for 2017 is shown in the share was held by interest income on loans and charts 4.11s, i 4.12.

67 For the year 2017, the return on assets28 and debt, overnight loans) - 97.7% (MDL 64 446.1 return on capital29 of the licensed banks million), increasing in absolute value by recorded values of 1.8% and 11.1%, MDL 4 980.5 million (8.4%) compared to the respectively, being at the same level as at the end of the previous year. Customer deposits end of the previous year. constituted MDL 59 987.7 million or 91.0% of total liabilities, the absolute value of customer The net interest margin30 amounted to 4.7% by deposits increased compared to 31.12.2016 by the 31.12.2017, being by 0.8 p.p. lower than 5 015.4 million lei (9.1%). At the same time, at the end of the previous year. other liabilities have increased (such as: transit and clearing amounts, payment cards The dynamics of net interest margin, of return operations, settlements with bank employees, on assets and of the banking sector capital of settlements with other natural and legal the Republic of Moldova for the period entities, budget settlements, settlements / 31.12.2016 -31.12.2017 is shown in the chart sales of securities and currency, etc. ), by MDL 4.13. 382.8 million (65.0%), which constituted MDL 971.8 million. Provisions increased by MDL The absolute value of interest-earning assets 296.0 million (4.1 times), amounting to MDL increased during 2017 by MDL 3 281.2 million 392.9 million, including provisions for business or by 5.5%, constituting MDL 63 486.2 million restructuring, employee benefits, provisions by 31.12.2017. The significant share of for expenditures for damages resulting from interest-generating assets in total banking bankruptcy proceedings, financing sector assets, which amounted to 74.9%, commitments and other provisions. Tax indicates banks’ ability to generate revenues liabilities increased by MDL 63.0 million in the future. (91.5%), amounting to MDL 131.8 million (Table A.19). Chart 4.12 Expenses structure of the banking sector of the Republic of Moldova in 2017 (%) Chart 4.13 Dynamics of net interest margin, the return on 4.4% 3.0% 2.7% assets and return on equity in the banking system of the 8.7% 32.0% Republic of Moldova for 31.12.2016-31.12.2017 (%)

8.7%

18 10.9% 16 29.9% 15.4 14.6 Interest-related expenditures on financial debt evaluated on amortised 14 14.3 cost Administration costs 12 11.1 11.1 Impairment on financial assets not measured at fair value through profit 10 or loss and impairment on non-financial assets Other operating expenses 8

6 Fee and comission expenses 5.5 4.8 4.8 4.7 4.7 Amortised cost 4 2.6 2.4 2.4 Tax expense 2 1.8 1.8 0 Other expenses 12/16 3/17 6/17 9/17 12/17

Return on assets Return on equity Net interest margin Source: NBM

Source: NBM

Liquidity and compliance with legal The balance of deposits according to the requirements prudential reports as of 31.12.2017 constituted MDL 59 896.9 million, increasing by MDL 5 058.3 million (9.2%) as a result of The liabilities of banks as of 31.12.2017 the increase in deposits from legal entities by constituted MDL 65 942.5 million, increasing MDL 3 111.2 million (18.3%) compared to by MDL 5 722.2 million (9.5%) as compared to 31.12.2016 to MDL 20 108.8 million and 31.12.2016. The major share in total liabilities, deposits of individuals by MDL 1 954.0 million as of 31.12.2017, was held by ﬁnancial (5.2%) to MDL 39 623.1 million. At the same liabilities measured at amortized cost time, deposits from banks decreased by MDL (customer deposits, other loans, subordinated 6.8 million (4.0%) to MDL 165.0 million. 28Return on assets = annualized net income / average assets The total amount of deposits in proportion to 29Return on capital = annualized net income /average of GDP decreased insigniﬁcantly by 0.3 p.p. shareholding capital compared to the previous year, accounting for 30Net interest margin = Net income from annualized interest / Average interest-earning assets 40.3% at the reporting date.

68 As of 31.12.2017, deposits in foreign currency expressed in cash, deposits with NBM, liquid as a percentage of total deposits represented securities, net interbank means with a term up 42.8% (the equivalent of MDL 25 632.3 million), to one month / total assets x100%) constituted their absolute value increased by MDL 148.5 55.4% rising by 6.1 percentage points over million (0.6%), compared to the end of the 2017. This indicator was respected by all previous year. The deposits increased due to banks (the limit for each bank 20%). an increase in attracted funds, by MDL 1 813.4 ≥ million, and decreased due to the revaluation Chart 4.15 Dynamics of liquid assets (MDL, million) and their share in total assets of the banking sector of the as a result of exchange rate ﬂuctuations, by Republic of Moldova (%) MDL 1 683.8 million (the calculation of the 55.5% revaluation of deposits was made based on 45000 53.2% 51.3% EUR, USD, Russian rubble, Romanian leu and 40000 50.3% 49.3% Ukrainian hryvnia, the share of other currencies 35000 LA / A being insigniﬁcant). Deposits in Moldovan lei 30000 amounted to 57.2% of total deposits, or MDL 25000 34 264.6 million, and represented an increase 20000 of MDL 4 909.9 million (16.7%), as compared 15000 to 31.12.2016. 10000 5000

0 Concentration of bank sector debt over the 12/2016 03/2017 06/2017 09/2017 12/2017 Cash and precious metals 3628.5 4337.9 4736.4 4660.3 4128.3 reporting period is shown in the chart 4.14. Deposits at NBM 14285.6 15235.2 16919 17579.9 15929.9 Liquid securities 11151.5 11264.7 9917.3 10227.9 15131.6 Net current interbank means 6837.6 6409.2 6890.9 8818.6 8939.6 The share of debt of the large banks in the Total liquid assets 35903.2 37247 38463.6 41286.7 44129.4 total debt of the banking sector at 31.12.2017 Source: NBM constituted 79.2%, recording an increase of 1.3 p.p., compared to 31.12.2016. At the same time, the share of debt of medium banks As of 31.12.2017, the liquidity principle III, decreased, accounting for 16.9% as of which shows the ratio between the adjusted 31.12.2017, and the share of debt of small effective liquidity and the required liquidity for banks remained at the same level, accounting each maturity band (limit 1), was respected for 3.9% of total debt in the sector. The value by all banks. ≥ of the long-term liquidity indicator for the banking sector (principle I of liquidity, assets with a repayment term of more than two years Thus, the liquidity indicators reveal the / ﬁnancial resources with a potential existence of adequate levels of liquidity to withdrawal period of more than two years) cover potential needs both in the short and amounted to 0.6 (average per sector). This long term. indicator was respected by all banks (the limit for each bank 1). Liquid assets amounted to MDL 44 129.5 ≤ million, increasing by MDL 8 226.3 million Chart 4.14 Dynamics of liabilities concentration in the (22.9%) compared to 31.12.2016. banking system of the Republic of Moldova by group of banks for 31.12.2016 -31.12.2017 (%) In the structure of liquid assets, liquid securities increased by MDL 3 980.1 million (35.7%), current net interbank funds with a 3.9% 3.9% 100% maturity of up to 1 month increased by MDL 16.9% 80% 18.2% 2 102.0 million (30.7%), deposits with NBM 60% increased by MDL 1 644.3 million (11.5%) and 40% 77.9% 79.2% cash and precious metals increased by MDL 20% 499.9 million (13.8%), the details are presented in the Chart 4.15. 0% 12/16 12/17 Within the structure of liquid assets by banking Small banks ( Assets < MDL 2000 mil.) sector, the deposits with NBM held the largest Medium banks (MDL 2000 mil. ==MDL 7000 mil.) securities - 34.3%, the share of current net interbank instruments - 20.3% and the share Source: NBM of cash and precious metals - 9.3%.

The value of the current liquidity indicator by sector - liquidity principle II (liquid assets,

69 Sensitivity to market risk Shareholding modiﬁcation

The proportion of the foreign currency assets During the year 2017, the National Bank of aggregated with the assets attached to foreign Moldova authorized access to the banking currency exchange rate in total assets at market of the Republic of Moldova to two 31.12.2017 constituted 36.8%. The proportion significant banks of the European Union: of the foreign currency balance sheet liabilities and of bonds attached to the foreign currency exchange rate in total assets on the same date (i) Intesa Sanpaolo S.p.A. (Italy) - a banking amounted to 36.5%. The insignificant institution of systemic importance for the difference of these weights indicates that the European Union supervised by the Central direct currency risk is insignificant. Bank of Europe, which is the parent bank of the Intesa Sanpaolo Group, with a significant Placements abroad by banks of the Republic of presence in Central and Eastern Europe, the Moldova as of 31.12.2017, according to data Middle East and North Africa, which acquired presented by licensed banks, constituted MDL the integral share package issued by BC 9 782.8 million, recording an increase of MDL “EXIMBANK - Gruppo Veneto Banca” SA; 1 984.9 million (25.5%), compared to the end of the previous year, and representing 12.3% of total bank assets and 96.8% of Tier I capital. (ii) Banca Transilvania S.A. (Romania) - the Details are shown in Table A.20. Thus, second largest bank of the banking sector in placements in Germany registered the largest Romania and the parent bank of Banca increase of MDL 2 380,5 million (259.0%). Transilvania Financial Group, which has a significant presence on the financial services According to the situation on 31.12.2017, the market in Romania, as well as in the Republic largest share of total placements in the sector of Moldova in the field of financial leasing, was in Germany - 33.7%, USA - 21.7%, Belgium which acquired the control package in the - 16.6% and France - 12.3%, the details are share capital of BC “VICTORIABANK” S.A. presented in the chart 4.16.

According to the Regulation on classiﬁcation of contingent assets and liabilities (MO of RM No 4.2 The NBM supervisory 216-221 of 09.12.2011), banks reduce their capital by the amount of potential losses, activity taking into account the rating assigned by international agencies by countries and by banks. Throughout 2017, the National Bank of Moldova continued to promote reforms in the Chart 4.16 Structure of total placements abroad of banks banking sector, focusing in particular on of the Republic of Moldova (%) establishing a transparent shareholder structure in order to attract new and 40 appropriate investors, on proper assessment

35 33.7 of the bank’s management, on identiﬁcation of

29.2 30 transactions concluded with afﬁliated banks

25 and on the timely recognition of 21.7 20.5 20 non-performing loans. These functions are 16.6 16.7 being carried out through both on-site and ex 15 11.8 12.3 ofﬁcio controls, using the supervisory tools 10 8.8 6 5 5.2 available at the National Bank. 5 2.4 1.3 1.6 1.7 1.4 1.9 1.3 0.5 0.3 0.2 0 Germany USA Belgium France Austria Italy Republic of Russia United Romania Others Ireland Kingdom (Belarus, On-site controls Kazahstan, Spain, Ukraine) 12/16 12/17 In 2017, there were performed 8 complex inspections at licensed banks. Source: NBM As a result of inspections, sanctions were imposed on 4 banks: sanctioned with warnings - 1 bank; 10 members of the Board, 14

70 members of the Committee; sanctioned with During 2017, as a result of monitoring of the fines -15 members of the Committee; 33 loan portfolios, the process of increasing the prescriptions. share of non-performing loans was ascertained. In this context, in the first quarter of 2017, the Decisions with application of sanctions and National Bank repeatedly recommended banks prescriptions have been adopted as a result of to apply appropriate governance measures, to the finding of violations and deficiencies, have effective processes for identifying, mainly related to the following: monitoring, managing and reporting the risks to which they may be exposed, and to strengthen internal control procedures, in • the administration of the bank was not particular those related to monitoring and performed in strict compliance with the management of non-performing loans. Thus, requirements of the law and regulatory banks have developed strategies or plans to acts issued by the NBM; mitigate non-performing loans and are • the positions’ requirements for constantly undertaking concrete measures to risk-weighted assets were not met; improve the quality of loan portfolios.

• the limits and requirements for risk In order to ensure transparency of the banking concentration (exposures) have not been sector in the Republic of Moldova, the National met); Bank, as a regulatory and supervisory authority, monitors the ownership structure of • engaging the bank in risky and doubtful banks, verifies their shareholders to determine operations. suitability of shareholders to the requirements of the Law on banking activity and of the At the same time, it is important to mention Regulation on holding participation quotas in that in the reporting year, 293 inspections the bank’s share capital, as well as in order to were performed, including 260 planned and 33 ensure certainty in identifying effective unannounced inspections. As a result of these beneficiaries by implementing the following: inspections, 64 currency exchange entities were warned, the activity of 20 currency exchange units was suspended, fines were • permanent tracking of transactions with applied to 18 currency exchange units and banks’ shares; license was withdrawn from one currency • requesting presentation of information exchange unit. related to the identity and activity of potential purchasers, including direct and Ex-officio controls indirect quota holders, to actual beneficiaries, and submission of Following the implementation of the Credit questionnaires, additional documents / Risk Register, the National Bank is receiving information necessary to assess their detailed, reliable and prompt information quality, including presentation of related to credit risk to which licensed banks information in the event of modifications are exposed. on previously presented data to the NBM;

Availability of complex operative data allows • conducting inquiries on how to acquire the central bank to determine the respective bank’s shares, as well as requesting risk not only by sector but also by groups of support of competent authorities; banks or by individual bank. It contributes to the early identification of risks associated • analysis of information / documents, with credit portfolios, ensuring a process of available media sources containing analytical and interpretative investigation of information about banks’ shareholders the corrective actions taken by the National Bank. Accordingly, the NBM monitors on a daily basis the quality of the loan portfolios, including During 2017, remedial measures and requests for granting, classification of credits sanctions were applied to shareholders of two granted to regulated requirements, etc. In banks. The Executive Board of the National case of classification of credits contrary to the Bank on the 14 of March 2017 decided to regulations in force, the NBM requests through impose a fine to a direct and indirect holder of letters to remove the detected violations. Thus, the substantial quota in the capital of BC banks are motivated to become more cautious “VICTORIABANK” S.A. for non-observance of in accepting transactions and to assess risks requirements of the Law on financial adequately. institutions regarding presentation of

71 information and documents requested by the banks to develop the implementation strategy National Bank for the purposes of supervision for the Basel III Agreement, including and evaluation of the quality of the bank’s alignment to the provisions of the Law on shareholders. The fine was applied in the banking activity and the Regulation on the amount of about 1% of the share held in the bank’s activity management framework. The share capital of BC “VICTORIABANK” S.A. by banks report regularly, every 2 months, on the the direct and indirect holder. progress made, the results achieved and the actions taken. Thus, banks have set up Also, the Executive Board of the National Bank, working groups on implementation of Basel III on 21.09.2017, decided to sanction by fine a framework and have concluded contracts with direct holder of substantial quota in the capital audit firms to provide specialized assistance. of the “Bank of Finance and Commerce” S.A. At the same time, in order to assess the for non-observance of requirements of the Law adequacy of capital and the ability of banks to on financial institutions for presentation of report under the new framework, NBM information and documents requested by the resumed the Quantitative Impact Study (QIS), National Bank for the purposes of supervision which stated that all banks in the Republic of and evaluation of the quality of the bank’s Moldova have sufficient capital to meet the shareholders. The fine was applied in the new prudential requirements. At the same amount of 1% of the participation quota held time, in 2017, the National Bank of Moldova by the shareholder in the bank’s share capital initiated the identification, with the assistance and was paid into the state budget. of a foreign audit company, of transactions concluded with related parties of the B.C. Banking supervision measures meant to “MOLDOVA-AGROINDBANK” S.A., B.C. increase the financial sector’s resilience have “VICTORIABANK” S.A. and BC intensified. Out of 11 banks, 7 were subject to “Moldindconbank” S.A. These banks are in complex on-site inspections. Two systemic breach of prudential limits and will have up to banks were under intensive supervision and 2 years to comply. one bank was in early intervention regime. The National Bank conducted thematic inspections on shareholders’ transparency and quality, on verification of transactions with Intensive supervision and early related parties, on assets’ quality assessments, intervention as well as other thematic controls.

As a result of adoption on October 4, 2016 of In 2017, two banks (BC the Law on recovery and resolution of banks “MOLDOVA-AGROINDBANK” S.A. and BC no. 232 of 03.10.2016, published in the Official "VICTORIABANK" S.A.) continued to be under Monitor of the Republic of Moldova no. the intensive supervision regime and one bank 343-346 art. 707 of 04.10.2016, according to (BC "Moldindconbank" S.A.) under the early art. 9 of the specified Law, the NBM has intervention regime. The mandate of the requested banks to develop and maintain a temporary administrators of BC recovery plan that sets out the measures to be "Moldindconbank" S.A. have been prolonged taken to restore their financial position in case several times during 2017. of significant deterioration. At the same time, in order to facilitate the implementation of the In order to avoid excessive risk, the National recovery plan, the NBM has developed and Bank monitors daily the activity of banks submitted to banks a Guide on development of under intensive supervision and under the a recovery plan containing detailed early intervention regime. In such a way, the information on all aspects that need to be financial situation of these banks, the included in the plan. In this context, in the transactions, the agenda of the meetings of third quarter of 2017, as a result of the governing bodies, etc. are examined. examination of completeness of recovery plans, letters were sent to banks indicating The specified banks are well capitalized and elimination of drawbacks and submission to operate in normal regime (they provide all NBM of updated recovery plans. In the fourth services, including those related to deposits, quarter of 2017, the banks submitted to the credits and settlement). NBM revised recovery plans, following comments previously received from the In 2017, the NBM carried out a range of National Bank. complex inspections, including at the aforementioned banks. Following the results of In the context of transition to BASEL III inspections performed, the Executive Board of standards, the NBM has solicited the licensed the NBM approved decisions of imposing

72 sanctions on the management of banks. At the process of BC “Basarabia” and BC “Bancosind” same time, banks have been prescribed S.A. remedial measures to optimize their lending and customer due diligence procedures, to Regarding the liquidation process of Banca de improve regulatory standards in the field of Economii S.A., BC “UNIBANK” S.A. and BC credit and internal control, to improve the “BANCA SOCIALA”˘ SA, initiated in 2015, we security management system, the internal mention that, with the purpose of recovering control system and the payment system, etc. the funds of these banks, in the year 2017 the The banks have developed remedial action liquidators cooperated with the law plans for liquidation of infringements and enforcement bodies, undertook organizational drawbacks found during inspections and will measures regarding sale of assets owned and report to the National Bank during the 2018 on in possession of banks and continued work their implementation. with debtors of banks. As a result, at the end of 2017, 179 actions were in progress in courts, The findings made by the National Bank of in order to recover funds previously disbursed Moldova regarding two groups of shareholders by banks, in total value of MDL 7,440.0 million. of the BC "MOLDOVA-AGROINDBANK" S.A. At the same time, the investigation bodies which acted in concert and acquired a were managing 44 criminal cases filed qualifying holding in the bank’s share capital in according to liquidators’ notifications. the size of 43.1%, without prior written permission of the National Bank,these groups As a result of the actions undertaken by intended to sell the acquired shares within 3 liquidators, during the liquidation process, up months. Because the mentioned shares were to date funds in a total amount of MDL 1 002.6 not alienated within the set deadlines, the million were recovered, including in 2017 – shares were cancelled and new ones were MDL 306.6 million (Banca de Economii SA – ˘ issued. Thus, on June 1, 2017, two unique MDL 159.4 million, BC “BANCA SOCIALA” SA – packages of shares were put on sale at the MDL 134.4 million and BC “UNIBANK” SA – MDL Moldova Stock Exchange. The National 12.8 million). Commission for Financial Markets has The financial resources recovered during the repeatedly extended the term of sale of new process of liquidation of banks were used for shares issued by the bank. It is worth the payment of debts related to emergency mentioning that as of 29.12.2017 the loans granted to Banca de Economii S.A., BC amendments to the Law on capital market no. “BANCA SOCIALA”˘ S.A. and B.C. “UNIBANK” 171 of July 11, 2012, by which it was S.A., until the appointment of liquidators of the established the procedure for cancellation, respective banks. Thus, until the 31.12.2017, issuance and sale of participation quotas held funds amounting to MDL 1 071.2 million were in breach of the requirements on the quality of repaid, including in 2017 – MDL 209.9 million. shareholders’ equity in the capital of banks, the period of exposure for sale having been Another aspect of actions related to the extended. recovery of the resources of the Banca de Economii S.A., BC "BANCA SOCIALA"˘ S.A. and With reference to BC "Moldindconbank" S.A., B.C. "UNIBANK" S.A. represents the survey according to provisions of the Law on financial conducted by the consortium Kroll and Steptoe institutions, the persons identified by the NBM & Johnson. On 21 December 2017, the as acting in concert without prior written National Bank of Moldova published a detailed permission of the NBM were supposed to summary of the banking fraud investigation, alienate voluntarily the shares within 3 months. which it received together with the second After finalization of legal actions related to report from the consortium Kroll and Steptoe & safeguarding measures of shares, as of Johnson. The synthesis reveals the way the October 2017, the aforementioned money was embezzled, as well as the shareholders had the possibility to alienate the countries were they circulated or arrived. The shares held. document has eight chapters that reflect the international investigative methodology, the analysis of fraudulent banks’ exposures in Banks in liquidation 2012-2014, Shor’s group link to fraudulent banks’ ownership, money laundering mechanisms, and the destination of fraudulent As of 31.12.2017, 8 banks were placed in funds. forced liquidation process. During 2017, the National Bank of Moldova approved the The National Bank of Moldova analysed the Reports on completion of the liquidation draft report and requested a few clarifications,

73 provided comments and suggestions to such scenarios materializing is very low. At the representatives of Kroll and Steptoe & Johnson. same time, banks take the necessary steps to Consequently, on March 6, 2018, the National improve the quality of credit portfolios, which Bank of Moldova received the final report on will allow them to reduce losses in case of the banking fraud investigation from Kroll and excessive stress scenario. Steptoe & Johnson. The document contains information about the fraud that led to With regard to liquidity risk, stress test results insolvency of “Banca de Economii” S.A., BC confirm the high level of liquidity in the "BANCA SOCIALA"˘ S.A. and B.C. "UNIBANK" banking sector, the banks being able to cope S.A. with deposits’ withdrawals at historical maximum rates, and liquidity deficits for stress The final report will be used by the National test scenarios applied were not recorded. Bank of Moldova for the purpose of identifying shortcomings in the system and implementing Also, in order to assess the potential risks that the appropriate measures. At the same time, could affect the stability of the sector and each following the visit of Kroll representatives to bank in the capital categories, asset quality, the Republic of Moldova, the NBM officially income, liquidity and market risk sensitivity, received all the investigation papers from the the National Bank conducts the study on international consortium Kroll and Steptoe & identifying vulnerability of the banking Johnson, which were forwarded to the Anti- sector.The study’s results indicate a low level Corruption Prosecutor’s Office. of vulnerability of the banking sector by the end of 2017 situation, with some Representatives of Kroll and Steptoe & Johnson vulnerabilities recorded in the categories of have confirmed their willingness to work with market risk sensitivity, assets’ quality and investigation bodies to support efforts to profitability. recover internationally fraudulent funds and to strengthen the evidence base within the In order to capture the opinion of risk procedures at national level. managers of the licensed banks on major risks to which the financial system is exposed, the National Bank of Moldova conducts a systemic risk survey every six months. Respondents 4.3 Banking sector risks’ believe that key risks persist in the financial system, on the background of a reduction of assessment probability of appearing of an event with a high impact on the system.

In order to monitor risks in the banking sector, In order to determine the financing conditions the National Bank of Moldova performs stress and the risk profile of the sectors financed tests, which are supervisory tools used to by Moldovan banks, the NBM is conducting assess the strengths of each bank, as well as quarterly a bank credit survey. the overall resistance to shocks of the banking sector. The stress tests used by the National Survey results indicate a slight relaxation Bank focus on credit risk, liquidity risk, interest trend in credit standards and credit rate risk and exchange rate risk as well as on agreements over the year 2017. This trend combinations of these. All stress tests are was largely driven by a reduction in financing based on the information reported by licensed costs and competitive pressure. At the same banks and are applied across the banking time, factors such as risk perception and sector, by groups of banks and of individual tolerance have moderated the relaxation of banks. credit standards and contract terms, especially for businesses. During the period considered, As a result of the stress tests performed at the the demand for loans from businesses level of the banking sector, it was found that remained broadly stable, while demand for banks in the Republic of Moldova are loans from the population followed an upward sufficiently capitalized and capable to cope trend. In the short term, banks anticipate an with most of simulated shocks. Exceptions are increase in demand for loans from both scenarios where the likelihood of severe categories of borrowers. At the same time, shocks or so-called historical peaks affect respondents anticipate a slight tightening of credit risk. Under these circumstances, it is standards for business loans and a relaxation possible that the solvency ratios of individual of standards applied to individual loans. banks fall below the limits regulated by the National Bank. However, the probability of

74 The risk of contagion 4.4 Fighting money At the end of 2017, the domestic banking laundering and sector registered a low level of contagion risk in terms of interbank placements both in terrorist ﬁnancing domestic banks and in foreign banks.

Chart 4.17 The net interbank placements of the licensed banks in the Republic of Moldova in the domestic banking During the year 2017, the NBM assessed the sector policies for identifying the risks of money laundering and terrorist financing in on-site inspections of licensed banks, foreign exchange units and non-bank payment service providers. At the same time, the proper implementation of the provisions of the normative acts, namely the procedures for knowing the customer, of requirements for increased precautions, monitoring of transactions, retention of data, reporting of transactions in accordance with the Law on prevention and fighting money laundering and terrorist financing no.190-XVI from 26.07.2007, as well as the development of an efficient internal control system in this domain.

During verifications, the NBM found Source: NBM shortcomings and violations of normative acts applicable in the field of prevention and Chart 4.18 The volume of net placements of licensed banks in foreign banks combating money laundering and terrorist financing and as a result has applied sanctions to supervised institutions and to their administrators, in accordance with the Law on financial institutions no.550-XIII of 21.07.1995.

NBM representatives, also, contributed to the national process of identification and assessment of the risks of money laundering and terrorism financing implemented with the World Bank’s methodological support, process which was completed with the publication of the National Risk Assessment Report SB / FT and the approval of the Action Plan on the reduction of risks in the field of money laundering and financing terrorism for 2017-2019 (GD no.791 of 11.10.2017). Source: NBM At the same time, the NBM performed The net interbank placements of the licensed activities for implementing of an IT solution in banks in the Republic of Moldova in the order to streamline the process of monitoring domestic banking sector, by the 31.12.2017, shareholders’ transparency and remote amounted to MDL 38.9 million, decreasing by analysis in the field of money laundering and MDL 8.8 million compared to the same period terrorism financing. Thus, there were of the last year (Chart 4.17). developed tender specifications and other The volume of net placements of licensed tender documents for procurement of goods banks in foreign banks constituted, by the and services. The implementation of this IT 31.12.2017, MDL 9 686.5 million, recording an solution will continue and in the next period by increase of MDL 2 036.4 million as compared utilizing the procurement procedure through to the end of the previous year (Chart 4.18). competitive dialogue. At the same time, the Out of these, 90.2% were placed in banks of NBM continued its actions aimed at enhancing Germany, USA, Belgium, France and Austria. cooperation and information exchange

75 activities with the Anti-Money Laundering Service and other national and overseas institutions and authorities.

NBM endorsed the draft of a new law on prevention and combating money laundering and terrorism financing, taking into account international standards and the Directive no. 2015/849 of the European Parliament and of the Council from the 20 May 2015 on prevention of the use of the financial system for the purposes of money laundering or terrorist financing.

76 Chapter 5

Payment System

monetary policy implementation and public conﬁdence in cashless payments.

5.1 Payment systems In the domain of payments’ and settlement regulation and systems’ supervision, the following are supervision subjected to supervision:

1. Payment and settlement systems (high In accordance with the Law on the National value payment systems and high volume Bank of Moldova no. 548-XIII of 21 July 1995, and low value payment systems); regulation and supervision of financial market 2. Clearing and settlement systems of infrastructures in the Republic of Moldova is securities; one of the core tasks of the National Bank. 3. Money remittances; This attribution is implemented in accordance with the best international practices, with the 4. Payment tools. recommendations, principles and standards in this domain issued by the Bank for In exercising its oversight function, the NBM International Settlements, the European pays special attention to systems that process, Central Bank, the International Monetary Fund compensate and settle high value payments and the World Bank. and pose a substantial risk in the event of an operational or settlement failure. At the same During 2017, modifications and completions to time, the NBM ensures an appropriate level of the Regulation on automated interbank attention to all components of the payment payment system, approved by the Decision of system subjected to supervision. the Administrative Council of the National Bank of Moldova no. 53, dated 02.03.2006, which resulted from the need to adjust the legal framework in the context of implementation of 5.2 Licensing, regulation transfer requirement from the Electronic Governance Centre (MPay) to the Ministry of and supervision of Finance of the responsibility for performing payment services direct debit operations, in accordance with the amendments made to the Government providers and of Decision no. 280 of 24.04.2013 on certain electronic money actions of implementation of the Government Electronic Payments Service (MPay), as well as issuers of the need to adjust the respective Regulation to the provisions of the Law on settlement finality in payment and financial instruments According to the Law on payment services and settlement systems no. 183 of 22.07.2016. electronic money no. 114 of 18.05.2012, the National Bank of Moldova (NBM) licenses, According to the Payment System Supervision regulates and supervises the activity of Policy of the Republic of Moldova (approved by payment services providers and of electronic the Executive Board Decision No. 299 of money issuers. October 27, 2016), the core objective of the NBM supervision is promotion of efficiency and In accordance with the nominated Law, no stability of the country’s payment system. In license was issued/withdrawn during the year the context of the basic objective, the 2017 for providing payment services/electronic elements of the payment system of the money issuance activity. Republic of Moldova are subjected to National Bank supervision, safe and efficient operation As of 31.12.2017, seven non-bank payment of which is essential for financial stability, services providers were active in the Republic

77 of Moldova, including two payment companies, Chart 5.1 The number and value of payments made one postal services provider and four through non-bank payment service providers companies’ issuers of electronic money. 25000 6000 During the year 2017, 4 on-site inspections 5000 were performed, of which three complex and 20000 one thematic, within which licensed non-bank 4000 payment services providers underwent 15000 veriﬁcation. 3000 10000 2000 As a result of these controls, infringements and million) (MDL, Value 5000 1000

deﬁciencies were found related to: transactions) (thousands Number

0 0 I/17 I/16 II/17 II/16 III/17 IV/17 III/16 • registration at the NBM of payment agents IV/16 in the Register of electronic money issuing Value Number companies; Source: NBM • identiﬁcation of customers while performing electronic transactions;

• internal procedures for prevention and combating money laundering, which are incomplete and do not contain all 5.3 Automated interbank mandatory requirements according to payment system legislation;

• notification of the NBM regarding modification of data in the documents The automated interbank payment system attached to the license issuing statement; (AIPS) consists of the real-time gross settlement system (the RTGS system) and the making non-cash payments within foreign • designated-time net settlement system (the exchange operations of individuals in the DNS system). The RTGS system is designed to absence of identity documents or without process urgent and high value payments, and indicating the purpose of the transfer etc. the DNS system is designed to process small value payments. Proposals and recommendations were forwarded regarding necessary actions to be In 2017, through AIPS, a total volume of 12.9 taken in order to eliminate the infringements million transactions worth of MDL 1 229.4 and drawbacks found and, where appropriate, billion were processed, increasing both in remedial measures and sanctions were number and in value by 7.4% and 48.9%, applied. respectively, compared to the year 2016. The average daily31 volume of operations Also, according to the provisions of the Law on amounted to 50.7 thousand transactions worth payment services and electronic money no. of MDL 4.8 billion. The maximum volume of 114 of 18.05.2012, the NBM performed ex payments settled daily in AIPS was reached on officio supervision of the activity developed by 25 April 2017, being settled 112.7 thousand payment services providers, including by payments. continuous monitoring of their activity, analysis of quarterly reports submitted to the From the payments’ structure point of view, NBM, examination of complaints (claims) the largest share of these payments was due regarding the activity of payment services to budget credit transfers (49.1% of total providers and of e-money issuers, review of payments), followed by ordinary customer information published on web pages etc. transfers (49.0%) and other types of payments During the year 2017, 75.2 million payment (1.9%). In terms of value, the payment transactions were performed through providers structure presents another picture: the of non-bank payment services, which is by amount of ordinary customer transfers (13.8% 1.8% more transactions than in 2016. These of the total amount of payments) exceeded transactions represented a total value of MDL the amount of budget credit transfers (10.9%), 21.6 billion, that is by 6.4% more than in 2016 but the largest share (75.3%) was attributed to (Chart 5.1). It is worth mentioning that the transfers made by banks in their own name overwhelming majority of these payments were and on their own account. performed by users – individuals. 31In 2017 there were 254 workdays.

78 In 2017, the distribution of the number of payments per AIPS component systems was as follows: 8.7% for the RTGS system and 91.3% 5.4 State securities for the DNS system. The distribution of the payment value has another picture, so that by book-entry system RTGS 95.4% of the total payment was settled, and by DNS only 4.6%. The state securities book-entry system (BES) is In 2017, on average, daily, through the RTGS a depository and settlement system for system, 4.4 thousand payments were settled, securities issued by the Ministry of Finance of amounting to MDL 4.6 billion, and through the the Republic of Moldova on behalf of the DNS system 46.3 thousand payments, Government of the Republic of Moldova and of amounting to MDL 223.0 million. The average securities issued by the National Bank. The value of a settled payment in the RTGS system final settlement for these issuance operations amounted to MDL 1 047.2 thousand, and of a is carried out in AIPS through the real-time payment settled in the DNS system – to MDL gross settlement system (RTGS system), 4.8 thousand. according to DvP (Delivery versus Payment) Comparing the total value settled through the principle. BES is organized and managed by RTGS system in 2017 and the annual GDP of the National Bank. the Republic of Moldova (MDL 150 369 million), it is estimated that in the RTGS system the BES supervision is performed to ensure stable annual GDP equivalent is settled in about 33 and efficient system operation. During 2017, operational days. This indicator reveals the BES availability for system participants importance of the RTGS system within the accounted for 100% and incidents affecting Moldovan financial system. operation of the system and participants did not take place. At the Eurosystem’s32 level, the gross settlement system in real time – Target2 processes a volume comparable to the annual GDP of the euro area every six workdays. 5.5 Cashless payment tools Table A.21 shows the evolution of payments settled by AIPS compared to 2016. Cashless payment tools are essential At the end of 2017, there were registered 16 components of the national payment system participants in AIPS, and namely: and the National Bank conducts their supervision in order to ensure efficiency and The National Bank of Moldova; • security of their utilization. • 11 banks licensed by the National Bank of Moldova; Out of payment tools available, the most used by population (individuals) are payment cards, • The cash and settlement centre from the other payment instruments being at the Tiraspol; incipient stage of utilization. It is worth • The State Treasury of the Ministry of mentioning that the NBM is undertaking Finance, including as a mandated relevant measures together with other participant, who does not have an international authorities and institutions in account opened in the AIPS; order to promote utilization of cashless payment tools and fight tax evasion. • The National Securities Depository of Moldova. Payment cards

AIPS supervision The number of cards 33 in circulation at the AIPS supervision is conducted to ensure stable end of 2017 accounted for 1 736 056 units and and efficient operation of this system. During increased by 14.8% compared to the end of 2017, the availability of the system for 2016, reaching the highest level so far (Chart participants was 99.9% and was within the set 5.2). parameters, and major incidents to disrupt 33Standardized and, where appropriate, customized AIPS activity and affect the participants did not information support through which the holder usually take place. has access to his or her identification number and/or identification codes depending on the type of payment 32The TARGET 2016 annual report, https://www.ecb. card to the payment account to which the payment card is europa.eu/pub/pdf/other/ecb.targetar2016.en.pdf attached for the purpose of making payment transactions.

79 Against the backdrop of the increase in the Chart 5.3 The number of operations performed with payment cards issued in the Republic of Moldova (million number of cards in circulation, the number operations) of active34 cards had approximately the same growth rate (by 11.4% more than the end of 2016) and the share of active cards in the total 30 number of cards in circulation did not change 25 signiﬁcantly, accounting for 58.6%. It is worth mentioning that this rate of use of cards has 20 remained virtually the same over the last few 15 years. 10

5 Chart 5.2 The number of payment cards in circulation (thousand units) 0 2011 2017 2012 2013 2015 2016 2014 2010 2007 2005 2006 2009 2008 2000 Cash withdrawals Cashless payments 1800 1600 1400 Source: NBM 1200 1000 800 It is also noted that in the reporting year, 52.7% 600 400 of the total volume of transactions performed 200 with cards issued in the Republic of Moldova 0 represented cash withdrawals. In view of the I/17 I/15 I/16 II/17 II/15 II/16 strong upward trend in the use of payment III/17 IV/17 III/15 IV/15 III/16 IV/16 Number of cards in circulation Number of active cards cards for making non-cash payments, in the near future cash withdrawals could give up the predominant position in favour of cashless Source: NBM payments. Concerning the technical solution of payment Daily, on average, with payment cards issued cards, the share of hybrid35 cards (58.9%) in the Republic of Moldova, 67 142 cash represents the majority of total cards in withdrawals and approximately 60 341 circulation in the Republic of Moldova. The cashless payments are made. The average contactless cards grew steadily, their amount of cash withdrawals reached MDL number being 1.8 times higher than at the end 1 661 in the reporting year, an increase of of 2016, with a share of 37.2% of total cards in 1.7% compared to 2016. At the same time, a circulation in the Republic of Moldova, cashless payment amounted to an average of amounting to 645.3 thousand units. Magnetic MDL 404, decreasing by 11.4% compared to stripe cards, which at the end of 2016 2016. accounted for 7.6% of all cards in circulation in the Republic of Moldova, continue their Domestic operations36 made with payment downward trend, reaching only 3.7% of the cards issued by licensed payment services total number of cards. Virtual cards, which providers represents 86.8% of the total account for only 0.2% of the total cards in number of transactions performed with cards circulation in the Republic of Moldova, have issued in the Republic of Moldova. also evolved towards diminishing. Of the total number of domestic operations, During the year 2017, via payment cards the share of non-cash payments amounted to issued by payment services providers from the 39.8% (32.4% for 2016) and to 10.8% as value Republic of Moldova, 46.5 million operations (8.5% for 2016). worth MDL 49.6 billion were made, both in the country and abroad, an increase compared to 2016 by 28.2% as number of transactions and Daily, 66 533 cash withdrawals and about 17.3% as value. The highest growth rate was 44 070 non-cash payments on the territory of registered for non-cash payments, an increase the Republic of Moldova with domestic of 52.6% compared to the previous year, while payment cards are performed. The average cash withdrawals increased by 12.1% value of a domestic cash withdrawal compared to 2016 (Chart 5.3). transaction amounted to MDL 1 649 in 2017, 36Payment transaction performed with an accepting 34Payment cards that made at least one ﬁnancial provider from the Republic of Moldova with cards issued by transaction during the reporting period. payment services providers licensed by the NBM. 35Card with a microprocessor and magnetic tape.

80 up by 1.8% compared to 2016. At the same made with the physical presence of the card time, a non-cash payment accounted for an (Chart 5.5). These ﬁgures show that average of MDL 301, decreasing by 3.6% approximately 2 out of 3 transactions compared to 2016. performed abroad with cards issued in the Republic of Moldova represent online Chart 5.4 The structure of domestic operations purchases and the increase in their volume denotes the consumers’ growing conﬁdence in this payment tool. 100% 11.1% 2.9% 7.9% 80% Chart 5.6 The indicators of payment cards market in the 28.7% Republic of Moldova 60%

40% 7 6 20% 89.2% 60.2% 5 0% 4 Number Value Cashless payments without the physical presence of the card 3 Cashless payments with the physical presence of the card Cash withdrawals 2 1 0 Source: NBM 2011 2012 2013 2014 2015 2016 2017 POS terminals per thousand inhabitants Chart 5.5 The share of operations performed abroad with Cashless payments per capita cards issued in the Republic of Moldova Payment cards per capita

Source: NBM 100% 3.6% 14.0% 80% During the year 2017, the following positive 30.4% 33.6% trends emerged on the Moldovan banking cards 60% market: 40%

20% 66.0% 52.4% • Non-cash payments made with cards 0% issued in the Republic of Moldova Number Value continued to increase at accelerated Cash withdrawals Cashless payments with the physical presence of the card rates as compared to 2016, increasing by Cashless payments without the physical presence of the card 52.6% in number of transactions made and by 35.2% in value;

Source: NBM • 63.1% of transactions performed abroad with payment cards issued in the Of the total number of domestic operations, Republic of Moldova represent payment 28.7% were non-cash payments made with transactions for online trade, which the physical presence of the card and 11.1% denotes an upward trend of these types were made without the physical presence of of operations and the increased trust of the card. card holders in this payment tool;

The number of transactions with cards, issued • The payment card acceptance network of in Republic of Moldova, carried out abroad the Republic of Moldova developed during during the year 2017 increased by 46.3 p.p. 2017, in particular, by increasing the compared to the same period of 2016, being number of POS terminals (16 609 POS approximately 6.6 times lower than the terminals at the end of 2017, an increase number of transactions performed in the of 10.2% compared to the same period of country with cards issued in the Republic of the previous year); Moldova. Of the total number of 6 161 380 transactions carried out abroad, 96.4% • The number of contactless cards in represent non-cash payments, an increase of circulation increased signiﬁcantly, being 47.6% compared to 2016. It is worth by 1.8 times higher compared to the end mentioning that 66.0% of the total number of of 2016, and because of the convenience transactions carried out abroad are non-cash and simplicity of their use, more and payments made without the physical presence more users choose to pay for purchases of the card and 30.4% are cashless payments by means of a cashless payment tool.

81 The core indicator for the assessment of the increase of 23.3% compared to 2016. situation regarding payment card fraud is the Depending on the type of systems used, most share of frauds in the total value of transactions transactions were made via Internet-payments through payment cards issued by local licensed (88.4%), while through other ARSSs the banks, both domestically and abroad. In the number of operations registered lower values: Republic of Moldova this indicator constituted PC-payments – 10.1% of total number of 0.023% for the year 2017, which is below the operations, Mobile-payments – 1.5% of the European level (0.039% for 201337). total number of operations. It should be noted that only 34.9% of the total number of Automated remote service systems operations performed through ARSS during 2017 were initiated by individuals. The value Although the total number of holders of of transactions performed through ARSS by automated remote services systems (ARSS) individuals and legal entities amounted to MDL was at the end of the reporting year 405.4 billion during 2017, up by 16.0% as of 545 879, an increase of 22.9 p.p. compared compared to 2016 (Chart 5.8). About 98.5% of to the same period of the previous year, the the value of operations performed by ARSS number of active holders38, reﬂecting the were carried out by legal entities. actual use of the automated remote service Chart 5.8 The number and operations value performed systems, increased by 36.4% compared to the through ARSS end of 2016, reaching 138 078 holders (Chart 5.7).

16 450 Chart 5.7 The number of ARSS uses by systems type 14 400 12 350 300 600000 10 250 8 500000 200 6 150 400000 4 100 billion) (MDL, Value 300000 2 50 Number of operations (million) operations of Number 0 0 200000 2013 2014 2015 2016 2017 Value Number 100000

0 2013 2014 2015 2016 2017 Source: NBM Internet-payments Mobile-payments PC-payments Telephone-payments Credit transfer

Source: NBM Out of the total of 15.9 million payment transactions, 10.7 million were initiated in The distribution of ARSS holders according to electronic format (67.5% of the total number the type of systems used reveals that 71.7% of credit transfer operations) amounting to of them are registered in Internet-payments MDL 449.1 billion (64.1% of the total value of systems (an increase of 24.2 p.p. compared to credit transfer operations), the remaining the end of 2016); 16.1% of the total number being initiated on hard copy. are holders of Mobile-payments (by 29.2 p.p. more than at the end of 2016); 10.4% (by 8.8 On the background of an increase in the total p.p. more than at the end of 2016) of the total number of credit transfer operations, number of holders use Telephone-payments compared to 2016, there is an upward trend in and only 1.8% use PC-payments (PC payments utilization of the electronic credit transfers, holders are only legal entities, the number of which according to estimations, by the end of which has increased by 13.5 p.p. compared to 2018, can reach a proportion of about 90% of the end of 2016). total number of credit transfer operations initiated by banks’ customers. During the year 2017, 13.5 million transactions were performed via ARSS, an Direct debiting

37Report on payment card fraud, published by the During the year 2017, through direct debiting European Central Bank in July 2015, https://www.ecb. were performed 86 329 payment operations europa.eu/pub/pdf/other/4th_card_fraud_report.en.pdf in a total amount of MDL 37.5 million. Total 38RBSS holder who carried out at least one ﬁnancial operation during the management period through a remote number of users of this instrument of payment banking service. represented 3 068 individuals.

82 Chapter 6

Cash operations

In 2017, the amount of currency in circulation Chart 6.2 The evolution of banknotes in monetary continued its upward trend, growth rate circulation in terms of quantity (million banknotes) (+10.7%, up to MDL 21 036.0 million) being lower by 0.6 p.p. compared to that registered 100 90 in 2016. 80 70 60 50 40 6.1 Evolution of currency 30 20 (banknotes and coins 10 in circulation) 0 5 lei 5 1 1 leu 10 lei 10 20 lei 20 50 lei 50 100 lei 100 200 lei 200 500 lei 500 2015 2016 2017 lei 1000 The value of banknotes in circulation at the end of 2017, amounted to MDL 20 905 million, an Source: NBM increase of 10.8% compared to the end of the previous year. The evolution of the value of banknotes in monetary circulation is shown in hold the largest share of the total number of the chart 6.1. banknotes in circulation, 34.7%, followed by banknotes with the denomination of 200 lei, Chart 6.1 The evolution of banknotes in monetary circulation in terms of value (MDL, million) with a share of 21.7%, and that of 100 lei, with a share of 12.9%. Similar to previous years, the 12000 smallest share in the total number of banknotes 11000 10000 in circulation belonged to banknotes with the 9000 denomination of MDL 1 000 (0.5%). 8000 7000 Chart 6.3 The structure by face value of banknotes in 6000 circulation at the end of 2017 5000 100% 4000 6.16 3000 2000 11.78 21.07 1000 80% 0 12.93

60% 11.31 5 5 lei 1 leu 54.88 10 lei 20 lei 20 50 lei 50

100 lei 100 4.59 200 lei 200 500 lei 500 2015 2016 2017 lei 1000 7.25 40% 5.87

Source: NBM 20% 16.84 34.70

7.37 At the end of 2017, about 272 million 0% Value Quantity banknotes were in circulation, by 8.8% more 1 leu 5 lei 10 lei 20 lei 50 lei than at the end of 2016. The evolution of 100 lei 200 lei 500 lei 1000 lei banknotes in monetary circulation, in terms of Source: NBM quantity, by the amount of each denomination is presented in the chart 6.2. Quantitative According to the nominal value structure, at increase of banknotes in circulation was the end of the reporting period, the quantity of determined by a higher increase in the banknotes in circulation constituted: of 1 leu – quantity of banknotes with the following 94.48 million banknotes, 5 lei – 15.99 million denomination: 1 leu, 10 lei, 50 lei and 200 lei. banknotes, 10 lei – 19.73 million banknotes, 20 lei – 12.48 million banknotes, 50 lei – 30.80 From the quantitative point of view, banknotes million banknotes, 100 lei – 35.21 million with the denomination of 1 leu continued to banknotes, 200 lei – 57.36 million banknotes,

83 500 lei – 4.92 million banknotes and 1 000 lei – coins held the weight of 27.0%, 10 bani coins – 1.29 million banknotes. 30.4%, and 25 bani coins – 28.3%, and from the point of view of value, held the weight of The chart 6.3 reﬂects details on the structure 9.4%, 21.2% and 49.3%, respectively. of banknotes in circulation at the end of 2017, by nominal values, represented in quantity and value. 6.2 Cash issuing, At the end of 2017, 807.72 million coins were in circulation, 6.4% more than at the end of 2016. withdrawal and The total value of coins in circulation was MDL processing 115.94 million, by 12.6% higher than in the corresponding period of the previous year. In terms of value and quantity, the evolution of During the year 2017, the National Bank of coins in monetary circulation by nominal value Moldova has put into circulation cash of total structure is presented in the chart 6.4 and 6.5, value of MDL 6 680.9 million, which is about respectively. 12.9% less compared to 2016.

Chart 6.4 The evolution of coins in monetary circulation in terms of value (MDL, million) In terms of value, the banknotes issued in 2017 constituted the amount of MDL 6 673.8 70 million (of which MDL 4 428.4 million were

60 up-dated banknotes), which is about 13.0% less compared to 2016, and from 50 quantitatively there were 97.7 million 40 banknotes, about 10.0% less than in 2016.

30 The decrease in the quantity of banknotes 20 issued into circulation in 2017 was due to the 10 decrease of the number of banknotes with denomination of 5 lei, 20 lei, 50 lei, 100 lei, 0 200 lei and 1 000 lei. 1 ban 5 bani 10 bani 25 bani 50 bani 2015 2016 2017 Chart 6.6 The banknotes issued during 2017 in terms of quantity Source: NBM

Chart 6.5 The evolution of coins in monetary circulation in 18.87% terms of quantity (million coins) 8.26% 13.58%

300

250 17.18% 200 18.06% 150 3.91% 1.06% 100 19.07% 0.01% 1 leu 5 lei 10 lei 20 lei 50 lei 100 lei 200 lei 500 lei 1000 lei 50

0 1 ban 5 bani 10 bani 25 bani 50 bani Source: NBM 2015 2016 2017 From the quantitative point of view, the

Source: NBM banknotes put into circulation according to the structure of nominal values constituted: 1 leu – The increase in the quantity of small 18.6 million banknotes, 5 lei – 3.8 million denomination coins in circulation was due to banknotes, 10 lei – 16.8 million banknotes, 20 the increase of the number of coins of lei – 8.1 million banknotes, 50 lei – 18.4 million following denominations: 5 bani, 10 bani and banknotes, 100 lei – 13.3 million banknotes, 25 bani. According to the nominal value 200 lei – 17.6 million banknotes, 500 lei – 1.1 structure from quantitative point of view, at million banknotes and 1 000 lei – 0.01 million the end of the reference period, the 5 bani banknotes. The nominal value structure of

84 banknotes put into circulation is presented in The share of banknotes withdrawn from quantitative terms in the chart 6.6. circulation by nominal value structure, in terms of quantity and value, is presented in Metallic coins issued in 2017 in terms of value the chart 6.8 and in the chart 6.9, respectively. amounted to 7.1 million lei, about 7.6% more than in 2016, and in terms of quantity – 48.8 Chart 6.9 The banknotes withdrawn from circulation during million coins, about 16.7% more than in 2016. 2016 in terms of quantity 21.52% From the quantitative point of view, the metallic 11.58% coins issued in 2017, according to the nominal value structure, consisted of: 1 ban – 1.2 million 15.55% coins, 5 bani – 12.2 million coins, 10 bani – 16.2 million coins, 25 bani – 19.0 million coins and 18.33% 50 bani – 0.2 million coins.

The distribution by volume of each denomination of coinage issued is shown in 14.53% the chart 6.7. 5.70% 0.62% 12.06% 0.11% Chart 6.7 The coins issued during 2017 in terms of quantity 1 leu 5 lei 10 lei 20 lei 50 lei 100 lei 200 lei 500 lei 1000 lei

Source: NBM 33.19% The National Bank of Moldova is continuously monitoring the increase of quality level of the banknotes in circulation, in accordance with the procedure established by the NBM. Thus

24.94% 75.65 million banknotes were processed in the 38.86% bank to verify authenticity and quality in 2017. Following such processing, about 51.94 million 0.44% banknotes were classiﬁed as inappropriate for 2.57% circulation. 1 ban 5 bani 10 bani 25 bani 50 bani Premises of putting into circulation of 1 Source: NBM leu, 2 lei, 5 lei and 10 lei coins

Chart 6.8 The banknotes withdrawn from circulation during In order to exercise effectively the functions of 2017 in terms of quantity the National Bank of Moldova, which operates as a single issuer of the national currency, the

20.22% National Bank continuously ensures adequate 11.84% monetary circulation. An important role is 15.46% optimal establishment of the nominal structure of the national currency, the proportion of 18.70% coins versus banknotes.

13.41% Thus, in the second half of 2017, the National 5.33% Bank conducted an extensive economic study 0.61% on utilization of cash on the territory of the 14.32% 0.11% Republic of Moldova and internationally, and 1 leu 5 lei 10 lei 20 lei 50 lei 100 lei 200 lei 500 lei 1000 lei made the decision to replace small denomination banknotes (1 leu, 5 lei and 10 lei) with coins of the same nominal value, and Source: NBM introduce a new coin with the nominal value – of 2 lei. During the year 2017, by means of deposits made by licensed banks, the National Bank of For this purpose, a range of working meetings Moldova withdrew from circulation banknotes with independent experts, representatives of with a total value of MDL 4 633.5 million, 19.0% local and central authorities, including less than in 2016; in terms of quantity 75.7 business, banking and transport, were million banknotes returned to the central bank, organized. In August 2017, the NBM initiated a about 15.1% less than in 2016. public consultation process to develop the

85 prototype design of new coins of 1 leu and 2 Chart 6.10 The structure of counterfeits by face value leu. The public contest was attended by 33 identiﬁed in 2017 in terms of quantity citizens who submitted a total of 80 bids of the concept for the new metal coins. Inspired by the sketches proposed by the winners of the contest, the National Bank has further 86.31% developed the design of the new metal coins.

6.3 National currency 1.54% 4.85% 6.11% counterfeiting 0.46% 0.73% 1 leu, 5 lei, 10 lei, 500lei 20 lei 50 lei 100 lei 200 lei 1000 lei During 2017, the number of counterfeits of national currency in the banking system Source: NBM totalled 3 960 banknotes, about 39.1% less than in 2016. As a fraction of the number of Chart 6.11 The structure of counterfeits by face value genuine banknotes in circulation at the end of identiﬁed in 2016 in terms of quantity the reporting period, which constituted 272 million banknotes, the number of forged banknotes was at a very low level and represented 0.0015% or about 15 fake 90.70% banknotes per 1 million genuine banknotes in circulation.

The most frequently forged banknote was that of 100 lei – 3 418 counterfeits. In second place was the banknote with the denomination of 1.72% 20 lei, with 242 counterfeits, followed by the 5.79% 0.20% 0.57% 200 lei banknote with 192 counterfeits, the 1.02% 1 leu, 5 lei, 10 lei, 500lei 20 lei 50 lei banknote, with 61 counterfeits and the 50 lei 100 lei 1 000 lei banknote, with a number of 29 fakes. 200 lei 1000 lei As a basis of comparison, in the year 2016, Source: NBM the number of counterfeits of national currency amounted to 6 498 banknotes, and the highest number of counterfeits were recorded for the 100 lei banknotes, totalling 5 894 banknotes, 20 lei – 376 banknotes, 50 lei – 112 banknotes, 1 000 lei – 66 banknotes. 6.4 Issuance of jubilee and commemorative coins The share of counterfeits by nominal value in the years 2017 and 2016 is shown in the chart and banknotes 6.10 and in the chart 6.11, respectively.

In order to ﬁght counterfeiting of national In accordance with the Law on the National currency, the National Bank of Moldova further Bank of Moldova no. 548-XIII of July 21, 1995, recommends the public become familiar with the National Bank of Moldova issued a new set the safety features of the banknotes on the of coins for the year 2017. The new issues NBM website. Also, to be vigilant for possibility represented 10 commemorative coins of fraud and to verify the authenticity of representing various events. Out of 10 banknotes and coins. In cases that such fraud commemorative coins, two are golden coins takes place, withdraw the banknotes from and eight are silver coins. Mintages differed by circulation and communicate such cases to the the metal in which the coins were struck, Ministry of Internal Affairs. respectively: 200 golden coins and 2 650 silver coins. At the same time, the NBM, in co-operation with the Ministry of Internal Affairs, organizes Table A.22 includes details of jubilee and specialized trainings for licensed banks on commemorative coins for the 2017 issue. detection and extraction of counterfeits from circulation.

86 Chapter 7

Activity related to modiﬁcation of the legal and regulatory framework

the process of appointing and confirming administrators. This way, the banks are primarily responsible for selecting and 7.1 Prudential regulation, proposing to the position of an administrator regulation of those candidates who meet the requirements stipulated in the Regulation as well as for the accounting evidence in re-evaluation of their qualifications. The banks qualifications and experience criteria, established for candidates who were proposed to the position of an administrator, were I. During 2017, the regulatory framework reviewed as well. Evaluation for each related to corporate governance, quality of candidate is completed by applying the shareholders as well as qualification rational based on significant information requirements set for administrators was related to the evaluation criteria and taking further improved. This process took place in into account any other relevant aspect, accordance with the amendments made to the including the size of the bank, the nature and legal framework regulating banking activity. complexity of its activities. Modifications to the Regulation on holding In this regard, the Regulation on banks’ participation quotas in the bank’s share capital activity management framework was aimed to improve the regulatory framework by approved. The new provisions of the establishing mechanisms to allow access to Regulation refer to corporate governance the banking market only to individuals who structure, internal control mechanism and risk meet the legal requirements related to management practices in banks. Based on banking shareholding quality, and namely: these guidelines, banks are required to operate efficiently and transparently, to have an adequate organizational structure, to have • extension of requirements regarding the a regulatory framework that corresponds to procedure of obtaining prior written the bank’s business model, to manage all the permission for persons who expect to risks resulting from its activity and to maintain receive shares of the bank as a financial stability, in order to protect the contribution to their share capital; interests of its depositors. Also, the banks • assessment of the quality of potential have to report cases of fraud that could affect acquirer / acquirer by cumulative their safety, soundness and reputation. At the examination and of the criteria related to same time, the banks have to adapt their excessive stratification of shareholding; policy for appointing administrators to the size and complexity of their institution and • improvement of the set of documents implement a remuneration policy that would that follows to be presented by the not favour excessive risk-taking. potential acquirer / acquirer for its further examination in the process of granting The new provisions of Regulation of prior permission for the solicitation of requirements to bank administrators aimed at holding the quota in the banks’ share enhancing corporate governance by improving capital; the system of continuous promotion to the obligation of banks to identify and be position of administrators of banks persons • aware of all changes in the structure of who correspond to the fit and proper principle, their shareholding, including the ultimate and respectively, at ensuring an efficient beneficial owner, and to provide this management of the bank. The Regulation information to the supervisory authority. contains a number of new provisions, based on the recommendations of the European Banking Authority Guide and of International Monetary At the same time, the process of granting Fund’s experts, which are intended to outline permissions to hold quotas in banks’ share

87 capital was improved for circumstances when Actions for implementing the Association the potential acquirer is an international Agreement between the Republic of Moldova organization, a multilateral development bank, and the European Union in the period a Moldovan bank or a foreign bank. In this 2017-2019 (approved by the Government case, a smaller set of documents is required to Decision no. 1472 of 30.12.2016), the be provided by the above-mentioned entities. Parliament of the Republic of Moldova adopted This process was simplified for potential the Law on banking activity no. 202 of October investors because of their status and the fact 6, 2017. that the respective banks are already supervised by competent authorities. The new banking law is aimed at improving national banking legislation taking into In order to create the regulatory framework for account best international standards and setting up branches of foreign banks on the practices related to licensing, regulation and territory of the Republic of Moldova, the supervision process of the National Bank of Regulation on licensing banks by establishing Moldova. Thus, the provisions of the Directive the mechanism of setting up a branch of the 2013/36 / EU of 26 June 2013 on the access to foreign bank, was adopted, which includes the activity of credit institutions and prudential licensing requirements, conditions of activity supervision of credit institutions and of development, as well as capital requirements. investment firms and of the Regulation Therefore, in order to ensure fair and equal 575/2013 of 26 June 2013 on prudential competitive treatment for all participants in requirements for credit institutions and the banking market, the branch of a foreign investment firms and on modification of the bank must have an endowment capital similar Regulation (EU) no. 648/2012 were transposed to the capital that a bank shall maintain. into the Law.

In this context, the Regulation on Therefore, Basel III standards referring to risk-weighted capital adequacy was also capital requirements were transposed into the adjusted. Respectively, as a component to the Law and, at the same time as the regulation at total regulatory capital was included the the level of legal acts of prudential treatment endowment capital. At the same time, from of various risks (credit, market, operational, the point of view of consolidation of capital by etc.) for calculation of risk-weighted banks in conditions of maintaining their exposures. financial stability, the regulation was supplemented with provisions, which condition In order to create adequate capital reserves capital distribution by banks in view of the designated to reduce the pro-cyclical nature of impact of economic and social events on crediting, to absorb the negative prudential indicators of the bank, determined consequences of excessive crediting or of inclusively by evaluation of stress tests’ results economic recessions that cause financial performed by the bank and/or by the National instability and which have the ultimate goal of Bank of Moldova. preventing and mitigating macro-prudential and/or systemic risk, the Law establishes In order to update and improve the accounting additional own funds requirements that the records of licensed banks, the Chart of banks shall hold in order to constitute capital accounts of bookkeeping within licensed banks buffers imposed by the National Bank of of the Republic of Moldova was modified. The Moldova (capital conservation buffer, bank adjustments were conditioned by entry into specific countercyclical capital buffer, O-SII force on January 1, 2018 of the International buffer, systemic risk buffer, combined buffer). Financial Reporting Standard 9 “Financial Tools”, which replaces IAS 39 “Financial tools” Taking into account the provisions of the and by amendments to legal and regulatory Moldova-EU Association Agreement, the acts. notions of “branch” and “subsidiary” (notions reversed as meaning in utilization in the II. For the purpose of implementing the Republic of Moldova compared to international provisions of the Association Agreement practices) have been modified at the Law level. signed between the Republic of Moldova and At the same time, in order to ensure efficient the European Union on 27.06.2014, which performance of the supervisor’s competencies establishes the commitment of the Republic of and strengthening corporate governance in Moldova to comply with the European norms, banks, the Law stipulates certain derogations including with the European financial and from the Law on joint stock companies, in banking directives, and in order to accomplish particular regarding attributions of the general the actions stipulated in the National Plan of meeting of shareholders, of the council and of

88 the executive body, as well as the exclusion of commitments of the Republic of Moldova in the commission of censors in the case of the context of the Association Agreement with banks from the Republic of Moldova from the the EU of transposing the Directive 2002/87 / list of banks’ control bodies. EC of the European Parliament and of the Council of 16 December 2002 and the Compared to the legislation in force at the time developments on international financial of the approval, the Law includes a wide range markets which determined the emergence of of rights and attributions for the National Bank certain financial groups providing services and of Moldova regarding the process of products related to different financial sectors assessment and supervision of banks, and called financial conglomerates, the Law no. continuously promotes the idea of significant 250 of 1 December 2017 on supplementary increase and diversification of applicable supervision of banks, of insurers / reinsurers sanctions and of sanctioning measures. In and investment firms in a financial particular, the National Bank of Moldova has conglomerate was developed and approved. the power to apply pecuniary administrative sanctions which are sufficiently big to have a Taking into account the fact that deterrent effect on certain significant conglomerates represent the largest financial deficiencies or which pose increased risks. groups that carry out inter-sectoral activities, the Law stipulates additional prudential In addition to the general prudential supervision at the level of the group in order to requirements applicable to the entire banking prevent potential contamination risk. Thus, in sector, the Law includes the requirement for order to avoid negative repercussions to the banks to possess internal capital that, financial sector, to protect the interests of depending on the risks to which they are or depositors, insurers and investors in the event may be exposed, would be appropriate as of financial instability at conglomerate level, distribution, quality and quantity. Banks will the Law stipulates consolidated prudential also apply strategies and processes to assess supervision of banks, of insurers /reinsurers and maintain the adequacy of their internal and of investment firms which belong to a capital. These rules are part of the second financial conglomerate, in particular with pillar of Basel III standards. regard to solvency, risk concentration, intra-group transactions, internal control The basic principles included by the Law refer mechanism, internal risk management at the to the following: conglomerate level, and reputation and competence of financial groups’ management. • creation of a coherent and consolidated primary and secondary legislative The Law establishes measures to facilitate framework related to banking activity in supplementary supervision of financial the Republic of Moldova, allowing conglomerates, the criteria for designating of a effective supervision of banks in the competent authority-coordinator and its tasks, Republic of Moldova; as well as the provisions on cooperation and exchange of information between competent • development of certain supervisory tools authorities involved, which should carry out necessary to prevent and minimize exchange of information, consult each other potential shortcomings in the activity of before making important decisions and handle banks at incipient stages, thus ensuring properly the claims for verification of stability of the banking sector and information. protection of depositors’ interests;

• harmonization of national banking The Law also stipulates requirements for legislation with internationally accepted mixed ﬁnancial holding companies, regulation standards and principles, and increase of of remedial measures and sanctions, as well as collaboration relations with supervisory provisions on supplementary supervision in authorities from other countries to ensure case of groups, parent companies of which are prudential supervision on a consolidated based in other countries - cooperation with basis and exchange of information, competent authorities from other countries especially in case of domestic banks, based on cooperation agreements. which are part of international banking groups.

In order to improve the legal framework of prudential supervision, taking into account the

89 7.2 Foreign Exchange procedure of performing foreign exchange operations. These modifications allow each Operations Regulation resident payment services provider (RPS provider) to regulate independently these aspects according to the specifics of their In 2017, the National Bank of Moldova (NBM) activity. promoted a range of amendments to the legal framework related to foreign exchange The principal amendments to the mentioned regulation. This framework regulates inflows regulation refer to the following aspects: and outflows of cash into/from the Republic of Moldova by banks, the process of submitting documents for performing payments/transfers • lighter requirements have been in foreign exchange transactions, notification established for clients’ applications to to the NBM by residents about foreign perform payments and transfers; the RPS loans/credits within operations related to direct providers were granted the possibility to investments, reporting by banks about foreign determine on their own the procedure of exchange operations to the NBM. documents’ presentation in order to perform payments/transfers within I. In order to grant certain new facilities to foreign exchange operations, if the banks related to cash transfers into/from the normative acts do not stipulate otherwise; Republic of Moldova, there are foreign conditions were established according to companies, which provide services related to • which an individual does not need to cash transfers from / to the Republic of present the identity card to the RPS Moldova and which can offer more provider, in case the RPS provider has not advantageous conditions for performing established stricter rules, the conditions respective operations. In 2017, the Instruction are meant to be met cumulatively as on introduction/withdrawal of cash into / from follows: the Republic of Moldova by banks was modified. (i) the legislation on prevention and combating money laundering and For this purpose, according to the terrorist financing and/or on providing amendments made, resident banks have been payment services and issuance of allowed to perform cash transfers into/out of electronic money does not establish the the Republic of Moldova and based on requirement to identify the individual and contractual relations with non-resident legal (ii) payment/transfer shall be made by entities, other than non-resident banks, which using the account of the natural person foresee sale / purchase of cash against opened at the RPS provider; or the cashless financial means. At the same time, in payment/transfer is made without order to minimize eventual risks in relation to utilization of the account of the individual specialized non-resident legal entities which, opened at the provider RPS and the compared to banks, may not be subject to regulation stipulates performing the regulation and supervision according to the payment/transfer without presentation of procedures established for banks, certain justifying documents. criteria have been determined which non-resident specialized legal entities shall meet on a permanent and cumulative basis. In In addition, legal entities have been allowed to particular, the specialized legal entity shall not make single payments/transfers in amounts be registered in an offshore country /area, be not exceeding EUR 1 000 without presentation subject to regulation and supervision in the of justifying documents. The purpose of this context of legislation on the prevention and liberalization is to simplify cashless payments / combating of money laundering and terrorist transfers in insignificant amounts by legal financing in the country in which it is persons, but the rule will not apply to registered, shall be operating in the respective payments / transfers of resident legal entities domain for at least 5 years. made in the framework of foreign exchange transactions subject to notification / II. To stimulate IT development and in order to authorization in accordance with the Law on simplify certain requirements for presentation foreign exchange regulation. of documents related to making payments and transfers in the framework of foreign exchange III. In order to specify certain aspects related to operations, certain modifications have been notification by residents to the NBM about made to the Regulation on conditions and external loans/credits in the framework of

90 direct investments operations (norms entered the licensed banks were allowed to into force on 10.12.2016 according to the Law import/export cash into/from the Republic of no.94 of 13.05.2016 on modification and Moldova not only on the basis of contractual completion of the Law on foreign exchange relations with non-resident banks but also on regulation no. 62-XVI of 21 March 2008), the the basis of contractual relations with corresponding amendments to the Instruction specialized non-resident legal entities; on external commitments were applied in 2017. For this purpose, the conditions were b) the report “Operations of buying and selling expressly stipulated under which a loan / foreign currency performed by a licensed credit under direct investment operations bank”; contracted by a resident from a non-resident before the date of 10.12.2016, but subject to c) the report “Licensed bank’s operations with modifications after this date, becomes subject cash in foreign currency and with traveller’s to notification and reporting to the NBM. These checks in foreign currency”. conditions cumulatively to be met are as follows: The amendment of these reports was intended to specify a few aspects regarding the manner a) the contracting parties and/or the term of the of reflecting foreign exchange transactions in loan/credit and/or the contract amount and/or cash with individuals (the number of operations the share held by the creditor in the debtor’s and their amount), in case that during the capital have modified, constituting less than reporting period revocation by individuals of 10%; the operations concerned took place. b) it fits into the loan/credit specified in item 2.5 letter (a), (b) or (d) of the instruction; c) the amount of the loan/credit exceeds EUR 50 000 (or its equivalent).

At the same time, the aforementioned instruction was supplemented with a new provision stipulating that taking into account or authorizing external commitments by the NBM does not exempt resident payment services providers, through which notiﬁed / authorized foreign exchange operations are performed, from complying with other provisions of the legislation of the Republic of Moldova, including the provisions related to enforcement of measures in accordance with the requirements of legislation in the domain of prevention and combating money laundering and terrorism ﬁnancing.

IV. The need of adjusting the reporting framework for foreign exchange operations has conditioned in 2017 the modiﬁcation and completion of the Instruction on reporting certain foreign exchange operations by licensed banks. In this regard, the following reports were modiﬁed: a) the report “Cash imported into/exported from the Republic of Moldova by banks”.

The modiﬁcation of this report was linked to the Decision of the Executive Board of the NBM no.35 of 8 February 2017 “On the modiﬁcation and completion of the Instruction on introduction/exportation of cash into/from the Republic of Moldova by banks”, by which

91 Chapter 8

External activity of the NBM

totalling 129.4 million SDRs (is equivalent to about USD 183.1 million and to 75% of the 8.1 International Republic of Moldova quota held at the IMF). According to the terms of the program, the Collaboration of the disbursement of funds takes place in 6 Republic of Moldova instalments, preceded by an assessment of the conditions for each instalment.

The first instalment amounting to SDRs 26 International Monetary Fund (IMF) million (about USD 35.9 million) was disbursed to the authorities of the Republic of Moldova The International Monetary Fund is an under the IMF Program in November 2016, international financial institution with the immediately after the Program has been fundamental mission of ensuring stability of approved, and during the year 2017 another the international monetary system. In order to two separate instalments were disbursed accomplish this mission, the IMF is directing its totalling SDRs 31.4 million (about USD 43.7 activity to monitoring the economic and million). The remaining amount follows to be financial policies of member states, promoting disbursed during the next stages of the international monetary cooperation and implementation of the program. currency stability, granting temporary financial assistance to countries with balance of The main objective of the program supported payments disequilibrium, and grants technical by the IMF in 2017 was focused on reforms in assistance to IMF member countries. The the financial and banking sector, prudent Republic of Moldova is member of the management of public finances and International Monetary Fund as of August 12, improvement of the operational framework in 1992. the energy sector. In the banking domain, the program aimed on strengthening governance Current quota of the Republic of Moldova at IMF and of financial situation of banks by amounts to 172.5 million of special drawing increasing transparency of shareholders, rights (SDRs), which represents 0.04 percent compliance of owners and administrators of of the IMF’s capital. This quota entered into banks with the criteria of honesty and force on the 17th of February 2016, following professionalism, identification of related the increase by the Republic of Moldova of its parties lending, and ensuring compliance with previous quota of (123.2 million SDRs) by 49.3 regulatory and capital requirements. million SDR. The voting power of our country In order to organize regular consultations and at the IMF is of 1,973 votes, which represents perform assessments related to the level of 0.08% of the total number of votes. implementation of the commitments assumed Throughout 2017, the Republic of Moldova by the IMF Program, during the year 2017, IMF advanced its collaboration relations with the experts performed 3 working visits to Chisinau IMF, based on a complex program of economic (14-28 February, 17-21 July and 25 October – reforms and financial support, which was 07 November). As a result of the visits, approved on November 7,2016 by the IMF finalization of the two rounds of assessments Executive Board for a period of three years. of the Program with the IMF was possible as well as the development of regular The Program is implemented through two consultations for the year 2017 in the 41 lending tools - the Extended Fund Facility39 framework of Article IV of the IMF Statute . (EFF) and the Extended Credit Facility40 (ECF), According to findings of IMF experts, as a result 39EFF which stipulates an annual interest rate equal to of the visits, the Republic of Moldova had a the SDRs’ core interest rate, a 10-years reimbursement term and a grace period of four and a half years. 41Article IV of the IMF Statute governs the cooperation 40(ECF) which stipulates an interest rate equal to zero by relations between the IMF and the member countries. the end of the year 2018, a grace period of five and a half Pursuant to the provisions of this article, annually the IMF years and a repayment term of 10 years. Two thirds of the grants consultations to the Republic of Moldova in the loan amount is granted on ECF basis. economic and financial policy domain

92 relative macroeconomic and financial stability In the context of financial arrangements, in 2017, overcoming the banking crisis of 2014. during the year 2017, the National Bank of Significant progress has been made by the Moldova received from the IMF 12.4 million Moldovan authorities in eliminating the SDRs (USD 17.26 million) offered through the long-term persistent vulnerabilities of the EFF financing mechanism to strengthen the financial-banking sector and in advancing the international reserves of the Republic of implementation of structural reforms. The Moldova. Table A.23 reflects the cumulative efforts made during the year significantly financial arrangements that the National Bank contributed to strengthening the financial of Moldova benefited from by the end of 2017. stability and to relaunching the economy. In the reporting year, total payments for servicing loans granted to the National Bank of In addition, IMF experts ascertained that Moldova by the IMF amounted to SDRs 46.25 significant progress has been made in 2017 in million (the equivalent of USD 64 million), of terms of the financial - banking sector which payments for the principal loan amount recovery, including strengthening the constituted SDRs 44.46 million (the equivalent supervisory and regulatory framework, of USD 61.52 million) and payments for loans improving management and increasing interests amounted to SDRs 1.79 million (the transparency of shareholders. equivalent of USD 2.48 million).

Strengthening the cooperation relations of the National Bank of Moldova with the IMF was European Union (EU) possible due to the visits made to Washington D. C. (October 10-15 and April 17-23) by the NBM leadership, in the context of participation In 2017, the Republic of Moldova advanced on in annual and spring meetings of the IMF and its way of gradual accession to the European of the World Bank Group. Union in the context of implementation of provisions of the Association Agreement During the visits, members of the Executive signed in Brussels on the 27 June 2014 Board of the NBM had a series of meetings between the Republic of Moldova on one side with officials of the IMF, the World Bank, and the European Union and the European European Commission, EBRD TreasuryUSA, Atomic Energy Community and their member the International Finance Corporation, the countries, on the other side. Council of Europe Development Bank and other important partners to discuss the In order to ensure continuity in the implementation of the Program with the IMF, implementation of the Association Agreement, the achievements and priorities in the process the Republic of Moldova and the European of reforms in the financial-banking sector, the Union agreed on a new Association Agenda for investment framework in the Republic of the period 2017-2019, which was published in Moldova and measures taken in 2017 to the Official Journal of the EU on the 19th of ensure macroeconomic stability of the country. August 2017 and which replaced the Association Agenda 2014 -2016, initially In addition, the successes achieved by the agreed on the 26 of June 2014. The new authorities of the Republic of Moldova in document has the goal of supporting and implementation of the Program with the IMF strengthening the resilience and stability of the were discussed by the Governor of the Republic of Moldova, while pursuing a closer National Bank during the bilateral meeting political association and a deeper economic with the IMF Managing Director, in the context integration. The 2017-2019 Agenda foresees a of participation at the high level conference list of short and medium-term priorities, Reaccelerating Convergence in Central and including in the areas, which target the tasks South-eastern Europe, organized by the IMF on of the NBM, such as: financial services, current July 10-11, 2017 in Dubrovnik. In this context, payments and capital flow, right of the IMF leadership welcomed the successes establishment and trade in services, economic achieved by the Moldovan authorities during development and market opportunities. 2017 and emphasized the importance of continuing the reform implementation agenda. In order to monitor the European integration The meeting of the Moldovan delegation with process at the national level, the Moldovan the managing Director of the IMF can be authorities have progressed on their way of considered a strong sign of support and implementing the provisions of the National credibility grunted to our country on behalf of Action Plan of the Republic of Moldova - EU development partners. Association Agreement (NAPAA) for the years 2017-2019, approved by the Decision of the

93 Government of the Republic of Moldova no. banking sector, progress in Association 1472 from December 30, 2016. This document Agreement implementation, etc. was developed based on the proposals received from relevant public institutions, The relations of the Republic of Moldova with including from the NBM, containing key the European partners were marked in 2017 cooperation priorities in fulfilling the by signing in Brussels, on 23 of November, of commitments stipulated in the Association the package of documents on granting Agreement with the European Union. macro-financial assistance to the Republic of Moldova by the European Union. The Therefore, the National Bank of Moldova is Memorandum of Understanding was signed by committed to implement the Plan through a the European Commissioner for economic and range of actions, such as: alignment of financial affairs, taxation and customs, by the legislation on the central bank to the EU’s best governor of the National Bank of Moldova and practices, strengthening the NBM’s capacity in by the minister of Finance in the presence of the field of banking regulation and supervision, the prime minister. development and strengthening of requirements related to governance and The Memorandum of Understanding stipulates banking risk management, transposition and the disbursement of EUR 100 million, in three implementation of EU legislation in the field of instalments, in accordance with the schedule financial-banking services, etc. of implementation of 28 reforms and actions by Chisinau authorities. Among them were The main role in coordination and monitoring included a range of actions in the at the national level of the European financial-banking field, such as the approval of integration process during 2017 belonged to the regulatory framework for transposition of the Governmental Commission for European European directives and of international Integration, a member of which is the NBM principles in the area of prudential supervision, governor. During the meetings of the transparency of banks’ shareholders, Governmental Commission for European improvement of the deposits guarantee Integration, held in 2017, there were system, etc. discussed, among other issues, the developments of the NAPAA implementation in During the visit of the Moldovan delegation to the period 2014-2016 and the priorities of the Brussels on the occasion of signing the new NAPAA for the period 2017-2019, the Memorandum, besides the meetings with the implementation of the Association AgendaRM- European Commissioner and the European EU for the period 2017-2019, the Deep and Commissioner for Neighbourhood Policy and Comprehensive Free Trade Agreement (DCFTA) Enlargement Negotiations, the NBM governor and preparation for regular meetings with the also had working meetings with the Deputy European partners. Director-General for EU Neighbourhood Policy and Enlargement Negotiations, the Director for Thus, in the context of cooperation between International Economic Relations and the the Republic of Moldova and the European Deputy Director-General of the European Union, during 2017, the representatives of the External Action Service for Russia, Eastern National Bank of Moldova participated in Partnership, Central Asia and the OSCE. During meetings of institutional cooperation the meetings, the governor of the NBM spoke organizations established by the Association about the progress in implementation of the Agreement: the Association Council, the IMF program and presented information Association Committee, the Association received from Kroll and Steptoe &Johnson on Committee in Trade Configuration, finalization of the investigation report and on Subcommittee on economic and other sectors transparency of the report’s conclusions. cooperation (cluster I). Another major event that marked the dialogue During these meetings a range of issues were of the NBM with the EU in 2017 is the discussed referring to the evolution of certain successful finalization of the Twinning Project macroeconomic indicators, the current entitled Strengthening the National Bank of situation in the area of maintaining financial Moldova’s capacity in the field of banking stability and of banking system consolidation, regulation and supervision in the context of EU as well as in banking regulation and requirements funded by the European Union. supervision domain, the progress related to The project was launched on 30th of June 2015 the area of banking sector reforms, measures and implemented during two years by the of fraudulent practices prevention in the National Bank of Moldova together with the consortium of the National Bank of Romania

94 and the Central Bank of Netherlands. The Cooperation with other central banks official closing events of the project were held and banking supervisory authorities in Bucharest (16.05.2017) and Chisinau from other countries (30.05.2017), bringing together senior officials, ambassadors of the European Union, officials of the National Bank of Moldova and of the In the context of strengthening the National Bank of Romania, and of the banking cooperation relations with the Bank of community and experts. Lithuania, on 22.08.2017, the Memorandum of Understanding between the National Bank of One of the key priorities of the NBM, in line Moldova and the Bank of Lithuania (Lietuvos with the Association Agreement concluded bankas) was signed during a working visit of between the Republic of Moldova and the the NBM delegation to Vilnius. The document European Union (EU) signed on June 27, 2014, signed by the Governor of the NBM and the is close cooperation with the central banks of Governor of the Bank of Lithuania stipulates the EU. Thus, during the year 2017, the NBM the establishment of a comprehensive advanced on the way of establishing new framework of cooperation and exchange of cooperation partnerships with other central information between the institutions. The banks of the European Union, in order to gain signed Memorandum offers new opportunities experience in various areas that fall within its to extend technical assistance in the banking competence. sector and to attract expertise of the EU central banks.

At the same time, in the framework of Group of Banking Supervisors from exercising the banking licensing function, in Central and Eastern Europe (BSCEE) 2017, the National Bank of Moldova collaborated with banking supervising authorities from other states (Belarus, In 2017, the National Bank of Moldova, as a Lithuania, Georgia, Russia, Czech Republic, member of the Group of Banking Supervisors Ukraine, Kyrgyzstan, Italy and Romania) in the Central and Eastern Europe, continued achieving a mutual exchange of information to work with BSCEE members by exchanging required in the process of assessment of the information and experience in the field of quality of individuals (“Fit & Proper”), which banking supervision and regulation. Thus, have developed an authorized and supervised between 31 May and 2 June 2017, an annual activity by these authorities. conference on the implementation of the existing legal framework in the European Union on Basel III was organized by the Group of Banking Supervisors of Central and Eastern Black Sea Trade and Development Bank Europe (BSCEE). The participation of the (BSTDB) National Bank of Moldova in this event took place in the context of achieving the strategic objectives of the National Bank of Moldova, The BSTDB was established on the basis of the and specifically the transposition into the Agreement signed on June 30, 1994 in Tbilisi national legislation of the CRD IV package of by 11 states participating in the Black Sea the EU (Capital Requirements Directive) Economic Cooperation, including the Republic through the Twinning project. of Moldova. BSTDB aims to finance various regional programs specific for transition to market economy, and the Republic of Moldova, It is worth noting that representatives of the one of the founders of the BSTDB, ratified the National Bank of Moldova participate regularly Agreement on the establishment of BSTDB by in the events organized by BSCEE, which offer Parliament Decision no. 670 from November the possibility to communicate with the 28, 1995. regulatory and supervisory authorities of other states. Taking advantage of this opportunity, during 2017, the National Bank of Moldova On July 3, 2017, the National Bank of Moldova collaborated with BSCEE members on the signed the Memorandum of Understanding with subject of compliance risk regulation. the Black Sea Trade and Development Bank, at the Regional Business Forum emph Moldova – Working Together to Support Growth, organized on the occasion of the Annual Meeting of the Board of Governors of the Black Sea Trade and Development Bank which in 2017 took place in Chisinau.

95 The document signed by the Governor of the policies and procedures of related parties’ risk NBM and President of the BSTDB stipulates management, to apply the identification creation of necessary framework to facilitate features of banks’ related parties and revise cooperation between the parties and extension the SREP Guide in order to include the specific of technical assistance in the banking field. At references regarding the related parties’ risks. the same time, the Memorandum offers new The technical assistance granted by the IMF opportunities to attract international expertise gave the possibility to share the experience of in areas of high interest for the National Bank the National Bank of Ukraine in developing of Moldova on behalf of the countries of the presumptions of affiliation and implementation Black Sea region. of exposure limits for banks’ related parties.

In the framework of the project EU High Level Advisers’ Mission to the Republic of Moldova External technical assistance and 2016-2018, an EU high-level adviser offered collaboration with international consultancy during the year 2017 in the area institutions and central banks of other of NBM policies. Assistance was provided in countries the context of banking supervisory reform, in order to create a modern and efficient In the context of the NBM cooperation with supervisory framework in line with the EU international institutions and with central standards and aimed to strengthen the NBM banks of other countries, during 2017, the communication capacities and cooperation National Bank of Moldova benefited from with other institutions for effectively technical assistance from a range of external counteracting financial crimes. donors in order to strengthen its capacities in various fields, such as monetary policy Also, during the year 2017, the National Bank framework assessment, strengthening banking of Moldova continued to receive EU assistance regulation and supervisory mechanism, through the Twinning Project for the purpose of aligning banking legislation to EU standards, gradual harmonization of prudential creation of the Central Securities Depository, regulations with the European CRD IV making external communication more framework (Directive no. 36/2013) / CRR effective, investment tools diversification and (Regulation no. 575/2013), which incorporates other areas specific for the central bank. Basel III rules and standards.

Thus, due to the technical assistance of the Within the Twinning Project Strengthening the IMF, assessment of the monetary policy National Bank of Moldova capacity in the field framework in the context of achieving the of banking regulation and supervision domain strategic objective of price stability became in the context of EU requirements, the NBM possible. During the visits of IMF experts to benefited from the support provided by experts Chisinau (19.06.2017 - 30.06.2017 and of the National Bank of Romania ((NBR) and 28-29.09.2017) an extensive exchange of of the Central Bank of Netherlands (CBN) in opinions took place on a few potential order to transpose the European regulatory elements of quantitative substantiation tools framework. The Twinning Project started on for monetary policy decisions, methods of the 30th of June 2015 and was completed on improving the monetary policy framework and the 30th of May 2017. making NBM external communication more effective. The main results have been achieved due to a range of activities, among which shall be Activities related to banking regulation and remarked training of employees, exchange of supervision remain among the core priorities experience with foreign experts, of the NBM. Therefore, in order to strengthen implementation of impact surveys and of the capacities in these areas, the central bank certain thematic evaluations. In this context, benefited from technical assistance from in collaboration with experts from the NBR, the several external donors. impact of introducing CRD IV / CRR liquidity requirements over the banking sector of the In this context, reviewing banks’ policies and Republic of Moldova was assessed in terms of procedures in the area of risk management of banks’ enrolment within the established limits. related parties has been an important subject Within the assessment, two liquidity indices of of discussions during the visits of IMF experts the Basel III international regulatory framework to Chisinau. The meetings developed on the were calculated: the liquidity coverage ratio occasion of visits gave the possibility to the (Liquidity Coverage Ratio - LCR) and the net NBM employees to get acquainted with the stable funding ratio (Net Stable Funding Ratio -

96 NSFR). Benefits of the Twinning Project will combating money laundering and terrorist become visible together with the full financing. implementation of the new regulatory framework and the application of new Throughout 2017, the National Bank of Moldova risk-based supervisory practices. Although the continued directing its efforts to achieving the direct beneficiaries of the project are the NBM objective of maintaining financial stability of and the licensed banks in the Republic of the Republic of Moldova banking system. For Moldova, the final beneficiaries are the citizens this purpose, the National Bank of Moldova of the Republic of Moldova, who will enjoy a benefitted from consultancy services of USA more viable, stable and secure banking system. Treasury experts in strengthening corporate Also, establishment of a new legal framework governance of banks, structural and editorial equivalent to that applicable in the European aspects of writing the Financial Stability Report, states contributes to improving the image of and in reorganizing the National Committee for the Moldovan banking sector and to attracting Financial Stability. new investors. Therefore, the adequate activity of the banks, especially the intense In order to strengthen the NBM capacities in process of lending, stimulates the overall the domain of bank liquidation, during 2017, economic growth in the Republic of Moldova. USA Treasury experts provided assistance and consultancy on such issues, as transactions on In particular, it is worth noting that one of the sale of assets of banks in liquidation and the major achievements registered as a result of attributions and responsibilities of liquidators. the Twinning Project is the approval of the Law on banking activity no. 202 of 06.10.2017, with Taking into account that the Law on banks’ the application of provisions of 01.01.2018. recovery and resolution came into force in October 2016, the assistance granted in 2017 Due to fruitful cooperation relationships with by the USA Treasury, the International the Deutsche Bundesbank, the NBM benefited Monetary Fund, the Central Bank of Germany, during the year 2017 from technical assistance and the Romanian Banking Institute in the field in the field of banking supervision, focusing in of recovery and resolution of banks was particular on minimum requirements for extremely beneficial. Within the established banking capital, capital concept under Basel II collaboration a range of issues have been / III agreement, capital adequacy, risk addressed, such as: drafting resolution plans, management and banks’ recovery plans. recovery plans, application of resolution tools, modality of identifying systemic banks based At the same time, sharing the experience of on the methodology of the Basel Committee the German central bank regarding IT tools on effective supervision, continuity of critical utilized both for on-site and off-site supervision functions of the bank, saving the viable assets has helped to create a vision of the NBM on of the bank in case of application of the the IT tools used, for determining additional resolution, as well as application of bankruptcy requirements for the development of the liquidation procedures of banks with a few current Credit Register, as well as of the need elements of the resolution. for additional solicitations of information from the banks for supervisory purposes. Additionally, at the solicitation of the National Bank of Moldova, in September 2017, the In the context of commitments made by the International Monetary Fund granted Republic of Moldova by signing the Association consultancy on improving the regulatory Agreement with the European Union, the framework for liquidity assistance in National Bank of Moldova has attracted emergency situations. Issues undergoing technical assistance from development counselling referred to the term for which partners in order to monitor transparency of liquidity assistance is provided in emergency shareholders of licensed banks. Thus, due to situations, the criteria for granting assistance, the technical assistance from experts from such as solvency, systemic importance of the Expert-Grup and PricewaterhouseCoopers, bank, eligible collateral and evaluation offered through the program Good Governance methodology, cooperation and sharing Fund, financed by the UK Government, the responsibilities between relevant authorities in NBM gained expertise in developing technical situations of crisis, as well as the conditions specifications and of tender documents for the that banks have to meet before and after acquisition of the IT solution for monitoring providing liquidity assistance in emergency shareholders’ transparency and remote situations. Following the recommendations of analysis in the field of prevention and the IMF, the current regulatory framework on granting liquidity assistance in emergency

97 situations by the NBM to banks follows to be from experts of the Financial Services amended in order to reflect the best practices Volunteer Corps (FSVC) through the United in the field. States Agency for International Development (USAID). The assistance was aimed to Starting from the need to implement the new implement a series of activities in order to financial reporting standard IFRS 9, as of facilitate the process of establishing the CSD, January 1, 2018, the National Bank of Moldova focusing on reaching the level of compliance of has requested technical assistance from the the newly created Central Securities World Bank related to classification of financial Depository with international standards, tools and estimation of expected losses including with the financial market associated with credit risk. The assistance was infrastructure principles developed by the granted in the period of December 13-14, Bank for International Settlements (BIS) and 2017, during the visit of World Bank experts to the International Organization of Securities Chisinau, being focused on determining the Commissions (IOSCO). most appropriate classification of financial assets and on the best solutions for assessing The development of an innovative, accessible, expected credit risk losses, starting from the efficient and safe national payment system structure and quality of financial assets in the remains one of the core priorities of the NBM. NBM portfolio. For this purpose, the NBM has received technical assistance from the FSVC experts to At the same time, familiarization with the Bank prepare a report on financial inclusion and of Lithuania’s asset allocation, investment tools feasibility of mobile payments. Foreign experts and risk quantification related to them, the assessed the local financial market to identify information systems used to estimate, monitor both the potential benefits and risks of and report the risks as well as the performance introducing mobile payments as well as to of managed portfolios was possible thanks to formulate recommendations that would help a documentary visit from 24 to 26 October increase financial inclusion based on research 2017 to the Central Bank of Lithuania, financed of experience and on existing implementation through the TAIEX program42. patterns in other countries.

In order to strengthen the institutional In its capacity of supplier of publications and capacities of the NBM in the field of analytical materials, which include national preservation and management of foreign statistical data, the NBM benefited during exchange reserves of the state, the European 2017 from technical assistance of the IMF in Fund for Southeast Europe facilitated the preparing forecasts of external sector’s participation of a representative of the NBM at indicators. the seminar Reserves and Assets Management, organized at the Swiss Also, the NBM representatives in charge of Confederation by the Bank for International macroeconomic statistics collaborated with the Settlements, between September 11 and 15, National Bank of Serbia (NBS) for organization 2017. The topics of the seminar focused on of the collecting, storage and data processing asset allocation under current market process, as well as for the technical support conditions, tactical asset allocation, Renmimbi, needed for compilation and production of Bitcoin and Blockchain, building a portfolio and international account indicators. In this calculating its performance. In the context of respect, in the period of July 12-13 2017, NBM this seminar, BIS provided participants with representatives made a documentary visit to access to a module for performing the asset the NBS in order to implement its experience allocation exercise (BAAM – BIS Asset in these areas. Management Asset Allocation Module). In particular, we note that the National Bank of In the context of actions to create the Central Moldova participated as a member of the Securities Depository (CSD), during the year Technical Working Group on statistics of 2017, the NBM received technical assistance international trade in services, foreign direct investments and commercial statistics related 42 TAIEX is a technical assistance and information to foreign subsidiaries in two sessions under exchange tool of the European Commission aimed at supporting the beneficiary authorities in the process of the Central European Agreement (CEFTA), to harmonizing national legislation with the EU legislation. which Moldova is a part as of 2017. The CEFTA TAIEX assistance is provided to beneficiary public Secretariat has launched the test version of a authorities for a short-term (up to 5 days) in the data exchange system between member form of workshops, EU expert missions to beneficiary institutions, or study visits of representatives from countries. In this context, the NBM contributed beneficiary authorities to EU countries’ authorities. with statistics of international accounts of the

98 Republic of Moldova in completing this range of seminars supported by international database. experts. The seminars were designated to provide necessary information support for CEFTA representatives have supported the streamlining the external and internal efforts of the NBM in developing the statistics communication processes carried out by the of international trade in services, for this central bank. A modern communication purpose, a working visit to Chisinau by a approach, in line with the expertise of other CEFTA expert in the period of April 4 – 7, 2017 countries, will help to optimize the NBM was organized. The final goal of this visit was activities and increase its credibility. The topic to conduct a general evaluation on the of external communication was also the possibility of expanding the capacity of the destination of the documentary visit of the NBM to produce statistics on foreign trade with communication team from the National Bank services according to CEFTA requirements, of Moldova to the National Bank of Romania, including the analysis of possibilities of organized by PricewaterhouseCoopers expanding geographical distribution of Romania under the Good Governance Fund respective indicators and utilization in the project, financed by the Government of Great process of well-known experience in this field. Britain. The respective support also included Taking into account that a modern human performing an opinions survey on the resources management system plays an perception of the National Bank of Moldova by important role in the effectiveness of the public. Subsequently, the results obtained and organization’s functioning, the NBM the related consultancy were implemented by representatives had the opportunity to finalizing a communication strategy. implement the experience of the National Bank of Romania (NBR) in performing certain Financial education among population practical activities related to employees’ undoubtedly contributes to increasing and recruitment process. At the same time, the promoting transparency, confidence and visit to Bucharest permitted to share the attractiveness of the banking sector. The experience of the NBM in the field of strategic National Bank of Moldova is constantly planning, as well as in organization and participating in the process of promoting implementation of processes management financial education at national level alongside system at the NBM. other relevant institutions. In this regard, the National Bank of Moldova benefitted from the At the same time, starting from the objective financial and technical assistance provided by of strengthening human resources in the the EFSE (European Fund for Southeastern domain of banking regulation and supervision, Europe) in implementing the International during the period 19-20.01.2017 and 20 Week of Financial Education Project. The -21.04.2017, the NBM benefitted from technical interactive games developed and organized by assistance from the NBR (within the Twinning the NBM for children of various age groups, project) on aspects related to identification of together with other educational activities, employees’ development needs in the represent an important perspective of respective fields. Additionally, during the promoting financial inclusion. period 01.01.2017 - 27.02.2017, thanks to the technical assistance from the UK Government, In other ways, we note that, in the context of there was accumulated and utilized knowledge identifying modalities to manage excess in the area of human resources management, liquidity in the domestic banking sector, by identifying optimization opportunities in representatives of the German Economic Team classification of job positions, in increasing the in Moldova (GET Moldova), working in a project retention of employees, in reviewing and of the independent consulting centre Berlin standardizing job descriptions, and of the Economics, funded by the German performance management system. Government, have collaborated to develop a range of recommendations and solutions. During 2017, the National Bank of Moldova also benefited from technical assistance in the It is to be noted, that GET Moldova provided area of external communication, which is assistance to Moldovan authorities, including essential in the process of dissemination of to the NBM, by identifying current economic thematic information and of improving the issues and developing recommendations for image of the institution in front of citizens and their solution, based on an independent foreign partners. In this regard, the Deutsche analysis and expertise. Also, on November 9, Bundesbank Centre for Technical Central Bank 2017, at the invitation of GET Moldova and of Cooperation and USAID offered training the German Council for International Relations opportunities to the NBM employees within a (DGAP), the governor of the NBM made a

99 working visit to Berlin, where he attended a seminar dedicated to the Republic of Moldova economic and banking reforms. During the event, the NBM governor reported on the progress of institutional and legislative reforms in the financial-banking domain, and in particular remarked the approval of the banking law which transposes the new banking supervision principles Basel III, measures of making banking shareholding more transparent, financial consolidation of systemic banks and the main stages of implementation of the program with the IMF. At the same time, during the working visit, the governor of the NBM had meetings with representatives of the Federal Government, of financial institutions and with representatives of foreign embassies in Berlin.

100 Chapter 9

Internal activity of NBM

NBM. The Chairman of the Supervisory Board is the Governor of the National Bank.

9.1 Corporate Governance In exercising its powers attributed by law, the of the National Bank Supervisory Board (i) approves the annual report and annual ﬁnancial statements; (ii) adopts internal control system standards, The Law on the National Bank of Moldova continuously checks and assesses the provides the legal authority and the operation of the internal control system; (iii) governance framework of the National Bank. adopts the rules of professional ethics; (iv) determines the remuneration fund of the The structure of corporate governance National Bank, the level of remuneration of the includes senior management bodies, members of the Executive Board and the high-level committees - the Audit Committee amount of monthly indemnities of members of and the Investment Committee - and several the Supervisory Board who are not members levels of control - external and internal. This of the Executive Board; (v) approves the structure is complemented by the compliance National Bank’s cost estimate and investment and ethics framework - the Code of Conduct allowance and monitors their execution; (vi) for NBM Employees, the Anti-Fraud Policy of selects, on a tender basis, the external audit the National Bank of Moldova, the Information organization; (vii) establishes the method in Security Policy, as well as public access to the which the National Bank Committees are NBM normative acts, statistics and created and operate; (viii) determines the publications. nominal value, the design of banknotes and metallic coins, procedures of putting into circulation and the conditions for their withdrawal from circulation. Governing bodies of the National Bank During the year 2017, the Supervisory Board held 10 meetings and approved 26 decisions, Governor on the following issues: The Governor of the National Bank is appointed by the Parliament at the proposal of • Approval of the Report on the execution the President of the Parliament. In accordance of the cost estimate, of investment with the Law on the National Bank of Moldova, allowances of the National Bank of the Governor is responsible for outlining the Moldova and ﬁnancial statements of the monetary and foreign exchange initiatives, for National Bank of Moldova for the year submission to the Executive Board and for end of period 31 December 2016; their implementation. The Governor, also, organizes and manages the activity of the • Approval of the Regulation on the bank and its representation in relations with attributions, competencies and operating any legal or physical person both in the procedures of the Investment Committee Republic of Moldova and abroad. of the National Bank of Moldova; Approval of the Report on internal audit Supervisory Board • activity in 2016;

The Supervisory Board consists of seven • Approval of the Report of the Audit members appointed by Parliament for a Committee of the National Bank of seven-year term, with the possibility of Moldova on the monitoring activity in renewing the mandate. Out of the 7 members, 2016; 3 members belong to the executive structure of the National Bank: the governor, the ﬁrst • Approval of the annual Report of the deputy-governor and a deputy-governor, and National Bank of Moldova for 2016; the other 4 members are not employees of the

101 • Putting into circulation as means of volume and conditions for their issuance; (vi) payment a modernized banknote with the adopts the normative acts of the NBM; (vii) face value of 5 lei; ensures implementation of decisions of the Supervisory Board; (viii) plans and organizes • Approval of graphic designs and of the current activity of the NBM. nominal values of commemorative and jubilee coins, issue 2017; During the year 2017, 77 meetings of the • Approval of modiﬁcation of the nominal Executive Board were organized, at which 369 structure of the national currency by decisions were examined and approved. introducing a new nominal value of 2 lei as metallic coin and replacement of 1, 5 The most important decisions concerned the and 10 lei banknotes with new metallic following areas: coins;

• Approval of the cost of estimate and of • the monetary and foreign exchange policy allowances for National Bank of Moldova of the National Bank of Moldova; investments for the year 2018; • regulation and banking supervision; • Approval of the Strategic Plan of Internal Audit of the NBM 2018-2022 and of the • the supervisory policy of the payments annual internal audit plan for 2018; system in the Republic of Moldova; reports and statistics; • Approval and modiﬁcation of the internal • regulations related to fulﬁlment of its • the accounting policies of the National duties. Bank of Moldova;

• internal regulatory framework. In its activity, the Supervisory Board paid special attention to examination of international experience and of best practices, During the year, 43 decisions of the Executive within permanent collaboration with Board were issued for publication in the Official representatives of the development partners Monitor of the Republic of Moldova. of the Republic of Moldova and with other financial-banking institutions on subjects of The Executive Board has continuously common interest. The Supervisory Board promoted the application of monetary policy promoted transparency of decision making tools and measures to ensure and maintain and monitoring of activities of the NBM with price stability; ensure the economy with the reference to legal attributions. national currency and credibility of the national currency; regulate and supervise Executive Board financial institutions, as well as efficiency, safety, accessibility and innovative character The Executive Board is composed of 5 of payments. members appointed by the Parliament: the governor, the first vice-governor and three Structure of the governing bodies: vice-governors. The Chairman of the Executive Board is the Governor of the National Bank. Sergiu CIOCLEA During 2017, the mandate of one deputy Governor, Chairman of the Supervisory Board governor was suspended by law. (SB) and Executive Board (EB) Vladimir MUNTEANU According to the Law on the National Bank of First Deputy Governor, SB and EB Moldova, the main tasks of the Executive Vice-President Cristina HAREA Board are: (i) establishes the monetary policy Deputy Governor, member of the SB and of the in the state; (ii) establishes the foreign EB Ion STURZU exchange policy in the state and the exchange Deputy Governor, member of the EB Aureliu rate regime of the national currency; (iii) CINCILEI decides on the procedure of issuing licenses, Deputy Governor, member of the EB authorizations, permits and approvals to be (suspended of right Dumitru URSU issued by the National Bank; (iv) examines member of the SB Alexandru PELIN results of controls performed at entities member of the SB Valeriu IAS, AN supervised by the National Bank and adopts member of the SB Vadim ENICOV the related decisions; (v) decides on the member of the SB issuance of claims of the National Bank, the

102 Committees Moldova in reviewing the investment policies and strategies for managing the foreign In order to ensure the efficiency of the currency reserves of the state. decision-making process, the Audit Committee and the Investment Committee operate in the Meetings of the Investment Committee are NBM. These permanent Committees have their usually held monthly, and in the case of major own operating regulations, which detail their issues, extraordinary meetings are organized. specific composition, attributions and The Investment Committee met in 2017 12 responsibilities. times, in ordinary regime. During each meeting, the performance of the investment Audit Committee portfolio for the previous reporting month, the evolution and forecasts of the domestic foreign The audit committee is made up of 3 members exchange market and international financial of the Supervisory Board who are not on the markets, the ratings of authorized pay-roll of the National Bank. The Audit counterparties and the risks of the investment Committee assists the Supervisory Board by portfolio were discussed. At the same time, providing consultancy on: (i) monitoring the new counterparties were examined and financial reporting process of the National included in the list of counterparties authorized Bank; (ii) monitoring the effectiveness of the to perform transactions. Also, periodically, internal control and risk management system; issues related to short and medium term (iii) monitoring and directing the internal audit investment strategy related to the strategic function; (iv) monitoring the independence allocation of assets were discussed. and external audit activity.

In order to ensure the activity and fulﬁllment of its duties, the Audit Committee in 2017 took External and internal control levels a range of practical measures and actions, of which the most important are: External control

• monitoring the effectiveness and The Law on the National Bank stipulates two adequacy of the internal control and risk levels of external control - the annual external management framework at NBM level; audit of the financial statements, of accounts and registers of the NBM undertaken by a • monitor compliance issues that may have renowned company and with experience in the a material impact on the NBM financial field of central bank audit and external public statements and/or the reputation of the audit on the legality and compliance of cost National Bank; estimates and of allowances for investments made by the Court of Accounts of the Republic • the analysis of the implementation of the Strategic Internal Audit Plan for the period of Moldova. 2013-2017; Internal control • the analysis and coordination of the Strategic Internal Audit Plan for the The NBM is in the process of aligning period 2018 - 2022 and its presentation operational risk management and internal to the Supervisory Board of the NBM for control system with international standards examination and approval; COSO43, ISO 3100044, with best practices in the field (International Operational Risk the analysis and coordination of the • Working Materials and Studies Group, IORWG), Annual Internal Audit Plan for 2018 and the National Bank is a member of this group). its presentation to the Supervisory Board of the NBM for examination and approval. The governance of operational risk management and the internal control system Investment Committee at the NBM, according to these standards, is carried out through three lines of defense. The Investment Committee of the National Bank consists of 10 bank employees, including The appropriate establishment of control 2 vice-governors, one of whom is the chairman procedures and activities by subdivisions in of the committee. 43COSO - The Committee of Sponsoring Organizations of the Treadway Commission. The Investment Committee is set up to assist 44ISO 31000 - Risk Management - Guidelines, the Executive Board of the National Bank of International Organization for Standardization

103 the process of risk management, based on the Anti-fraud policy processes management system, is the first line of defense of the National Bank against the Anti-Fraud Policy aims to increase fraud risk factors that may threaten goals achievement. awareness and management, identify areas of For this purpose, each structural subdivision of fraud at risk and implement appropriate the NBM identifies risks and applies a set of control measures at all levels of the NBM, control procedures on a daily basis to manage which will help prevent and detect fraud, risks associated with business processes it monitor fraud risk and promote consistent operates with and ensures their effectiveness organizational conduct. Anti-fraud policy also and efficiency. sets out the conditions for conducting investigations regarding prevention and The second line of defense is to provide the risk investigation of suspicions of fraud. management framework, process organization, independent coordination and supervision of Implementation of anti-fraud policy, staff the risk control and risk management process. training on fraud risk and its management, The functions of the second level of control reporting suspected frauds - all these establish include specific monitoring mechanisms and and develop the anti-fraud culture, which processes to exercise adequate control over discourages potential perpetrators and financial and operational risks. The second line reinforces the commitment of the National of defense is represented by the Investment Bank staff to combat fraud. The responsibility Committee and financial and operational risk of the entire staff of the National Bank makes management structures. a major contribution to creating an enabling environment for raising awareness of risk and At this level of defense is ensured the of consequences of fraud. normative framework regarding operations on the financial market, the procedures of The governing bodies of the National Bank are conducting and controlling foreign exchange promoting a zero tolerance policy regarding operations, planning and organizing NBM fraud and corruption. procurement, ensuring the continuity of activity and security of information, including Measures to combat money laundering standards, policies and plans to manage and terrorist financing incidents that disrupt or threaten any operational function within the NBM. The NBM The National Bank has established internal keeps record of the incidents that take place, rules on prevention and combating money including measures undertaken and personnel laundering and terrorist financing in the responsible for these measures. framework of operations performed. The purpose of these rules is non-admittance of The third line of defense provides independent involvement of the National Bank in operations assurance and is represented by the internal or activities with the risk of money laundering audit. Internal audit grants management and and terrorist financing. line managers an adequate reasonable independent assurance on the adequacy and The norms are in line with international effectiveness of governance, risk management standards and with national legislation on and internal controls, including the method in customer knowledge and transactions which the first and second line of defense performed through the National Bank and meet the risk management objectives. establishes the requirements for organizing, implementing and monitoring compliance by bank’s subdivisions of the criteria for Framework of Compliance and Ethics prevention and combating money laundering and financing terrorism.

Code of Conduct of the NBM Employee The internal reporting system supports the activity of the NBM in combating money The National Bank requires that all employees laundering and terrorist acts financing by comply with the highest standards of systematically centralizing all findings of the professional ethics. For that purpose, the Code activity carried out in the domain and bringing of Conduct is established to address personal them to acknowledgement of the member of and professional ethics conduct of National the Executive Board, who coordinates the Bank staff, including conflict-of-interest activity. For high risk operations, reporting is behavior, confidentiality, security and done to the Executive Board. management of information.

104 Information security policy

The information security policy within the 9.2 The strategic plan of National Bank ensures security of information in all its forms and protection of informational the National Bank of resources managed in accordance with the Moldova bank’s needs and provisions of the legal framework.

The members of the Supervisory Board and of The strategic plan of the National Bank of the Executive Board, as well as any employee Moldova for the years 2013-2017 of the National Bank are obliged to ensure security of information they possess and to The strategic plan aims to strengthen the role which they have access. At the same time, the of the NBM in society by fulfilling its responsibilities in the process of ensuring responsibilites, of ensuring efficient use of information security, information management, resources and reducing exposure to risks. The monitoring of utilization and distribution of priorities set by the objectives of the plan are information, reporting of information security designed to ensure a high level of efficiency, incidents, as well as the method of their transparency and performance, by aligning to investigation, are clearly established and best international practices of communication, clearly divided. credibility and corporate governance.

Public access to normative acts, The strategic plan of the NBM for the years statistics and publications of the NBM 2013-2017 includes several key elements such as mission, vision, values, core business areas, strategic objectives, etc. Public access to normative acts, statistics and publications of the NBM ensures a high degree of transparency, while respecting the NBM Mission of the National Bank of Moldova independence as well as confidentiality of certain aspects related to the fulfillment of the The fundamental objective of the National NBM attributions. Publication of various data Bank of Moldova is to ensure and maintain and analysis related to the attributions of the price stability. Without prejudice to its National Bank of Moldova, as well as fundamental objective, the National Bank of promotion of an open relationship with the Moldova promotes and maintains a financial target groups are aspects of major importance system based on market principles and in external communication of the bank. supports the general economic policy of the state. The National Bank of Moldova pays increased attention to the reverse connection in the Vision of the National Bank of Moldova communication scheme. In such a way, by regular and frequent communications, the National Bank provides detailed explanations The National Bank of Moldova is an about its activity and activities of the banking independent, efficient and credible public sector. The functioning of the interactive authority, which promotes an adequate database on the NBM website provides public monetary policy and contributes to ensuring access to information, internal data and the integrity and stability of the financial analysis and aims to provide accurate, current, system, by consistently applying the best clear and transparent information for creating international practices for the interest of a public opinion regarding the decisions of the society. National Bank, but also for conducting various studies and research. Values of the National Bank of Moldova

Civic Commitment – activity aimed at the beneﬁt of the public interest; Efﬁciency – application of modern innovations and technologies in the use of resources; Excellence – demonstrating competence and professionalism in the exercise of duties and adoption of best international practices; Transparency – transparent and impartial

105 attitudes in decision-making; Responsibility – responsible attitude towards society in the implementation of established tasks; 9.3 Management and Integrity – ethical behavior at the bank and organization every employee level; Credibility – conduct that inspires and maintains public trust. According to the National Bank of Moldova By setting up the core business areas, Strategic Plan for 2013-2017, out of the ten emphasis is placed on the concrete functions strategic objectives, two are related to human of the NBM, these areas actually reflecting the resources: optimization of human resources mission of the NBM and constitute its core management and development of corporate pillars. The principal areas of activity are serve governance. as a basis for formulating strategic objectives, as follows: Respectively, the key priorities of the Monetary policy – the application of monetary departments dealing directly with human policy tools and measures to ensure and resources management and development, in maintain price stability; 2017, were focused specifically on these areas; Currency issue – securing the economy with the measures taken are being detailed in the national currency and promoting the continuation. credibility of the national currency; Supervision of financial institutions – regulate and supervise the work of financial institutions; Organizational evolutions Payment system – promoting the efficiency, safety, accessibility and innovative character of payments. Strategic objectives are those In 2017, a range of modifications took place priorities that the NBM establishes based on its regarding the organizational structure of the mission for a determined period in order to National Bank of Moldova, which meant to contribute to the realization of its vision. contribute to the achievement of the Bank’s strategic objectives and of its core Strategic objectives of the NBM for the period competencies, as well as to increase its 2013-2017 are: efficiency by lowering the hierarchical levels. At the same time, these changes aim to Ensure price stability; • increase the capacity of the NBM to adapt to • Increasing the credibility of the national changes in the economic environment by currency; redefining responsibilities, restructuring activities, and strengthening institutional • Development of NBM oversight function; capacity in the long run. Thus, functions • Promote cashless payments and reduce related to the NBM core competencies have cash in circulation; been developed through the creation of specialized subdivisions in the areas of • Strengthen the financial stability function; supervision, resolution, financial stability, • Improve external communication; combating money laundering and terrorist financing, etc. • Strengthening the image and credibility of the NBM; At the same time, compared to 2016, the • Increase the efficiency of NBM’s number of managerial positions of the bank operational activity; was reduced by about 4%, with the reduction of 30 sections. Contrary the ratio of units • Optimize human resource management; related to the NBM core activities increased by • Development of corporate governance. about 3% compared to the number of units in the support and governance area. These The year 2017 marks the end of the first optimizations had a positive impact on Strategic Plan of the NBM for the years efficient utilization of the banks’ resources of 2013-2017. During the implementation of the personnel, considering the extension of the Strategic Plan, the NBM followed development institution’s responsibilities as a central bank. directions in strict connection with its mission and vision, which were oriented towards the creation of a strong and competitive financial sector.

106 consultants, carrying out monitoring and counseling in 5 major projects of the NBM. The 9.4 Internal audit opinion and proposals of the internal auditors on project areas and risks were submitted, either as a result of the examination of the Internal audit at the NBM is an independent project documentation or at the request of the activity of objective assurance and counselling, project management committee. designated to add value and improve the institution’s activities. Internal audit helps the In order to monitor the actions taken to institution achieve its objectives through a implement the recommendations made in the systemic and disciplined approach within the special audit reports / special reports, DAI framework of assessment and enhancement of performs quarterly follow-up monitoring to effectiveness of risk management, control and assess the extent to which recommendations governance processes by providing the were met both in 2017 and in previous years. institution’s governing bodies with a reasonable and objective assurance on their Also, in 2017, DAI developed the Strategic functionality. Internal Audit Plan for 2018-2022. The planning process has been performed The structure and positioning of the internal according to existing regulations and best audit within the NBM is in line with the practices and based on the risk assessment requirements of the Law on the National Bank procedure. For the implementation of the of Moldova45, the Standard of Qualification46 Strategic Plan, the Annual Internal Audit Plan and good practices in the field. Accordingly, 2018 was also developed. The the NBM Internal Audit Department is above-mentioned plans were coordinated and organized and operates in accordance with a approved. normative and methodological framework in line with international standards.47. The applicable regulatory framework assures the responsibility of IAD staff to avoid conflict of interest and to ensure objectivity in carrying 9.5 Information technology out audit missions. Internal DAI procedures ensure reporting of cases of damage to the independence and / or objectivity of IAD/ IAD During the year 2017, in the field of employees. In the audit activity, IAD information and communication technology (in employees are guided by the Audit Manual. In continuation ICT), the most important results 2017, the audit activity was performed were achieved in the major projects at the according to the approved audit plan and set NBM level, but also as a result of certain priorities. IAD in its work did not encountered projects for strengthening ICT infrastructure obstacles in expressing independent opinion. and capacities. The IAD Director has regularly reported the results of the audit work to the NBM governing In total, 8 projects were implemented, of which bodies: the Audit Committee and the 4 transversal-projects at NBM level, the other Supervisory Board. The annual internal 2017 projects being internal at subdivision level. audit plan was fulfilled to a 100% Referring to transversal projects, their accomplishment. The Internal Audit description is presented in Table A.32 “The Department fulfilled the insurance missions, Evolution of Major Projects of the NBM during audited financial statements and the NBM 2017”. From the other category, first of all, it is budget execution report, audited and worth mentioning the project aimed at monitored areas of increased-risk. Audit implementing a new remote modular reserve missions and advisory activities have data center. The necessity for this project materialized through: 15 insurance missions, derives from the premise that ensuring 37 reports, 31 consulting / advisory advice to continuity of NBM business processes is a managers and members of the governing critical success factor in the realization of the bodies of the National Bank. NBM mission. As a result, the solution implemented for the new Reserve Data Center At the same time, the internal auditors corresponds to the highest standards in the participated as technical-analytical field, as well as to the requirements and 45Law on the National Bank of Moldova no. 548-XIII of demands for reliability and performance 21.07.1995 - Article 33 (4) characteristic to central banks. Other 46Standard IIA - 1100 “Independence and Objectivity”) important achievements pertained, in 47 International Standards for the Professional Practice of particular, to the extension of infrastructure Internal Auditing

107 capabilities, as a proactive measure for system; awareness of individual salary level; continuous increase of ICT resources increasing attractiveness of the NBM as an necessities, resulting from the implementation employer. The second step, which involves of new solutions and respectively, from the establishing a direct relationship between the increase of the level of automation of activities value of the position and the level of salary, as at the NBM level. well as ensuring internal equity and external competitiveness of salary, is to be achieved in Overall, all efforts made and achievements 2018 as part of an implementation project of obtained in the ICT ﬁeld, ultimately, pursue an integrated human resources management the same common goal of ensuring a proactive system with the aid of a consulting company and effective alignment of ICT capabilities with with international experience in the ﬁeld. the strategic and operational needs of the NBM. Statistical information

In 2017, volunteer staff turnover rate was 9.6 Human resources 4.98%, which represented a decrease, management compared to 2016, when it registered a level of 8.43%. Analyzing volunteer staff turnover rate by hierarchical levels, for managerial positions in 2017 it reached 5.16%, and for Chart 9.1 Human resource management processes executive positions 4.91%.

250 Chart 9.3 General information about NBM employees 209 200

305 296 293 281 277 278 280 279 150 261 129 127 people

100 182 80 178 176 61 55 58 51 49 49 53 53 48 49 130 50 37 35 31 95 102 22 16 20

0 40.5 40.5 40.8 Employments Dismissals Transfers Promotions 8 8 9 10 10 10 2013 2014 2015 2016 2017 MEN WOMEN UNION BACHELOR MASTERS PHD AVERAGE RETENTION MEMBERS STUDY STUDIES AGE (YEARS) IN THE NBM Source: NBM (YEARS) 2015 2016 2017

Chart 9.2 Voluntary ﬂuctuation of NBM staff Source: NBM

12 10.40 It is important to mention that the voluntary 10.62 10 9.37 staff turnover rate includes only those persons 8.43 who have resigned on their own initiative, 8 excluding those persons employed seasonally 6.67 6.82 4.91 6 and those who have left for other reasons 5.94 4.98 (retirement, termination of the employment 4 5.16 4.12 3.88 contract, reduction of staff, etc.). 2 The average age of the bank’s stuff as of 31 0 December 2017 was 40.8 years. Nearly 2014 2015 2016 2017 two-thirds are women (62.63%) and more than Total Heads Executors one-third (37.37%) are men. We also mention that women are represented in senior Source: NBM positions, including in the Executive Board. Optimizing the payroll system

The ﬁrst stage of implementation of a new payroll system for employees of the National Bank was accomplished by uniformity of payment of wages, which has the following beneﬁts: increasing the transparency of the

108 subdivision and to the strategic objectives of the bank. Measurement of achieving Professional training objectives and matching skills with the established set of competencies serves as a basis for possibilities of promotion and for Professional development other development measures.

During the year 2017, in order to ensure the Corporate culture development of skills and increase human capital of the NBM, 170 employees beneﬁted Chart 9.5 Duration of training attended by employees from various forms of training, selected according to the individual needs of 8 to 14 days 15 to 30 days professional development. 15% 2%

The duration of trainings was between one day and 14 days. Most of the trainings attended by NBM employees were from 3 to 7 days.

NBM employees were trained in various ﬁelds hosted by countries such as Romania, Italy, up to 3 days 20% Austria, Turkey, the Netherlands, Germany, France, Poland, USA, UK, CIS countries, as well as at trainings and seminars in the Republic of 3 to 7 days 63% Moldova.

Chart 9.4 Age distribution of employees who participated Source: NBM in the training During the year, events were organized to help 89.4% strengthen corporate culture and employee

160 retention, such as: organizing sports activities

140 and encouraging employees to take part in recreational activities, excursions, and charity 120 activities organized within the “Christmas 100 Caravan” which contributed to social 80 empowerment of employees and to civic 60 7.6 % education. number of persons of number 40 2.9% 20 Recruitment 0 less 25 25-54 more 55 Chart 9.6 Training areas in which employees participated age (years)

Monetary Policy 21 Source: NBM Human Resources 21 Banking Supervision 20 Governance 20 Payments Systems 19 Risk management 19 Regulation 18 Performance management IT 16 SIRF 16 BASEL III 15 Accounting 15 In 2015, the Performance Management System Statistics 15 Banking Operations 14 10 was implemented at the National Bank of AREAS Acquisitions Cash Operations 10 Moldova through which a set of generic, Communication 9 Banking resolution 8 managerial and professional competencies Macroeconomy 7 Audit 7 were developed for which an optimal expected Legal 6 Finance 6 level was established. The measurement of Stress testing 4 Financial stability 4 the level of competences of each employee Finacial markets 3 International relations 2 was also carried out in 2017, the results being Combating money laundering 2 0 5 10 15 20 25 a platform for identifying the needs for further TRAINING development and improvement. Source: NBM

Also, within the performance management The recruitment process at the National Bank system, regular meetings are held for setting of Moldova has registered substantial individual goals for each employee, which are improvements in communication of vacancies, directly related to the objectives of the increase of the number of candidates and

109 employment of qualiﬁed staff, prepared for accept students from higher education challenges in implementing the NBM institutions from the country and from abroad attributions. In 2017, the scope of ads for for internships. For this purpose, the NBM vacancies on social and proﬁle pages, participated in the Job and Internships Fair, in Facebook and LinkedIn has increased. The order to provide the necessary information to number of ads increased from 730 in 2016 to 1 interested candidates. 804 in 2017. In order for vacancies to be as visible as possible to the targeted group of At the same time, in 2017, an increase in the candidates, the NBM participated in Job Fairs number of trainees was registered, including 6 and in visits at higher education institutions for students from abroad. informative purposes regarding vacancies and possibilities of internships.

Chart 9.7 Recruitment in NBM

398

400

350

300 185

250

200 58 42 150 90 34 76 61 100

0 Number of Canditates Employement Total employees vacancies competitions

Total 2017 Total 2016

Source: NBM

Chart 9.8 Internships for students in the NBM

20 19 18

16 14 14 13 12 11 11 9 10

8 6 6 5

4 2 2 0 0 Total trainees In the country Abroad Bachelor Masters/ PhD study studies

2016 2017

Source: NBM

The important indicators that show the evolution of recruitment are: the number of vacancies, the number of candidates, the contests organized and the persons employed. There is also a positive trend in professional training and in the level of experience of newly employed people.

Internships In order to contribute to professional development of specialists with banking and other proﬁles, the NBM is open to

110 Chapter 10

Analysis of the ﬁnancial situation for 2017

Chart 10.1 Evolution of available proﬁt for total distribution/losses (MDL million) 10.1 General considerations 1960.89

In accordance with the Law on the National Bank of Moldova no. 548-XIII of 21 July 1995 (republished in the Ofﬁcial Monitor of the Republic of Moldova, 2015, no. 297-300, -262.15 -95.31 art.554), the fundamental objective of the National Bank of Moldova is to ensure and maintain price stability.

Source: NBM The basic tasks of the National Bank are established in the Law on the National Bank of Moldova. In accordance with the legal According to the financial statement, on 31 provisions, the operations of the National Bank December 2017, the bank recorded a total loss of Moldova are performed in order to promote of MDL (95.31) million, compared to December and maintain the monetary and foreign 31, 2016 when it recorded a total loss of MDL exchange policy in the state, to ensure (262.15) million, this fact being determined, to stability of the banking system, issuance of a large extent, by the following developments national currency, management of currency with significant impact: reserves of the state, provision of payment services and issuance of electronic money, etc. Respectively, maximization of profit from the • Increase of interest income on other state activity of the National Bank of Moldova is not securities held to maturity - government an end in itself and cannot serve as an bonds of MDL 467.26 million compared to impediment to the achievement of the core 2016 (MDL 150.73 million) representing objective and attributions. the revenues from state bonds issued on 4 October 2016 for a total amount of MDL 13 341.20 million for the Ministry of Finance to execute payment obligations 10.2 Available profit for derived from state guarantees. Government bonds with maturities of 1-9 distribution years were issued with the coupon rate of 1.40% annually, and those with maturities of 10-25 years with the coupon The financial result of the National Bank of rate of 5.30% per annum. Moldova depends directly on the necessity to On the 31 of December 2017, the total perform monetary and foreign exchange amount of state bonds constituted MDL operations in order to achieve the fundamental 13 291.20 million (on 31 December 2016: objective and fulfilment of the Bank’s core MDL 13 341.20 million). tasks. Evolution of available profit for distribution during the period 2015-2017 is • Decrease of interest expenses on banks’ reflected in chart 10.1. required reserves by MDL 265.22 million compared to 2016 (MDL 799.78 million) On December 31, 2017, the level of statutory following the gradual decrease of interest capital in the total monetary liabilities rates applied to main monetary policy constituted about 5.08% (on December 31, operations. The average rate paid on the 2016: 6.23%). required reserves in Moldovan Lei during the year 2017 varied between a

111 maximum of 6.0% annually and to a Impact of implementation of the minimum of 3.56% annually (2016: monetary policy and of activities related 16.50% - 6%). The amount of required to relations with the Government of the reserves maintained by banks as of 31 Republic of Moldova on the financial December 2017 amounted to MDL situation of the National Bank of 12 638.58 million, USD 70.65 million and Moldova EUR 118.53 million (December 31, 2016: MDL 10 063.69 million, USD 61.34 million and EUR 105.54 million). The level of the During the year 2017, the National Bank of required reserves held in Moldovan lei Moldova continued to utilize financial tools to was gradually increased, during the year absorb excess liquidity. Expenditures from 2017, from 35% to 40%, in 2016 being sterilization operations performed through maintained at 35%. The level of required issuance of certificates of the National Bank of reserves in foreign currency, USD and Moldova have increased, amounting to about EUR, has not been changed for six MDL 520 million in 2017 compared to about consecutive years, accounting for 14% of MDL 346 million in 2016. The increase of the calculation base. The calculation base expense on amortization of the discount of for the required reserves in Moldovan lei CBN was determined by the increase in the during the year 2017 increased, average daily balance of certificates issued by registering an increase of about 9.9% the NBM, which during the reporting period compared to the end of the previous year. amounted to MDL 6 358.07 million (2016: MDL 2 959 million). • Decrease in revenues from foreign currency operations by MDL 178.21 At the same time, during the 2017, as a result million compared to 2016 (MDL 238.75 of gradual decrease of the interest rate million) as a result of appreciation of the applicable to required reserve from the funds MDL against the USD by about 14.42%, attracted in Moldovan lei from 6% to 3.56% versus GBP (by 6.20%) and compared to (2016: from 16.50% to 6%), the NBM recorded EUR by 2.30%, the revenues being mainly smaller net expenditures by about MDL 264 recorded due to the sales of foreign million, compared to 2016. currency. Most of the revenues were achieved between 1 January and 5 The interest rates paid on attracted funds in February 2017, during which the MDL freely convertible currencies varied from 0.6% depreciated compared to EUR by 3.16% to 0.3% (2016: variation range from 0.2% to and compared to the GBP by 3.10%. 0.65%). In 2016, the revenues were higher, following the depreciation of the The set of monetary policy tools applied by the exchange rate of MDL versus the USD by National Bank of Moldova during 2017 and the about 1.64%, being registered, mainly, activities related to relations with the due to sale of foreign currency. Government of the Republic of Moldova generated a net loss of MDL 448.42 million, • Registration of revenues from the smaller by MDL 291,021 million compared to recovery of certain expenditures related the losses in 2016 (Table A.25). to liquidation procedures of the banks in liquidation in the amount of MDL 75.24 million (2016: MDL 0 million). Impact of management of state currency reserves operations on the financial The impact of events on realizing a total loss, situation of the National Bank of by fields of activity performed by the National Moldova Bank of Moldova during 2017 is presented in table A.24. The official reserve assets of the state, held by the NBM, increased as of 31 December 2017 as compared to 31 December 2016 by 27.08% or by about USD 597.33 million (from USD 2 205.93 million to USD 2 803.26 million), being invested predominantly in financial instruments denominated in USD, euros and pounds. At the same time, during the year 2017 there was an increase in the average annual volume of international reserves by

112 25.74% or by USD 487.98 million (from USD reserves of the state are invested is taken into 1 934.79 million to USD 2 432.77 million). account.

The net revenues related to the management The evolution of the official exchange rate of of foreign exchange reserves and other foreign the MDL against the currencies in which exchange operations in the year 2017 currency reserves are held had a significant constituted MDL 541.52 million, decreasing by impact on the financial situation of the about MDL 124.20 million as compared to the National Bank of Moldova. Its dynamics and previous year, when revenues amounted to the average annual values are reflected in MDL 665.72 million. Table A.27.

It should be mentioned that in 2017 there was Thus, at the end of 2017, unrealized losses a significant decrease in net income from were recorded as a result of the appreciation currency rate differentials of MDL 193.81 of the MDL against currencies, which are million (the net income from currency rate components of the investment portfolio, i.e. differentials in 2017 amounted to MDL 44.62 against USD by 14.42%, against EUR by 2.30% million compared to MDL 238.43 million in and against GBP by 6.20%. Due to exchange 2016) due to the appreciation of the MDL rate differentials at revaluation of currency exchange rate against the USD - 14.42% stocks which amounted to MDL (4 851.88) during the year 2017 (2016: depreciation of million and the decrease in prices of securities 1.64%) and the slowdown of appreciation of held in foreign currencies on international the exchange rate of MDL versus EUR - 2.30% markets the NBM incurred unrealized losses (2016: 2.74%) and GBP - 6.20 % (2016: from revaluation of the investment securities 15.88%). in the amount of about MDL (28.89) million. According to the Law on the National Bank of The impact of currency reserves management Moldova, the unrealized losses were offset operations on the financial situation of the with unrealized revenues from the National Bank of Moldova is presented in table corresponding reserve accounts. A.26. At the end of 2016, unrealized losses from the The average profitability ratio for managing exchange rate differentials from the currency reserves for 2017 decreased by revaluation of foreign exchange reserves 0.07 pp. to 1.14% (2016: 1.21%), as a result of represented an amount of MDL (1 033.31) a lower currency exchange rate profit than in million and unrealized losses from the the previous year (Chart 10.2). differentials of the revaluation of investment securities portfolio an amount of MDL (18.15) Chart 10.2 Evolution of currency reserves profitability in million. 2017 compared to 2016

2.0% 10.3 Capital and reserves

1.5%

1.0% The activities carried out by the National Bank 1.00% of Moldova during the year 2017, in order to 1.47% 1.40% 1.14% 0.5% 0.68% 1.21% fulfil its core duties, are reflected in the structure of the bank’s balance sheet, as 0.0% shown in Table A.28. Deposits in foreign Securities in foreign Total Portfolio currency currency, including net income from sales 2017 2016 The capital and reserves situation is presented in Table A.29. Source: NBM In accordance with the art. 19 of the Law on It should be noted that, in accordance with National Bank of Moldova no.548-XIII of international best practices as well as with the 21.07.1995, the general reserve fund shall be provisions of the Law on the National Bank of used exclusively to cover losses registered Moldova, the main criteria for the selection of according to the result of the activities at the reserve assets are the safety of core principal end of the financial year. amounts and its liquidity. Thus, only after ensuring these two criteria, the profitability of Thus, on 31 December 2017, the general instruments in which the foreign exchange reserve fund was used to cover losses

113 registered at the end of the ﬁnancial year in the amount of MDL 95.31 million, the reserve fund decreasing to MDL 1 448.48 million. Consequently, the statutory capital was reduced, amounting to MDL 2 351.45 million.

By December 31, 2017, the Bank’s capital and reserves amounted to a total of MDL 4 004.72 million, decreasing as compared to December 31, 2016. This decrease was due to coverage of unrealized losses from exchange differentials as a result of the revaluation of foreign currency stocks in the amount of MDL (4 851.88) million and of coverage of unrealized losses from revaluation of investment securities in the amount of MDL (28.89) million.

Other reserves include the reserve of cumulative revenue and losses from revaluation of government securities, classiﬁed as available for sale, and favorable differentials from revaluation of monetary gold. The revaluation of these assets represents changes in global market values that may subsequently register proﬁts or loss.

By December 31, 2017, the level of statutory capital in total monetary liabilities amounted to about 5.08% (by December 31, 2016: 6.23%).

114 Chapter 11

External communication

The National Bank of Moldova continued to International Week of Financial Education, improve its communication by using new tools Open Doors Day, International Savings Day, and informational channels. In 2017, the etc. was completed with new ones: "A Holiday Communication Strategy was approved. The Day at NBM" and "From Student to Student" Strategy was adapted to new realities and has (attracting high school students of the the objective to encourage opening of the Academy of Economic Sciences of Moldova to National Bank to the public on the principles of volunteer in educational activities). transparency, accessibility, clarity, actuality and predictability. As well, in the context of assuming a social communication, the National Bank has been The importance of communication of the involved in trainings on communication in National Bank of Moldova derives from its situations of crisis and emergencies. mission, vision, and its values and relates to the strategic objectives of the bank. The National Bank makes its decisions known to the public, explains their meaning and the expected effect on the economy, the ﬁnancial-banking sector and related participants. In this context, more than 600 comments to journalists’ requests were provided, 6 press conferences including quarterly reports and 9 thematic interviews were organized. The researches and macroeconomic analysis performed by the NBM were presented in 27 publications.

The use of new tools and modern communication channels, such as multimedia and social networks, as well as openness to the public, have generated positive results conﬁrmed by monitoring the implementation of the Communication Strategy on a quarterly basis.

As a result, the interest of users increased regarding monetary policy issues, banking supervision, regulatory acts developed together with alignment to the latest international banking regulatory principles adopted in 2010, known under the generic title BASEL III. At the same time, the impact of National Bank’s posting on social networks increased: Facebook, YouTube, Twitter, LinkedIn (For example, from 100 to 4 000 views on Facebook), which also reﬂects the interest of target groups, which are less familiar with ﬁnancial-banking issues.

In the context of openness to the public, the National Bank continued to pay special attention to the ﬁnancial education process, receiving as guests over 2,000 children and young people. The range of traditional projects developed in this respect included:

115 List of Figures

1.1 GDP comparative evolution in selected economies (%) ...... 12

1.2 USDX evolution in the context of Fed monetary policy ...... 13

1.3 The annual average growth rate of world price indexes (%) ...... 13

1.4 Global oil supply and demand (milion barrels per day) ...... 14

1.5 Proﬁtability rates for state securities with maturity of 2 years (%) ...... 15

1.6 Base rates in USA, EU and UK (%) ...... 15

2.1 Contribution of demand components (p.p.) to the GDP growth (%) ...... 16

2.2 Contribution of economic sectors (p.p.) to the GDP growth (%) ...... 16

2.3 Contrubution of components (p.p.) to the household ﬁnal consumption growth (%) ...... 17

2.4 Evolution of the household disposable income (%, versus the same period of the previous year) and contribution of components (p.p.) ...... 17

2.5 Annual rate of gross capital formation (%) and components contribution (p.p.) ...... 17

2.6 Investments in long-term tangible assets (%) and contribution of founding sources (p.p.) ...... 18

2.7 Global agricultural production (%, versus the same period of the previous year ...... 18

2.8 Evolution of industrial production (%, versus the same period of the previous year) and components’ contribution (p.p.) ...... 18

2.9 Evolution in real terms of transport of goods (%, versus the same period of the previous year) and components’ contribution (p.p.) ...... 19

2.10Evolution in real terms of internal trade (%, versus the same period of the previous year) ...... 19

2.11Evolution of wholesale trade (%, versus the same period of the previous year), current prices ...... 19

2.12Evolution of exports annual rate (%) and contribution by categories of countries (p.p.) ...... 20

2.13Evolution of exports annual rate (%) and contribution by groups of goods (p.p.) ...... 20

2.14Evolution of exports annual rate (%) and contribution by origins (p.p.) ...... 20

2.15Evolution of imports annual rate (%) and contribution by categories of countries (p.p.) ...... 21

2.16Evolution of imports annual rate (%) and componets’ contribution by groups of goods (p.p.) ...... 21

2.17Annual growth rate of employed population (%, versus the same period of the prevous year) and its formation by national economy sectors (p.p.) ...... 21

2.18Evolution of unemployment and employment rates (%) ...... 21

116 2.19Wage bill in economy and average number of employees (%, versus the same period of the previous year) .... 22

2.20Real average wage (%, versus the same period of the previous year) ...... 22

2.21Annual rate of CPI and of core inﬂation (%) ...... 23

2.22Annual rate of inﬂation subcomponents (%) ...... 23

2.23CPI evolution (%) and subcomponents’ contribution (p.p.) ...... 23

2.24Components contribution (p.p.) to the annual growth rate of core inﬂation (%) ...... 24

2.25Components’ contribution (p.p.) to the annual growth of food prices (%) ...... 24

2.26Components’ contribution (p.p.) to the annual growth of regulated prices (%) ...... 25

2.27Components contribution (p.p.) to the annual growth of fuel prices (%) ...... 25

2.28Annual rate of IPPI (%) ...... 26

2.29Annual rate of IPPI (%) and its components’ contribution (p.p.) ...... 26

2.30Evolution of construction price index (%, compared to the similar period of the last year ) ...... 27

2.31Producer prices of agricultural products (%, versus de previous year ) ...... 27

2.32Indicators of national public budget ...... 28

2.33State debt as a share of GDP (%) ...... 29

2.34The current account – main components ...... 30

2.35The export of goods in 2017, by geographical area (%) ...... 31

2.36The import of goods in 2017, by geographical area, CIF prices (%) ...... 31

2.37The import of energy products and electricity (USD, million, CIF prices) ...... 31

2.38The ﬁnancial account by functional categories (million, USD) ...... 32

2.39The external loans (net incurrence of liabilities), inﬂows and reimbursement by maturities (million, USD) ..... 33

2.40Direct investment: net incurrence of liabilities, disaggregated by instruments (million, USD) ...... 33

2.41International investment position in dinamics, end of period (million, USD) ...... 34

2.42The indicators of ofﬁcial reserve assets adequacy of the Republic of Moldova (million, USD) ...... 34

2.43Direct investmens, liabilities, main components, stock* end of period (million, USD) ...... 35

2.44The external debt to GDP ratio (%) ...... 35

2.45The external debt structure by maturities, end of period (million, USD) ...... 36

2.46The short-term external debt by types, as of 31.12.2017 ...... 36

3.1 The evolution of daily balance of money market operations (million, MDL) ...... 39

3.2 The evolution of average monthly balance of overnight deposits and of average interest rate ...... 40

117 3.3 The evolution of attracted funds in MDL, required reserves in MDL and required reserves ratio ...... 41

3.4 The evolution of required reserves in USD and EUR ...... 41

3.5 The evolution of the ofﬁcial exchange rate of MDL/USD and the volume of daily transactions of the NBM in 2017 . 41

3.6 The evolution of components of M2 money supply (%, increase versus the same month of the previous year) ... 42

3.7 The dynamics of components of M3 money supply (%, increase versus the same month of the previous year) ... 42

3.8 The balance of credits granted to the economy (%, increase versus the same month of the previous year) .... 43

3.9 The dynamics of balance components of credits granted in economy (%, increase versus the same month of the previous year) ...... 43

3.10The dynamics of volume and weighted average interest rate of new credits granted in MDL ...... 43

3.11The dynamics of volume and weighted average interest rate of new credits granted in foreign currency ..... 43

3.12The dynamics of balance components of attracted deposits (%, increase versus the same month of the previous year) ...... 44

3.13The dynamics of volume and weighted average interest rate of new term deposits attracted in MDL ...... 44

3.14The dynamics of volume and weighted average interest rate of new term deposits attracted in foreign currency . 45

3.15The average interest rate in MDL (%) ...... 45

3.16The evolution of banking margin on new operations in national and foreign currency (p.p.) ...... 46

3.17The average interest rate of credit and deposit balances (%) ...... 46

3.18The quantitative indicators of the primary market of SS (MDL, million) ...... 47

3.19The monthly dynamic of indicators of the primary market of SS ...... 47

3.20The structure of SS issues by maturity in 2016 ...... 48

3.21The structure of SS issues by maturity in 2017 ...... 48

3.22The dynamic of nominal interest rates on SS with the maturity up to one year (%) ...... 48

3.23The evolution of interest rates on ﬁnancial market (%) ...... 49

3.24The dynamic of SS in circulation at the end of period (MDL, million) ...... 49

3.25The dynamic of SS indicators traded on the secondary market ...... 49

3.26The structure of SS traded on secondary market by maturity in 2016 ...... 49

3.27The structure of SS traded on secondary market by maturity in 2017 ...... 50

3.28The structure of SS procurements on the primary market by category of participants ...... 50

3.29The selling-buying transactions performed by the primary dealers on the secondary market (MDL, million) .... 50

3.30The structure of SS in circulation in the holders’ proﬁle as of 31.12.2016 ...... 51

3.31The structure of SS in circulation in the holders’ proﬁle as of 31.12.2017 ...... 51

3.32The evolution of reference rates on the interbank market and of NBM base rate (%) ...... 52

118 3.33The turnover of foreign exchange transactions against MDL carried out on the domestic forex market, by the settlement method (bank transfer or cash) ...... 53

3.34Currency structure of the total turnover of foreign exchange transactions carried out against MDL on the domestic forex market in 2016 (%) ...... 53

3.35Currency structure of the total turnover of foreign exchange transactions carried out against MDL on the domestic forex market in 2017 (%) ...... 53

3.36Total number of currency exchange transactions carried out by legal entities, by currency ...... 54

3.37The number of transactions carried out against euros and US dollars on the intra-bank forex market through bank transfer, by the amount traded (showing the equivalent of amounts ranging from 10 000 to 100 000 US dollars) . 54

3.38The number of transactions carried out against euros and US dollars on the intra-bank forex market through bank transfer, by the amount traded (showing the equivalent of amounts exceeding 100 000 US dollars) ...... 54

3.39Balance sheet assets, by asset type, at the effective exchange rate (in USD million) ...... 55

3.40Currency structure of foreign currency assets, at the effective exchange rate (%) ...... 55

3.41Foreign currency liabilities on the balance sheet, at the effective exchange rate, by liability type (in USD million) 56

3.42Currency structure of foreign currency liabilities, at the effective exchange rate (%) ...... 56

3.43Fluctuations in the ofﬁcial exchange rate of the domestic currency against the US dollar and the euro ...... 57

3.44Evolution of currencies of the main trading partners of the Republic of Moldova and other countries from the region against the US dollar, 31 December 2017/31 December 2016 (%) ...... 57

3.45Contribution of Moldova’s main trading partner countries to ﬂuctuations of the REER in 2017 ...... 58

3.46The evolution of the REER of the domestic currency, calculated on the basis of shares held by currencies of the main trading partner countries, during 12/2014 - 12/2017 ...... 58

3.47The currency structure of the net foreign currency supply from individuals (recalculated at a constant exchange rate) ...... 58

3.48The coverage of the net foreign currency demand by supply and the evolution of the ofﬁcial rate ...... 59

3.49Evolution of ofﬁcial reserve assets presented as months of imports of goods and services (MBP6) ...... 59

3.50The structure of foreign exchange reserves, by investment instruments, at the end of 2015-2017 (USD million) . 60

3.51The composition of foreign exchange reserves, as of 31 December 2017 ...... 61

3.52The regulatory currency composition, as of 31 December 2017 ...... 61

4.1 Dynamics of main indicators for 31.12.2016 – 31.12.2017 ...... 62

4.2 Dynamic of capital and risk weighted capital adequacy for 31.12.2016 -31.12.2017 ...... 63

4.3 Dynamics of Tier I capital concentration in the banking system of the Republic of Moldova by groups of banks for 31.12.2016 – 31.12.2017 (%) ...... 63

4.4 Dynamics of assets concentration of the banking system of the Republic of Moldova by groups of banks as of 31.12.2016 – 31.12.2017 (%) ...... 64

4.5 Assets concentration of the banking sector as at 31.12.2017 (%) ...... 64

119 4.6 Dynamics of assets, loans and deposits to GDP (%) ...... 65

4.7 Distribution of the loan portfolio according to the sector in which the borrower operates as at 31.12.2017 (%) .. 65

4.8 Dynamics of the structure of loan portfolio of the banking sector of the Republic of Moldova according to the level of investment operations risk as of 31.12.2016 (%) ...... 66

4.9 Dynamics of the structure of loan portfolio of the banking sector of the Republic of Moldova according to the level of investment operations risk as of 31.12.2017 (%) ...... 66

4.10Income and expenses dynamics of the banking sector of the Republic of Moldova (MDL, million) for 2016-2017 .. 67

4.11Incomes structure of the banking sector of the Republic of Moldova for 2017 (%) ...... 67

4.12Expenses structure of the banking sector of the Republic of Moldova in 2017 (%) ...... 68

4.13Dynamics of net interest margin, the return on assets and return on equity in the banking system of the Republic of Moldova for 31.12.2016-31.12.2017 (%) ...... 68

4.14Dynamics of liabilities concentration in the banking system of the Republic of Moldova by group of banks for 31.12.2016 -31.12.2017 (%) ...... 69

4.15Dynamics of liquid assets (MDL, million) and their share in total assets of the banking sector of the Republic of Moldova (%) ...... 69

4.16Structure of total placements abroad of banks of the Republic of Moldova (%) ...... 70

4.17The net interbank placements of the licensed banks in the Republic of Moldova in the domestic banking sector . 75

4.18The volume of net placements of licensed banks in foreign banks ...... 75

5.1 The number and value of payments made through non-bank payment service providers ...... 78

5.2 The number of payment cards in circulation (thousand units) ...... 80

5.3 The number of operations performed with payment cards issued in the Republic of Moldova (million operations) . 80

5.4 The structure of domestic operations ...... 81

5.5 The share of operations performed abroad with cards issued in the Republic of Moldova ...... 81

5.6 The indicators of payment cards market in the Republic of Moldova ...... 81

5.7 The number of ARSS uses by systems type ...... 82

5.8 The number and operations value performed through ARSS ...... 82

6.1 The evolution of banknotes in monetary circulation in terms of value (MDL, million) ...... 83

6.2 The evolution of banknotes in monetary circulation in terms of quantity (million banknotes) ...... 83

6.3 The structure by face value of banknotes in circulation at the end of 2017 ...... 83

6.4 The evolution of coins in monetary circulation in terms of value (MDL, million) ...... 84

6.5 The evolution of coins in monetary circulation in terms of quantity (million coins) ...... 84

6.6 The banknotes issued during 2017 in terms of quantity ...... 84

120 6.7 The coins issued during 2017 in terms of quantity ...... 85

6.8 The banknotes withdrawn from circulation during 2017 in terms of quantity ...... 85

6.9 The banknotes withdrawn from circulation during 2016 in terms of quantity ...... 85

6.10The structure of counterfeits by face value identiﬁed in 2017 in terms of quantity ...... 86

6.11The structure of counterfeits by face value identiﬁed in 2016 in terms of quantity ...... 86

9.1 Human resource management processes ...... 108

9.2 Voluntary ﬂuctuation of NBM staff ...... 108

9.3 General information about NBM employees ...... 108

9.4 Age distribution of employees who participated in the training ...... 109

9.5 Duration of training attended by employees ...... 109

9.6 Training areas in which employees participated ...... 109

9.7 Recruitment in NBM ...... 110

9.8 Internships for students in the NBM ...... 110

10.1Evolution of available proﬁt for total distribution/losses (MDL million) ...... 111

10.2Evolution of currency reserves proﬁtability in 2017 compared to 2016 ...... 113

121 List of Tables

1.1 Apreciation (-)/depreciation (+) of currencies in 2017 (%) ...... 13

1.2 The evolution of selected indicators in neighbouring economies, main trading partners in 2017 (%) ...... 14

3.1 The annual weighted average nominal interest rates of the state securities by maturities (%) ...... 48

A.1 Balance of payments of the Republic of Moldova (according to BPM6) (million, USD).... 125

A.2 Structure of external trade in services (million, USD)...... 126

A.3 Structure of primary income (million, USD)...... 126

A.4 Structure of secondary income (million, USD)...... 126

A.5 Financial account by functional categories (million, USD)...... 127

A.6 Foreign loans (incurrence of liabilities), receipts and repayments (million, USD)...... 127

A.7 International investment position of the Republic of Moldova as of December 31, 2016 (million, USD)...... 128

A.8 Gross external debt of the Republic of Moldova at the end of the period (million, USD)... 128

A.9 Total turnover of the domestic foreign exchange market operations of the foreign currency against MDL (equivalent in USD, million)...... 129

A.10Structure of turnover of foreign exchange transactions against MDL on domestic foreign exchange market...... 129

A.11Net balance (purchases minus sales) operations of foreign currency against MDL performed by licensed banks, sorted by transaction date (equivalent in USD, million)...... 130

A.12Balance sheet assets in foreign currency of the licensed banks (equivalent in USD, million) 130

A.13Disposable funds in foreign currency of the licensed banks (equivalent in USD, million).. 131

A.14Balance sheet liabilities in foreign currency of licensed banks (equivalent in USD, million) 131

A.15Current accounts and deposits in foreign currency of bank’s clients, by tipes of currency (equivalent in USD, million)...... 131

A.16Conditional assets and liabilities in foreign currency of licensed banks (equivalent in USD, million)...... 132

A.17Investment limits and constraints applied by the NBM for investment risk management.. 133

A.18Dynamics of the assets structure of the banking sector of the Republic of Moldova in 31.12.2016 - 31.12.2017...... 134

A.19Dynamics of liabilities structure of the banking sector of the Republic of Moldova in 31.12.2016 - 31.12.2017...... 135

122 A.20Dinamics of placements abroad of banks of Republik of Moldova (MDL, milion)...... 135

A.21Evolution of payments settled through AIPS...... 136

A.22Commemorative coins issued in 2017...... 136

A.23Financial arrangements with the IMF received by the National Bank of Moldova...... 136

A.24Analysis of proﬁt available for distribution in conjunction with the main activities of the NBM136

A.25Net result from the monetary policy implementation and activities related to relations with the Government of Republic of Moldova...... 137

A.26Net result obtained from the management of foreign exchange reserves held by the NBM 137

A.27Evolution of the ofﬁcial exchange rate...... 137

A.28Share of signiﬁcant balance sheet items (%) and the annual average rates related to the ﬁnancial instruments (%)...... 138

A.29Capital and reserves...... 138

A.30List of decisions of the Supervisory Board and Executive Board of the National Bank of Moldova issued for publication in the Ofﬁcial Monitor of the Republic of Moldova in 2017. 139

A.31List of decisions of the Executive Board of the National Bank of Moldova issued for publication in the Ofﬁcial Monitor of the Republic of Moldova in 2017 (continuation).... 140

123 Appendix A

Statistical tables

124 Table A.1: Balance of payments of the Republic of Moldova (according to BPM6) (million, USD)

2015 2016 2017 CURRENT ACCOUNT -467.72 -285.58 -616.94 Goods and services -1 998.45 -1 869.78 -2 253.71 Goods -2 123.47 -2 087.98 -2 569.00 export (FOB) 1 506.94 1 547.33 1 857.74 import (FOB) 3 630.41 3 635.31 4 426.74 Services 125.02 218.20 315.29 export 972.04 1 046.24 1 252.69 import 847.02 828.04 937.40 Primary income 450.11 460.65 510.80 inflow, of which: 816.83 744.70 882.51 compensation of employees 783.15 713.83 839.56 investment income 36.52 33.66 45.35 outflows, of which: 366.72 284.05 371.71 investment income 283.59 213.97 291.49 Secondary income 1 080.62 1 123.55 1 125.97 inflow, of which: 1 223.78 1 245.49 1 264.74 current international cooperation 196.42 216.98 183.73 personal transfers 756.97 750.39 800.10 outflows 143.16 121.94 138.77 CAPITAL ACCOUNT 54.87 -20.79 -30.41 Net lending (+) / net borrowing (-) (Balance of the current and capital account) -412.85 -306.37 -647.35 FINANCIAL ACCOUNT -458.05 -214.56 -569.77 Direct investment -209.12 -74.68 -205.77 net acquisition of financial assets 7.02 16.29 2.69 net incurrence of liabilities, of which: 216.14 90.97 208.46 equity and investment fund shares, except earning reinvestment 43.88 43.97 39.23 earning reinvestment 123.37 91.03 86.81 debt instruments 48.89 -44.03 82.42 Portfolio investment -4.04 -0.36 -1.00 net acquisition of financial assets -0.01 - -0.87 net incurrence of liabilities 4.03 0.36 0.13 Financial derivatives (other than reserves) – banking, net value -0.70 0.49 -0.43 Other investment 62.30 -671.15 -893.77 net acquisition of financial assets -1.00 -421.65 -480.41 other equity investment - - 0.56 currency and deposits -42.09 -340.03 -384.78 loans 0.16 1.48 -3.42 trade credits and advances 40.93 -45.00 -92.77 other claims - -38.10 - net incurrence of liabilities -63.30 249.50 413.36 currency and deposits -119.75 0.83 13.24 loans 24.71 124.74 107.24 trade credits and advances 36.21 127.93 288.92 other liabilities -4.47 -4.00 3.96 Reserve assets -306.49 531.14 531.20 Errors and omissions net -45.20 91.81 77.58 Information: Personal transfers: credit 1 449.93 1 377.78 1 559.21

Source:NBM

125 Table A.2: Structure of external trade in services (million, USD) 2015 2016 2017 Credit (export) 972.04 1 046.24 1 252.69 Services for processing raw materials that are owned by others 139.63 147.89 189.02 Transport 321.90 351.17 410.65 Travel 210.26 243.36 312.01 Charges for the use of intelectual property n.i.e. 4.48 6.24 5.69 Telecommunications, computer and information services 162.04 152.41 173.42 Other business services 87.57 93.23 114.11 Government goods and services n.i.e. 31.88 36.33 29.04 Other services 14.28 15.61 18.75 Debit (import) 847.02 828.04 937.40 Services for processing raw materials that are owned by others 2.88 2.82 10.86 Transport 302.19 298.16 345.69 Travel 281.48 254.36 305.35 Charges for the use of intelectual property n.i.e. 18.33 19.07 20.33 Telecommunications, computer and information services 84.13 73.09 79.80 Other business services 87.33 110.59 106.82 Government goods and services n.i.e. 33.34 35.84 27.28 Other services 37.34 34.11 41.27 Balance 125.02 218.20 315.29 Services for processing raw materials that are owned by others 136.75 145.07 178.16 Transport 19.71 53.01 64.96 Travel -71.22 -11.00 6.66 Charges for the use of intelectual property n.i.e. -13.85 -12.83 -14.64 Telecommunications, computer and information services 77.91 79.32 93.62 Other business services 0.24 -17.36 7.29 Government goods and services n.i.e. -1.46 0.49 1.76 Other services -23.06 -18.5 -22.52 Source: NBM

Table A.3: Structure of primary income (million, USD) 2015 2016 2017 Credit (inﬂow) 816.83 744.70 882.51 Compensation of employees 783.15 713.83 839.56 Investment income 36.52 33.66 45.35 of which: reserve assets income 23.76 23.68 28.12 Other primary income -2.84 -2.79 -2.40 Debit (outﬂows) 366.72 284.05 371.71 Compensation of employees 83.34 70.51 80.74 Investment income 283.59 213.97 291.49 Other primary income -0.21 -0.43 -0.52 Balance 450.11 460.65 510.80 Compensation of employees 699.81 643.32 758.82 Investment income -247.07 -180.31 -246.14 of which: reserve assets income 23.76 23.68 28.12 Other primary income -2.63 -2.36 -1.88 Source: NBM

Table A.4: Structure of secondary income (million, USD) 2015 2016 2017 Credit (inflows) 1 223.78 1 245.49 1 264.74 General government 123.66 155.97 141.13 Other sectors*, of which: 1 100.12 1 089.52 1 123.61 Personal transfers** 756.97 750.39 800.10 Debit (outflows) 143.16 121.94 138.77 General government 8.46 5.81 10.27 Other sectors*, of which: 134.70 116.13 128.50 Transferuri personale** 70.77 65.16 69.00 Balance 1 080.62 1 123.55 1 125.97 General government 115.20 150.16 130.86 Other sectors*, of which: 965.42 973.39 995.11 Personal transfers** 686.20 685.23 731.10 *Financial corporations, non-financial corporations, households and non-profit institutions serving households. **Current transfers between resident and non-resident households. Source: NBM

126 Table A.5: Financial account by functional categories (million, USD)

2015 2016 2017 Net lending (+) / net borrowing (-) -458.05 -214.56 -569.77 (Financial account balance) net acquisition of financial assets -300.48 125.78 52.61 net incurrence of liabilities 157.57 340.34 622.38 Direct investment -209.12 -74.68 -205.77 net acquisition of financial assets 7.02 16.29 2.69 net incurrence of liabilities 216.14 90.97 208.46 Portfolio investment and financial derivatives -4.74 0.13 -1.43 net acquisition of financial assets -0.01 - -0.87 net incurrence of liabilities 4.73 -0.13 0.56 Other investment 62.30 -671.15 -893.77 net acquisition of financial assets -1.00 -421.65 -480.41 net incurrence of liabilities -63.30 249.50 413.36 Other equity investment - - 0.56 net acquisition of financial assets - - 0.56 Currency and deposits 77.66 -340.86 398.02 net acquisition of financial assets -42.09 -340.03 -384.78 net incurrence of liabilities -119.75 0.83 13.24 Loans -24.55 -123.26 -110.66 net acquisition of financial assets 0.16 1.48 -3.42 net incurrence of liabilities 24.71 124.74 107.24 Trade credits and advances 4.72 -172.93 -381.69 net acquisition of financial assets 40.93 -45.00 -92.77 net incurrence of liabilities 36.21 127.93 288.92 Other accounts receivable / payable 4.47 -34.10 -3.96 net acquisition of financial assets - -38.10 - net incurrence of liabilities -4.47 -4.00 3.96 Reserve assets -306.49 531.14 531.20 Note: Reserves assets flows were evaluated at daily rate Source: NBM

Table A.6: Foreign loans (incurrence of liabilities), receipts and repayments (million, USD) 2015 2016 2017

receipt repayment receipt repayment receipt repayment Loans 339.40 314.69 434.84 310.10 423.06 315.82 Central Bank - 35.16 11.74 48.65 17.27 61.54 long-term - 35.16 11.74 48.65 17.27 61.54 Public administration 138.71 40.39 233.13 57.66 200.97 74.58 long-term 138.71 40.39 233.13 57.66 200.97 74.58 Deposit-taking corporations, 24.62 111.50 20.52 75.99 47.38 27.06 except Central Bank short-term 4.43 4.28 3.13 3.09 4.32 2.10 long-term 20.19 107.22 17.39 72.90 43.06 24.96 Non-financial corporations, 146.16 93.78 126.60 99.31 89.22 99.08 households and non-profit institutions serving households short-term 2.90 1.68 16.31 1.64 3.62 3.12 long-term 143.26 92.10 110.29 97.67 85.60 95.96 Other financial corporations 29.91 33.86 42.85 28.49 68.22 53.56 short-term 4.32 0.02 - 0.20 - 0.65 long-term 25.59 33.84 42.85 28.29 68.22 52.91 Source: NBM

127 Table A.7: International investment position of the Republic of Moldova as of December 31, 2016 (million, USD)

As of Changes reflecting As of 31.12.2016 total BP price exchange rate other 31.12.2017 dynamics flow changes fluctuations adjustments Internationat investment position (net) -3 034.13 -920.20 -569.77 -63.43 -484.95 197.95 -3 954.33 Assets 4 608.75 381.99 52.61 -1.54 128.61 202.31 4 990.74 Direct investment 249.74 2.99 2.69 - 0.30 - 252.73 Equity participations 177.31 8.04 8.04 - - - 185.35 Debt instruments 72.43 -5.05 -5.35 - 0.30 - 67.38 Portfolio investment 5.09 -0.87 -0.87 --- 4.22 Equity participations 2.57 -0.01 -0.01 - - - 2.56 Debt instruments 2.52 -0.86 -0.86 - - - 1.66 Financial derivatives 4.00 ----- 4.00 Other investment 2 143.99 -217.46 -480.41 - 60.64 202.31 1 926.53 Other participations - 0.56 0.56 - - - 0.56 Currency and deposits 1 416.83 -131.85 -384.78 - 50.62 202.31 1 284.98 Loans 111.07 -3.42 -3.42 - - - 107.65 Trade credits and advances 607.07 -82.75 -92.77 - 10.02 - 524.32 Other assets 9.02 - - - - - 9.02 Reserve assets* 2 205.93 597.33 531.20 -1.54 67.67 - 2 803.26 Liabilities 7 642.88 1 302.19 622.38 61.89 613.56 4.36 8 945.07 Direct investment 3 037.51 664.23 208.46 61.03 390.21 4.53 3 701.74 Equity participations 1 312.97 549.87 126.04 61.03 358.27 4.53 1 862.84 Debt instruments 1 724.54 114.36 82.42 - 31.94 - 1 838.90 Portfolio investment 90.84 13.83 0.13 0.86 13.01 -0.17 104.67 Equity participations 90.38 - - - - - 103.80 Debt instrumentse 0.46 - - - - - 0.87 Financial derivatives 4.29 0.43 0.43 --- 4.72 Other investment 4 510.24 623.70 413.36 - 210.34 - 5 133.94 Currency and deposits 135.84 29.49 13.24 - 16.25 - 165.33 Loans 3 138.64 281.14 107.24 - 173.90 - 3 419.78 Trade credits and advances 933.98 299.62 288.92 - 10.70 - 1 233.60 Other liabilities 144.03 3.96 3.96 - - - 147.99 SDR allocations 157.75 9.49 - - 9.49 - 167.24 *evaluated at daily rate Note: The official cross exchange rates of original currencies against the U.S. dollar at the end of the period were used for the evaluation of stocks Source: NBM

Table A.8: Gross external debt of the Republic of Moldova at the end of the period (million, USD) 2015 2016 2017 General government 1 353.76 1 481.68 1 722.54 Short-term 0.07 0.46 0.87 Long-term 1 353.69 1 481.22 1 721.67 Central Bank 339.29 292.28 264.29 Long-term 339.29 292.28 264.29 Deposit-taking corporations, 376.56 374.63 440.44 except Central Bank Short-term 172.63 228.10 267.87 Long-term 203.93 146.53 172.57 Other sectors 2 253.44 2 362.11 2 707.54 Short-term 970.45 1 044.52 1 332.00 Long-term 1 282.99 1 317.59 1 375.54 Other ﬁnancial corporations 98.24 112.36 126.92 Short-term 6.11 5.67 4.92 Long-term 92.13 106.69 122.00 Non-ﬁnancial corporations 2 125.80 2 220.16 2 550.59 Short-term 964.01 1 038.79 1 327.02 Long-term 1 161.79 1 181.37 1 223.57

Households s, i NPISHs* 29.40 29.59 30.03 Short-term 0.33 0.06 0.06 Long-term 29.07 29.53 29.97 Direct investment: intercompany lending 1 781.16 1 724.53 1 838.89 Short-term 106.44 115.51 146.94 Long-term 1 674.72 1 609.02 1 691.95 TOTAL 6 104.21 6 235.23 6 973.70 *Non-proﬁt institutions serving households. Source: NBM

128 Table A.9: Total turnover of the domestic foreign exchange market operations of the foreign currency against MDL (equivalent in USD, million) Transactions of licensed banks in the foreign exchange market against MDL, structured Foreign Domestic foreign by sources (including operations with financial derivatives) exchange exchange market NBM Resident Non-resident Legal Individuals and foreign Miscellaneous Total offices Transfer Cash Total banks banks entities exchange offices (Cash) Cash Transfer Total Turnover 2016 454.1 270.6 17.8 5 728.4 2 310.0 312.2 2 622.2 585.4 9 678.5 994.2 7 368.5 3 304.2 10 672.7 2017 433.8 279.8 27.7 6 476.5 2 474.2 345.4 2 819.6 625.9 10 663.3 1 344.3 8 189.1 3 818.5 12 007.6 2017/ 2016, % –4.5 3.4 55.6 13.1 7.1 10.6 7.5 6.9 10.2 35.2 11.1 15.6 12.5 Purchases 2016 28.2 135.3 11.8 2 076.2 2 017.7 224.0 2 241.7 352.0 4 845.2 512.8 2 827.5 2 530.5 5 358.0 2017 0.0 139.9 20.6 2 409.5 2 128.7 224.7 2 353.4 418.4 5 341.8 719.9 3 213.1 2 848.6 6 061.7 2017/ 2016, % -100.0 3.4 74.6 16.1 5.5 0.3 5.0 18.9 10.2 40.4 13.6 12.6 13.1 Sales 2016 425.9 135.3 6.0 3 652.2 292.3 88.2 380.5 233.4 4 833.3 481.4 4 541.0 773.7 5 314.7 2017 433.8 139.9 7.1 4 067.0 345.5 120.7 466.2 207.5 5 321.5 624.4 4 976.0 969.9 5 945.9 2017/ 2016, % 1.8 3.4 18.3 11.4 18.2 36.8 22.5 -11.1 10.1 29.7 9.6 25.4 11.9 Source: Report on purchases and sales operations of foreign currency made by licensed banks and the NBM data; Report on foreign exchange operations carried out by foreign exchange offices; Report on foreign exchange operations carried out by foreign exchange bureaus by hotels.

Table A.10: Structure of turnover of foreign exchange transactions against MDL on domestic foreign exchange market

Domestic foreign exchange Domestic foreign exchange Total foreign transfer market cash market exchange market purchases sales purchases sales purchases sales 2016 Share,% USD 56.5 59.7 24.6 28.6 41.4 55.2 EUR 39.8 37.0 61.9 58.6 50.2 40.1 RUB 2.3 2.8 10.1 5.6 6.0 3.2 Other currencies 1.4 0.5 3.4 7.2 2.4 1.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 2017 Share, % USD 50.6 56.9 21.7 28.9 37.0 52.4 EUR 45.8 39.5 63.2 56.7 54.0 42.3 RUB 2.0 2.8 10.7 5.8 6.1 3.3 Other currencies 1.6 0.7 4.4 8.5 2.9 2.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Report on purchases and sales operations of foreign currency made by licensed banks and the NBM data; Report on foreign exchange operations carried out by foreign exchange ofﬁces; Report on foreign exchange operations carried out by foreign exchange bureaus by hotels.

129 Table A.11: Net balance (purchases minus sales) operations of foreign currency against MDL performed by licensed banks, sorted by transaction date (equivalent in USD, million)

Net balance

NBM Resident Non-resident Legal Individuals Miscellaneous TOTAL banks banks entities (including foreign exchange ofﬁces) Quater I -11.4 0.0 0.9 -408.5 415.4 18.0 14.4 Quater II -176.2 0.0 -0.5 -381.5 534.0 29.2 5.0 Quater III -231.7 0.0 8.6 -388.8 564.0 45.1 -2.8 Quater IV 21.6 0.0 -3.2 -397.2 347.8 26.3 -4.7 2016 -397.7 0.0 5.8 -1 576.0 1 861.2 118.6 11.9 Quater I -28.1 0.0 -0.2 -394.4 380.0 43.4 0.7 Quater II -99.7 0.0 8.9 -436.3 470.6 56.2 -0.3 Quater III -196.0 0.0 -0.5 -476.7 625.7 57.4 9.9 Quater IV -110.0 0.0 5.3 -350.1 410.9 53.9 10.0 2017 -433.8 0.0 13.5 -1 657.5 1 887.2 210.9 20.3

Source: NBM

Table A.12: Balance sheet assets in foreign currency of the licensed banks (equivalent in USD, million)

Balance as of Balance as of 31.12.2017/ 31.12.2016 31.12.2017 31.12.2016, % Fixed course Actual Share Actual Share Fixed course Actual from 31.12.2017 course % course % from 31.12.2017 course Loans granted in foreign currency, including: 826.3 759.0 53.6 803.0 46.9 -2.8 5.8 EUR 542.8 475.4 33.6 547.9 32.0 0.9 15.3 USD 283.5 283.6 20.0 255.1 14.9 -10.0 -10.0 Disposable funds in foreign currency, including: 537.5 497.0 35.1 697.6 40.7 29.8 40.4 EUR 323.0 283.0 20.0 463.8 27.1 43.6 63.9 USD 197.9 198.0 14.0 211.1 12.3 6.7 6.6 Other currencies 16.6 16.0 1.1 22.7 1.3 36.7 41.9 Required reserves in foreign currency 187.3 171.7 12.1 212.1 12.4 13.2 23.5 Other assets in foreign currency (1+2+3), including: -68.3 -62.4 -4.4 -64.0 -3.7 -6.3 2.6 1."Nostro" accounts opened in banks of the Republic of Moldova 2.5 2.5 0.2 2.3 0.1 -8.0 -8.0 2.Other assets 32.8 30.3 2.1 44.6 2.6 36.0 47.2 3.Adjustments and allowance for impairment losses -103.6 -95.2 -6.7 -110.9 -6.5 7.0 16.5 Assets attached to the foreign exchange rate 56.7 51.4 3.6 63.8 3.7 12.5 24.1 Total foreign exchange balance-sheet assets 1 539.5 1 416.7 100.0 1 712.5 100.0 11.2 20.9 Source: NBM

130 Table A.13: Disposable funds in foreign currency of the licensed banks (equivalent in USD, million) Balance as of Share Balance as of Share 31.12.2017/ 31.12.2016 % 31.12.2017 % 31.12.2016, % "Nostro" accounts opened abroad 315.8 63.5 463.7 66.5 46.8 Cash in foreign currency 97.5 19.6 125.2 17.9 28.4 Placements abroad 51.1 10.3 62.4 8.9 22.1 Overnight placements 31.7 6.4 45.2 6.5 42.6 Securities in foreign currency 0.9 0.2 1.1 0.2 22.2 Total 497.0 100.0 697.6 100.0 40.4 Source: NBM

Table A.14: Balance sheet liabilities in foreign currency of licensed banks (equivalent in USD, million)

Balance as of 31.12.2016 Balance as of 31.12.2017 31.12.2017/31.12.2016, % Fixed course Actual Share Actual Share Fixed course Actual from 31.12.2017 course % course % from 31.12.2017 course Total current and deposits accounts of non-bank clients, including: 1 384.9 1 269.2 90.0 1 493.4 87.9 7.8 17.7 - residents 1 314.7 1 204.2 85.4 1 409.6 82.9 7.2 17.1 - non-residents 70.2 65.0 4.6 83.8 4.9 19.4 28.9 Term deposits 757.3 693.5 49.2 800.1 47.1 5.7 15.4 Current accounts 437.7 403.3 28.6 491.2 28.9 12.2 21.8 Sight deposits 189.9 172.4 12.2 202.1 11.9 6.4 17.2 Received credits 125.3 115.2 8.2 158.6 9.3 26.6 37.7 "Loro" accounts and term deposits of banks from abroad 3.7 3.7 0.3 3.2 0.2 -13.5 -13.5 Other liabilities in foreign currency 24.8 22.6 1.6 44.2 2.6 78.2 95.6 Total foreign exchange balance-sheet liabilities 1 538.7 1 410.7 100.0 1 699.4 100.0 10.4 20.5 Source: NBM

Table A.15: Current accounts and deposits in foreign currency of bank’s clients, by tipes of currency (equivalent in USD, million)

Balance as of 31.12.2016 Balance as of 31.12.2017 31.12.2017/31.12.2016, % Fixed course Actual Share Actual Share Fixed course Actual from 31.12.2017 course % course % from 31.12.2017 course EUR 930.6 815.2 64.2 999.7 66.9 7.4 22.6 USD 445.9 445.8 35.1 483.1 32.3 8.3 8.4 RUB 3.9 3.7 0.3 4.2 0.3 7.7 13.5 Other currencies 4.5 4.5 0.4 6.4 0.4 42.2 42.2 Total 1 384.9 1 269.2 100.0 1 493.4 100.0 7.8 17.7 Source: NBM

131 Table A.16: Conditional assets and liabilities in foreign currency of licensed banks (equivalent in USD, million) Balance as of Share Balance as of Share 31.12.2017/ 31.12.2016 % 31.12.2017 % 31.12.2016, % Conditional assets in foreign currency Current purchases 115.2 97.6 54.2 86.6 -53.0 Purchases on term 2.7 2.3 7.7 12.3 2.9 ori Other conditional assets 0.1 0.1 0.7 1.1 7.0 ori Total conditional assets 118.0 100.0 62.6 100.0 -46.9 Conditional liabilities in foreign currency Current sales 115.3 97.5 54.2 87.6 -53.0 Sales on term 3.0 2.5 7.7 12.4 2.6 ori Other conditional liabilities 0.0 0.0 0.0 0.0 - Total conditional liabilities 118.3 100.0 61.9 100.0 -47.7 Conditional assets minus Conditional liabilities -0.3 0.7 (Conditional assets minus Conditional liabilities)/TRC (%) -0.06 0.11 Source: NBM

132 Table A.17: Investment limits and constraints applied by the NBM for investment risk management Risks Techniques to minimize the investment risk Credit risk * Investing in secure, high credit quality counterparts, selected based on the Standard&Poor, Moody and Fitch’s Ratings (the average rating quoted by the above three agencies is to be used). * Setting the minimum allowable rating for authorized counterparts’ transactions. * Establishing investment limits depending on: the type, duration and rating of investment instruments, as well as the foreign exchange composition. * Daily monitoring of investment limits and compliance with credit limits. * Quantification of credit risk by using the default coefficients determined by the Standard&Poor’s rating agency, for each type of rating and term to maturity. Market risk * Daily market risk monitoring by assessing at market price the unrealized gains and losses incurred as a result of exchange rate fluctuations and developments in securities’ prices. * Managing and monitoring the market risk of the investment securities portfolio by using the value-at-risk methodology (VaR and CVAR), which estimates potential financial losses based on a range of parameters and assumptions determined for different changes in market conditions. 133 * Monitoring the interest rate risk and determining (by using PV01) the sensitivity of the investment portfolio securities’ prices to interest rate fluctuations. * Establishing by the NBM Executive Board of the official currency composition for the investment portfolio, that aims to cover foreign exchange risk, the portfolio’s optimization through optimal proportioning of foreign exchange assets and liabilities, as well as by setting an investment horizon to ensure the meeting of current external obligations and implementation of the monetary and foreign exchange policies of the state. The official currency composition is determined based on an extensive analysis of: the foreign exchange composition of trade in goods and services, the external debt, the intervention currency, etc. The reserves currency composition may deviate within +/- 10% from the official currency composition. * Establishing by the NBM’s Investment Committee of the currency composition of each sub-portfolio, and allowed deviations from it. * Complying with the official currency composition and currency composition of each sub-portfolio. Liquidity risk * Securing liquidity through demand deposits and investing in securities with high liquidity and low risk. * Ensuring daily liquidity risk monitoring by using market benchmarks set for indexed investment sub-portfolios grouped by instrument type and foreign currency. The applied benchmarks are market indices that are recognized and used worldwide to assess the performance and risks of investment portfolios. * The NBM’s investment policy allows active reserves management to ensure limited instrument and duration deviation of +/- 20% from the benchmark. Source: NBM Table A.18: Dynamics of the assets structure of the banking sector of the Republic of Moldova in 31.12.2016 - 31.12.2017 Indicator 31.12.2016 31.12.2017 31.12.2017/ 31.12.2016 MDL, million Share MDL, million Share MDL, million +/- (%) in total in total assets (%) assets (%) Cash and cash equivalents 21 184.3 38.7 34 867.4 43.8 6 683.2 23.7 Financial assets held-for-trading 0.0 0.0 0.0 0.0 0.0 - Financial assets designated as at fair value through profit or loss 0.0 0.0 0.0 0.0 0.0 0.0 Financial assets available for sale 594.4 0.8 1 861.3 2.3 1 266.9 213.1 Loans and receivables 35 558.6 48.8 34 508.4 43.4 -1 050.2 -3.0 Investments held to maturity 4 696.0 6.4 4 487.6 5.6 -208.4 -4.4 Tangible assets 2 343.5 3.2 2 271.7 2.9 -71.7 -3.1 Intangible assets 258.7 0.4 262.0 0.3 3.3 1.3

134 Claims on taxes 60.8 0.1 45.0 0.1 -15.9 -26.1 Other assets 612.3 0.8 762.5 1.0 150.2 24.5 Fixed assets and disposal groups classiﬁed as held for sale 521.9 0.7 475.9 0.6 -46.0 -8.8 TOTAL ASSETS 72 830.4 100.0 79 541.7 100.0 6 711.3 9.2 Source: NBM Table A.19: Dynamics of liabilities structure of the banking sector of the Republic of Moldova in 31.12.2016 - 31.12.2017 Name 31.12.2016 31.12.2017 Dynamics

MDL, million MDL, million MDL, million % Financial liabilities held for trading 0.0 0.0 0.0 0.0 Financial liabilities designated as at fair value through proﬁt or loss 0.0 0.0 0.0 0.0 Financial liabilities measured at amortized cost: 59 465.6 64 446.1 4 980.5 8.4 including clients deposits 54 972.2 59 987.7 5 015.4 9.1 Provisions 96.9 392.9 296.0 305.6 Debts on taxes 68.8 131.8 63.0 91.5 Other debts 589.0 971.8 382.8 65.0 TOTAL DEBTS 60 220.3 65 942.5 5 722.2 9.5 Source: NBM

Table A.20: Dinamics of placements abroad of banks of Republik of Moldova (MDL, milion) Name of country 31.12.2017 31.12.2067 Dynamics 31.12.2017/ compared to 31.12.2016 Amount Share Amount Share MDL (%) in total in total per sector, (%) per sector (%) Germany 3 299.7 33.7 919.2 11.8 2 380.5 259.0 United States of America 2 122.1 21.7 2 277.3 29.2 -155.2 -6.8 Belgium 1 619.8 16.6 1 596.1 20.5 23.7 1.5 France 1 198.6 12.3 1305.3 16.7 -106.7 -8.2 Austria 585.2 6.0 686.5 8.8 -101.3 -14.8 Italy 490.8 5.0 102.8 1.3 388.0 377.3 Republic of Ireland 153.9 1.6 403.0 5.2 -249.1 -61.8 Rusia 139.3 1.4 131.6 1.7 7.7 5.9 United Kingdom 125.9 1.3 146.9 1.9 -20.9 -14.3 Romania 26.3 0.3 35.3 0.5 -9.0 -25.5 Belarus 9.1 0.1 16.2 0.2 -7.0 -43.5 Kazakhstan 7.0 0.1 1.0 0.0 5.9 570.9 Georgia 3.4 0.0 0.0 0.0 3.4 x Ukraine 1.3 0.0 2.7 0.0 -1.4 -50.6 Latvia 0.1 0.0 0.1 0.0 0.0 0.0 Spain 0.1 0.0 173.8 2.2 -173.8 -100.0 Total in all countries: 9 782.8 100.0 7 797.9 100.0 1 984.9 25.5 Source: NBM

135 Table A.21: Evolution of payments settled through AIPS System Year Number (thousands of payments) Value (MDL, million) Average value per transaction Total Daily average Total Daily average (MDL, thousands) AIPS 2016 11 989.4 47.0 825 816.3 3 238.5 68.9 2017 12 877.1 50.7 1 229 411.7 4 840.2 95.5 Including: RTGS 2016 1 001.2 3.9 775 664.8 3 041.8 774.7 2017 1 119.9 4.4 1 172 771.1 4 617.2 1 047.2 DNSS 2016 10 988.2 43.1 50 151.5 196.7 4.6 2017 11 757.2 46.3 56 640.6 223.0 4.8 Source: NBM

Table A.22: Commemorative coins issued in 2017 Coin name Face value Metal Weight Diameter Edition (gr.) (mm) (ex.) Series: "Historical events" 100 years since establishing the Country Council MDL 100 Silver 999/1 000 31.1 37.0 750

Series: "Alley of Classics from the S, tefan cel Mare s, i Sfânt Public Garden in Chis, inau" Mihail Kogalniceanu˘ – 200 years since birth MDL 100 Gold 999.9/1 000 7.8 24.0 100 MDL 50 Silver 999/1 000 13.0 28.0 200 Alexei Mateevici – 100 years from passing to eternity MDL 100 Gold 999.9/1 000 7.8 24.0 100 MDL 50 Silver 999/1 000 13.0 28.0 200 Series: "Personalities" Eugen Doga – 80 years since birth MDL 50 Silver 999/1 000 13.0 28.0 500 Ion Vatamanu – 80 years since birth MDL 50 Silver 999/1 000 13.0 28.0 200 Series: "Famous women" Maria Dragan – 70 years since birth MDL 50 Silver 999/1 000 13.0 28.0 300 Series: "Red book of the Republic of Moldova"

Garoﬁt,a-triunghiulara˘ MDL 50 Silver 999/1 000 16.5 30.0 300 Series: "Science and innovation" Vladimir Andrunachievici – 100 years since birth MDL 50 Silver 999/1 000 13.0 28.0 200 Source: NBM

Table A.23: Financial arrangements with the IMF received by the National Bank of Moldova

Type of Amount approved Amount disbursed Share of disbursements Stock as of Stock as of facility until 31.12.2017 until 31.12.2017 in the total amount approved 31.12.2017 31.12.2017

(SDRs, million) (SDRs, million) (%) (SDRs, million) (USD, million) Extended Fund Facility (EFF) 374.70 257.52 68.73 119.91 170.36 Extended Credit Facility (ECF) 311.56 191.58 61.49 66.12 93.93

Source: NBM

Table A.24: Analysis of proﬁt available for distribution in conjunction with the main activities of the NBM 2017 2016 Financial result Financial result Difference Absolute Difference 2017/2016 MDL, thousandsMDL, thousands % MDL, thousands Activities managed by the bank Monetary instruments and activities related to relations with Government (448,418) (739,439) (39.36) 291,021 Foreign exchange reserves management 541,522 665,720 (18.66) (124,198) NBM relations with IMF (49,428) (41,276) 19.75 (8,152) National currency issuance (32,055) 16,720 (291.72) (48,775) Other operations, including operating costs (106,930) (163,874) (34.75) 56,944 Proﬁt available for distribution (95,309) (262,149) (63,64) (166,840) Source: NBM

136 Table A.25: Net result from the monetary policy implementation and activities related to relations with the Government of Republic of Moldova 2017 2016 Difference Absolute Difference 2017/2016 MDL, thousands MDL, thousands % MDL, thousands Overnight deposits (55,473) (57,904) (4.20) 2,432 Required Reserves (534,322) (797,853) (33.03) 263,531 Accounts and deposits of the Ministry of Finance (93,147) (48,494) 92.08 (44,653) Open market operations (519,828) (346,052) 50.22 (173,776) Leading activity and placement in state securities 754,353 510,864 47.66 243,488 Net result (448,418) (739,439) (39.36) 291,021 Source: NBM

Table A.26: Net result obtained from the management of foreign exchange reserves held by the NBM 2017 2016 Difference Absolute Difference 2017/2016 MDL, thousands MDL, thousands % MDL, thousands Securities in foreign currency 326,793 334,060 (2.18) (7,267) Deposits 188,975 105,154 79.71 83,821 Differences from foreign exchange rate 44,617 238,433 (81.29) (193,817) Commissions and fees (18,863) (11,927) 58.15 (6,936) Net Result 541,522 665,720 (18.66) (124,199) Source: NBM

Table A.27: Evolution of the ofﬁcial exchange rate 2017 2016 Average on At the end Average on At the end period of the year period of the year USD/MDL 18.4902 17.1002 19.9238 19.9814 EUR/MDL 20.8282 20.4099 22.0548 20.8895 GBP/MDL 23.7824 22.9715 27.0353 24.4903 XDR/MDL 25.6155 24.2942 27.7060 26.7768 XAU/MDL 746.9164 710.1013 798.7571 736.7237 Source: NBM

137 Table A.28: Share of significant balance sheet items (%) and the annual average rates related to the financial instruments (%) 2017 2016 Share Annual Share Annual % average % average interest rate, % interest rate, % ASSETS 100.00 - 100.00 - Foreign assets 76.88 1.14 75.57 1.21 State securities 22.89 6.62/1.40/5.30 24.17 16.52/1.40/5.30 Loans granted (short/medium term) 0.04 - 0.04 - Other assets 0.20 - 0.22 - LIABILITIES 100.00 - 100.00 - National currency in circulation 31.01 - 29.46 - Available funds of the Government, including: 12.95 - 8.86 - sight, MDL 6 .72 1.66 4.16 1.89 term, MDL 0.77 7.61 - - sight, FCC 5.46 - 4.70 - Available funds of the banks, including: 23.56 - 22.21 - LORO accounts, including: 17.17 - 15.35 - required reserves in MDL, paid - 5.19 - 10.33 required reserves in FCC, paid 5.35 0.48 5.32 0.27 overnight deposits 0.99 5.24 1.54 9.05 Certificates of the NBM (placed) 13.59 8.11 9.18 11.55 Loans received from IMF (EFF, ECF) 6.67 1.53 9.07 1.08 Other liabilities 6.32 - 7.28 - Capital and reserves 5.90 - 13.94 - Source: NBM

Table A.29: Capital and reserves 31 December, 2017 31 December, 2016 MDL, thousands MDL, thousands Authorized capital 902,970 902,970 General reserve fund 1,448,482 1,543,791 Total statutory capital 2,351,452 2,446,761 Reserve of unrealized gains from exchange rate differences from the revaluation of foreign exchange stocks 1,479,755 6,331,636 Reserve of unrealized gains from the revaluation of investment securities 164,542 193,431 Other reserves 8,967 13,713 Total capital and reserves 4,004,716 8,985,541 Source: NBM

138 Table A.30: List of decisions of the Supervisory Board and Executive Board of the National Bank of Moldova issued for publication in the Ofﬁcial Monitor of the Republic of Moldova in 2017

Decision of the Supervisory Board No. Decision Date of Decision of Published in the Ofﬁcial Monitor no. approval the SB of the Republic of Moldova

number/article date 1 15 30.11.2017 On putting into circulation as a means of payment of a ﬁve-lei banknote 429-433/2236 08.12.2017 with upgraded security features Decisions of the Executive Board No. Decision Date of Decision of Published in the Ofﬁcial Monitor no. approval the EB of the Republic of Moldova

1 20 26.01.2017 On the level of interest rates of the National Bank of Moldova and the 30-39/154 03.02.2017 minimum reserve requirements 2 21 26.01.2017 On the level of base rate applied by the National Bank of Moldova on 30-39/155 03.02.2017 long-term loans 3 35 08.02.2017 On the amendment and completion of the Instruction on the cash 50-59/311 17.02.2017 import/export by Moldovan banks 4 52 22.02.2017 On the level of interest rates applied by the National Bank of Moldova 67-71/486 03.03.2017 5 62 09.03.2017 On the approval of the Regulation on the provision of payment services 119-126/818 14.04.2017 through automated remote service systems and the repeal of a series of regulatory acts of the National Bank of Moldova 6 73 29.03.2017 On the level of interest rates of the National Bank of Moldova and the 109-118/751 07.04.2017 minimum reserve requirements 7 87 06.04.2017 On the approval of the Instruction on the compilation and submission 144-148/861 05.05.2017 by the banks in course of liquidation of reports and information on the liquidation 8 89 06.04.2017 On the amendment and completion of the Instruction on reporting of 134-143/840 28.04.2017 foreign exchange operations by licensed banks 9 102 27.04.2017 On the level of interest rates of the National Bank of Moldova and the 144-148/862 05.05.2017 minimum reserve requirements 10 103 27.04.2017 On the level of base rate applied by the National Bank of Moldova on 144-148/863 05.05.2017 long-term loans 11 118 04.05.2017 On the amendment and completion of the Regulation on the Automated 155-161/934 19.05.2017 Interbank Payment System, approved by the Decision of the Council of Administration of the National Bank of Moldova no. 53 of 2 March 2006 12 120 05.05.2017 On the reporting deadlines set for banks 149-154/874 12.05.2017 13 130 24.05.2017 On the level of interest rates of the National Bank of Moldova and the 171-180/1013 02.06.2017 minimum reserve requirements 14 134 24.05.2017 On the amendment and completion of a series of regulatory acts of 190-200/1162 16.06.2017 the National Bank of Moldova 15 135 24.05.2017 On the repeal of the Regulation on reporting by authorised banks of 171-180/1014 02.06.2017 foreign loans and authorisations for foreign currency export, reflected in the Balance of Payments 16 141 24.05.2017 On the amendment and completion of the Regulation on adequacy 190-200/1163 16.06.2017 of the risk-weightedcapital (new edition), approved by the Decision of the Council of Administration of the National Bank of Moldova no.269 of 17 October 2001. 17 142 02.06.2017 On systems falling under the provisions of the Law no. 183 of 22 July 181-189/1082 09.06.2017 2016 on settlement finality in payment and securities settlement systems 18 143 02.06.2017 On the amendment of the Regulation on the activity of foreign 190-200/1164 16.06.2017 exchange offices 19 146 07.06.2017 On the approval and repeal of a series of regulatory acts of 201-213/1183 23.06.2017 the National Bank of Moldova 20 147 07.06.2017 On the amendment and completion of the Instruction on external 201-213/1184 23.06.2017 commitments 21 162 28.06.2017 On the level of interest rates of the National Bank of Moldova and the 229-243/1243 07.07.2017 minimum reserve requirements 22 165 28.06.2017 On the amendment and completion of a series of regulatory acts of 244-251/1284 14.07.2017 the National Bank of Moldova Source: NBM

139 Table A.31: List of decisions of the Executive Board of the National Bank of Moldova issued for publication in the Ofﬁcial Monitor of the Republic of Moldova in 2017 (continuation)

No. Decision Date of Decision of Published in the Ofﬁcial Monitor no. approval the EB of the Republic of Moldova

number/article date 23 188 19.07.2017 On the amendment and completion of the Instruction on the compilation 289-300/1541 11.08.2017 and submission by banks of primary reports to identify and supervise the credit risk, approved by the Decision of the Executive Board of the National Bank of Moldova no.54 of 09 March2016 24 189 19.07.2017 On the amendment and completion of the Instruction on the reporting of 289-300/1542 11.08.2017 data on the use of payment instruments and services, approved by the Decision of the Council of Administration of the National Bank of Moldova no. 211 of 23 October 2014 25 193 26.07.2017 On the level of interest rates of the National Bank of Moldova and 277-288/1511 04.08.2017 the minimum reserve requirements 26 194 26.07.2017 On the level of base rate applied by the National Bank of Moldova 277-288/1512 04.08.2017 on long-term loans 27 195 26.07.2017 On the amendment and completion of the Instruction on the submission 289-300/1543 11.08.2017 by banks of electronic reports to the National Bank of Moldova, approved by the Decision of the Council of Administration of the National Bank of Moldova no. 132 of 17 July 2008 28 203 27.07.2017 On the approval of the Regulation on the requirements to bank 289-300/1544 11.08.2017 administrators 29 229 28.08.2017 On the level of interest rates of the National Bank of Moldova and 330-334/1731 08.09.2017 the minimum reserve requirements 30 253 27.09.2017 On the level of interest rates of the National Bank of Moldova and 356-359/1841 06.10.2017 the minimum reserve requirements 31 267 04.10.2017 On the amendment and completion of the Regulation on the licensing 371-382/1944 27.10.2017 of banks no. 23 / 09-01 32 269 06.10.2017 On the amendment and completion of the Instruction on the compilation 371-382/1945 27.10.2017 and submission by banks of reports for prudential purposes, approved by the Decision of the Council of Administration of the National Bank of Moldova no.279 of 1 December 2011 33 273 19.10.2017 On the amendment and completion of the Regulation on holding 389/1982 03.11.2017 of equity shares in the share capital of a bank 34 277 25.10.2017 On the level of interest rates of the National Bank of Moldova and 383-388/1980 03.11.2017 the minimum reserve requirements 35 278 25.10.2017 On the level of base rate applied by the National Bank of Moldova 383-388/1981 03.11.2017 on long-term loans 36 305 05.12.2017 On the level of interest rates of the National Bank of Moldova and 429-433/2237 08.12.2017 the minimum reserve requirements 37 307 07.12.2017 On the amendment and completion of the chart of accounts for 441-450/2300 22.12.2017 bookkeeping for licensed banks in the Republic of Moldova 38 328 14.12.2017 On the amendment and completion of the Regulation on the 451-463/2357 29.12.2017 reporting of the balance of payments data 39 341 21.12.2017 On the amendment and completion of the Instruction on the compilation 1-6/29 05.01.2018 of Monetary Statistics Reports by licensed banks 40 342 21.12.2017 On the amendment and completion of a series of regulatory acts of 1-6/30 05.01.2018 the National Bank of Moldova 41 354 27.12.2017 On the level of interest rates of the National Bank of Moldova and 1-6/31 05.01.2018 the minimum reserve requirements 42 355 27.12.2017 On the approval of the Regulation on the required reserves 18-26/89 19.01.2018 43 366 29.12.2017 On the reporting deadlines set for banks 1-6/32 05.01.2018 Source: NBM

140 Table A.32: Progresses achieved in the implementation of the NBM’s major projects during 2017

No. Project Reference Objectives Started on Achievements Further actions planned for strategic goal 2018 1 Implementation 3. Development To streamline the Q III, 2015 In 2017, the public bidding and Completion of the application’s of the IT solution of the NBM’s processes of procurement procedure was implementation / development to streamline the supervisory authorisation and carried out, following which the phase. User trainings and start licensing, function storage of regulatory NBM selected the supplier of of the application’s testing authorisation acts. To strengthen the IT solution for streamlining phase. Preparation for system and notification the NBM’s capacity in the licensing, authorisation and deployment and, later, for a processes the field of increasing notification processes. By the pilot operation of the system. the level of end of the fourth quarter of Final acceptance and transparency in the 2017, the analysis and design completion of the project. ownership structure phases were finalised, during of licensed banks which the following documents through an ongoing were developed and submitted: control programme. the technical solution document; the document on the configuration / settings of the application; and the document on the conceptual architecture of the solution. In addition, the application’s implementation / development phase was launched.

141

No. Project Reference Objectives Started on Achievements Further actions planned for strategic goal 2018 2 Implementation 3. Development To streamline the Q III, 2014 In the second quarter of 2017, To initiate and conduct the of the IT of the NBM’s monitoring process; the NBM’s Executive Board procurement and solution for supervisory to strengthen the decided to merge the project on implementation of the IT streamlining the function NBM’s capacity in the the implementation of the IT solution. shareholder field of increasing the solution for streamlining the transparency level of transparency shareholder transparency monitoring and in the ownership monitoring process with the remote analysis structure of licensed project on the remote analysis in the field of the banks by exercising in the field of the prevention prevention and an ongoing control; to and combating of money combating of ensure an automated laundering and terrorist money monitoring process of financing. Following the laundering and the shareholder merger, a new set of tender terrorist transparency. To documents was developed. In financing ensure obtaining of this context, the NBM organised information on the presentation sessions with the exposure of the participation of the IT solution banking sector and / suppliers, recognised on the or of each bank to the local market. The NBM risk of money identified the optimal laundering and procurement procedure, terrorist financing. To intending to initiate the ensure a wider procurement procedure. application of the risk-based banking supervision, taking into account the current channels and 142

No. Project Reference Objectives Started on Achievements Further actions planned for strategic goal 2018 methods of money laundering and terrorist financing.

3 Implementation 3. Strengthening Implementation of June 2013 The NBM approved the Law on Successfully completed of Basel III the NBM’s the provisions of the the Banking Activity, based on Agreement supervisory Basel III Agreement to which the regulatory and function provide a more supervisory standards in the flexible framework of banking system are being prudential revised and updated. In this regulations that context, the NBM prepared would ensure setting about 20 draft documents of of capital adequacy secondary regulations to ensure requirements that are the transposition of the appropriate to the provisions of the European risk profile of regulatory framework on banking institutions. banks. The NBM conducted an Enhancing the impact study of the stability of the implementation of Basel III on banking system and the liquidity level of licensed fostering banks. transparency and order in the market.

4 Setting up of the 5. Strengthening Establishment of the July 2016 During 2017, the NBM defined To s ign contract with the Central of the NBM’s Central Securities functional requirements for the award-winning provider. Securities financial Depository in Central Securities Depository (CSD) and developed technical To elaborate the CSD's rules / Depository stability Moldova, which will documentation on the CSD's regulations / policies. 143

No. Project Reference Objectives Started on Achievements Further actions planned for strategic goal 2018 function deal in corporate hardware and software To set up and ensure the state securities, solutions. Based on the above registration of the CSD. government documents, the NBM initiated a public procurement procedure To appoint the CSD's securities and money for the IT solution and awarded management bodies and to hire market instruments the contract. staff. issued by the NBM, During the same period, the and provide the NBM amended a series of To start the implementation of following basic legislative acts to ensure their the CSD’s IT solution. securities services: compliance with the Law no. 234 initial registration of of 3 October 2016 on the CSD. Besides, the NBM developed securities; opening documents on the and administration of establishment of the CSD and securities accounts; initiated actions in the logistic managing the and internal organisation fields. securities settlement system. 5 Setting up a 8. Increase the To ensure a September Following a public procurement Successfully completed Remote Back-up efficiency of reasonable level of 2016 procedure conducted in 2017, Centre NBM's protection of the the NBM selected the supplier of the IT solution for setting up operational NBM’s resources a Remote Back-up Centre. activity (data, Subsequently, the IT solution applications, IT was successfully delivered, infrastructures, tested, deployed and passed equipment) and to final acceptance. strengthen the capacities required to ensure the non-stop operation of the 144

No. Project Reference Objectives Started on Achievements Further actions planned for strategic goal 2018 NBM’s IT system in emergency situations.

6. Transform NBM 8. To improve Ensuring the March 2012 During 2017, the tender To complete the preparation of the efficiency of assessment and documents were updated tender documents, to announce the NBM's revision of the NBM’s considering the implementation international public tender for the selection and operational business processes in parallel of the project on implementation of the bank activity related to banking setting up of the Central operations system and cash operations and the Securities Depository. operations management management of Additionally, during the system. financial, material reporting year, the NBM To initiate a public tender and human resources, continued the implementation procedure for the procurement as well as ensuring of measures set out in the of the Human Resources the modernisation of Action Plan in view of achieving Management Information the NBM’s banking the optimisation of business System (HRMIS). information system, processes as well as of the so as to achieve the medium- and long-term objective of performance objectives. increasing the operational efficiency of the NBM. The goal pursued under the Transform NBM project focuses on a multidimensional transformation of the organisation with a view to ensuring its

145

No. Project Reference Objectives Started on Achievements Further actions planned for strategic goal 2018 maximum alignment with the NBM’s strategic objectives. This approach is based on the Enterprise Architecture model, which once implemented ensures the correlation between the business processes, organisational structure, personnel, applicative systems, information, technologies etc. to the organisation's objectives. 7 Implementation 8. To increase To review and update December Based on the decision taken in To initiate the procurement of the cash the efficiency of the NBM’s business 2015 2016 to merge the procurement procedure; to select the operations the NBM's processes of the cash procedures of the system for supplier; to initiate the management operational operations the cash operations implementation of the cash system activity management and the management and the bank operations management bank operations operations system, as separate system. systems, in order to lots, the NBM modified its increase efficiency of tender documentation and the NBM's operational updated eligibility criteria as 146

No. Project Reference Objectives Started on Achievements Further actions planned for strategic goal 2018 activity. well as its functional, non- functional and system implementation requirements. 8 Implementation 9. To optimise To implement a new Q I, 2017 The NBM conducted a public Analysis and elaboration of a of an Integrated the management payroll system based tendering procedure, following career development system. Human of human on the evaluation of which the contract was signed Analysis and elaboration of the job positions. with the award-winning service Resources resources managerial skills development To ensure internal supplier. In the third quarter of system. Management equity of job positions 2017, the implementation of the Defining the talent System and salaries. new integrated human management program. To increase external resources management system Final acceptance and competitiveness of was launched. The first two completion of the project. the NBM in the labour stages of the project were market. completed. The first stage To ensure a high involved redefining functions, qualification level of the evaluation of job position, the staff. defining job families; analytical To improve the evaluation of all job positions organisational climate within the NBM; training the and increase the NBM staff and transferring the employee loyalty. know-how on the methodology of job position evaluation; the elaboration of the matrix of NBM’s job positions; determining the number of job families. During the second stage, a draft document of the new salary policy for the NBM’s personnel was elaborated.

147