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Rating Action:

Moody's affirms Moldova's B3 rating; outlook stable

02 Nov 2018

London, 02 November 2018 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Moldova's B3 long-term foreign and local currency issuer ratings. The outlook remains stable.

The decision to affirm the ratings and maintain the stable outlook balances the following key rating factors:

(1) Strong economic growth balanced by low wealth levels and structural economic challenges;

(2) A moderate government debt burden and strong debt affordability metrics;

(3) Improving institutional capacity amid governance challenges and low policy predictability;

(4) Moderate political risk drives exposure to event risk, while banking sector risk has diminished.

Moldova's long-term foreign currency bond and deposit ceilings remain unchanged at B2 and Caa1, respectively. The local currency bond and deposit ceilings remain unchanged at B2.

RATINGS RATIONALE

AFFIRMATION OF B3 LONG-TERM ISSUER RATINGS

The decision to affirm the B3 ratings balances Moldova's credit challenges, which include low GDP per capita and a narrow economic and export base, and limited institutional strength, against a moderate debt burden and high debt affordability. It also takes into account the significant progress achieved under the IMF program to address the vulnerabilities in the banking sector.

FIRST DRIVER: STRONG ECONOMIC GROWTH BALANCED BY STRUCTURAL ECONOMIC CHALLENGES

The first driver for the rating affirmation is Moldova's low economic strength, which balances improving long-term growth prospects with relatively low per capita income, volatile growth dynamics and structural challenges, including its limited diversification. The relatively high reliance on the agricultural sector and remittances exposes the economy to adverse climatic conditions and external shocks. Structural impediments, such as labor shortage due to persistent emigration, also weigh on the country's economic strength.

The economy experienced strong growth in the first half of 2018, with real GDP expanding by 4.5% year-on-year compared with 2.9% in the same period last year. Growth has been broad-based, driven by robust private consumption supported by remittances and increasing investment. Export growth has been robust, reflecting a favorable external environment and increasing trade integration with EU, although the contribution of net exports remained negative due to stronger import growth. The growth momentum is expected to continue in 2019, albeit at a slower pace. Moody's expects real GDP growth to remain relatively high at close to 4% in 2019-20, supported by continued robust private consumption.

That said, Moldova's economic profile remains constrained by the very small economic size, and a GDP per capita of less than $7,000 in PPP terms in 2017, which is well below the European B-rated peers and below the median for B3-rated sovereigns. Growth has been robust but also more volatile than for peers, reflecting the country's susceptibility to environmental events and external developments.

SECOND DRIVER: MODERATE GOVERNMENT DEBT BURDEN AND STRONG DEBT AFFORDABILITY

The second factor considered in the affirmation of the rating at B3 is Moldova's moderate fiscal strength, balancing favorable debt burden and debt affordability metrics with a large share of foreign currency-denominated debt. Moldova's debt burden is relatively low with a government debt-to-GDP ratio at 31.5% of GDP at end-2017, well below the B-rated median of 56% of GDP. Moody's projects the debt-to-GDP ratio to increase only gradually, remaining below 35% of GDP until 2020, although the debt dynamics remain exposed to the risk of weaker than expected growth and exchange rate depreciation. Nevertheless, after appreciating significantly in 2017 on the back of stronger remittances and capital inflows, the exchange rate has remained broadly stable in 2018. Debt affordability metrics are strong and compare favorably with the B-rated peers. The government's interest payment burden, with interest payments absorbing about less than 4% of revenue in 2017, is very low and compares very favorably to the B-rated median (9.3% of GDP in 2017), reflecting a high share of concessional debt.

Moldova's fiscal performance has been characterized by small budget deficits, though in part reflecting under-execution of capital expenditure. However, revenue performance has improved in 2017 and 2018 due to robust economic growth but also improvements in tax administration. Fiscal policy is expected to remain prudent, supported by the new fiscal rule that came into effect this year, although the recently introduced capital amnesty could potentially undermine efforts in fighting corruption and reduce tax compliance.

THIRD DRIVER: IMPROVING INSTITUTIONAL CAPACITY AMID GOVERNANCE CHALLENGES AND LOW POLICY PREDICTABILITY

The authorities have made notable progress under the IMF program, in particular in addressing the vulnerabilities of the banking sector by strengthening the regulation and supervisory capacity. The measures include a new banking law, a new bank recovery and resolution law and anti-money laundering law. At the same time, the governance structure of the central bank has improved and its legal powers and operational capacity have been expanded.

Despite these improvements, institutional strength, as measured by the Worldwide Governance Indicators, remains weak, particularly as concerns control of corruption. Despite progress in implementing reforms agreed with international institutions over the past two years, implementation risks have increased ahead of the upcoming parliamentary election, while policy-making remains unpredictable, as highlighted by the recent adoption of a package of credit negative fiscal measures in late July 2018, while limited progress as concerns the judicial system reforms led to the cancellation of the related EU budget support program last year.

FOURTH DRIVER: MODERATE POLITICAL RISK DRIVES EXPOSURE TO EVENT RISK, BANKING SECTOR RISK HAS DIMINISHED

The fourth driver is the moderate political risk score, driven by a somewhat volatile domestic political environment and, to a lesser extent, by geopolitical risk related to the unresolved conflict in the separatist region of Transnistria. Despite the recent stability, the domestic political environment remains fragile, particularly ahead of the general elections scheduled in February 2019. Weaknesses in the domestic political environment also entail fiscal risks, as exemplified by the recent suspension of the EU Macro-Financial Assistance after the invalidation of the capital's mayoral elections. That said, the risks of renewed tensions in Transnistria have diminished somewhat over recent years and more recently, the dialogue has become more constructive, with steps to address some long-standing issues such as the Protocol decision on vehicles registration.

The banking system risk has diminished and substantial progress has been made in addressing the vulnerabilities of the financial sector under the aegis of the IMF program, in particular with reference to the transparency of the bank shareholders - with the transfer of two systemic banks to fit and proper shareholders completed this year - the assessment of the related party lending and the improvement of corporate governance. Nevertheless, the continuation of the reform momentum is key to preserving financial stability over the longer term.

RATIONALE FOR STABLE OUTLOOK

The stable outlook balances Moldova's reform progress, in particular in the financial sector, against a somewhat volatile political landscape and policy unpredictability ahead of the elections in early 2019 that could hamper the reform momentum or result in a less prudent fiscal policy, as well as structural economic challenges, including a narrow economic and export base, that continue to constrain the country's credit profile.

WHAT COULD CHANGE THE RATING - UP

Upward pressure on the rating could arise if the progress of financial sector reforms continues, along with a strengthening of the country's governance profile. Addressing long-standing structural economic impediments, including for example the weak business climate and labour shortage, is also key to the emergence of upward rating pressure.

WHAT COULD CHANGE THE RATING - DOWN

Moldova's government rating could be downgraded if there were an increase in political risk that resulted in a slowdown or reversal of the reform progress achieved under the IMF program and/or in a less prudent fiscal stance that could erode the government's relatively favorable fiscal metrics. Although not likely, Moldova's rating could also be downgraded if conditions in the Transnistria region were to deteriorate rapidly.

GDP per capita (PPP basis, US$): 6,687 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.5% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 7.3% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -0.8% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.9% (2017 Actual) (also known as External Balance)

External debt/GDP: 72.9% (2017 Actual)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 30 October 2018, a rating committee was called to discuss the rating of the Government of Moldova. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have increased. The issuer's institutional strength/framework have improved but remain weak. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in this rating was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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