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Rating Action:

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

31 Jul 2020

London, 31 July 2020 -- 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) Moldova's low shock absorption capacity due to limited economic resilience reflecting low wealth levels and a narrow economic base as well as low institutional strength; Moody's considers institutional strength a governance factor under its ESG framework;

(2) Fiscal strength supported by a moderate debt level and high debt affordability despite the anticipated rise in debt-to-GDP induced by the coronavirus shock;

(3) Susceptibility to event risk remains driven by political risk, while external support helps to contain banking sector, liquidity and external vulnerability risks.

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. The short-term foreign currency bond ceiling and short-term foreign currency deposit ceiling remain at Not Prime (NP).

RATINGS RATIONALE

FIRST DRIVER: LOW SHOCK ABSORPTION CAPACITY DUE TO LIMITED ECONOMIC RESILIENCE

The first driver for the rating affirmation at B3 is Moldova's limited shock absorption capacity, constrained by low economic resilience and institutional strength, which makes the sovereign vulnerable to macroeconomic shocks. Moldova's low economic resilience reflects a low GDP per-capita (estimated at $7703 (PPP) in 2019) compared with European B-rated peers, volatile growth dynamics and a narrow economic base. Moreover, a high reliance on the agricultural sector exposes the economy to adverse climatic conditions as exemplified by the recent drought.

Moldova is also highly dependent on remittances -- a key driver of private consumption -- that, albeit recovering, have been significantly affected by the coronavirus outbreak. In the medium term, structural challenges, including labor shortage due to emigration, also constrain economic strength. Moody's projects real GDP to contract by 4.5% in 2020, compared with 3.6% growth in 2019. Growth is expected to recover in 2021 to around 4% assuming that the spread of virus will be contained.

Limited institutional strength also weighs on Moldova's shock absorption capacity. Despite recent improvements, institutional strength, as measured by the Worldwide Governance Indicators, remains weak, particularly as concerns control of corruption. The completion of the IMF programme in March 2020 reflects the country's commitment to reform implementation despite the volatile political conditions and led to significant progress on banking sector reforms that helped to restore macroeconomic and financial stability.

The recent staff-level agreement between the authorities and the IMF on a new funded three-year programme with a proposed financing of $558 million that focuses on supporting economic recovery after the coronavirus shock and advancing institutional reforms signals the willingness of the authorities to sustain the reform momentum. The agreement will be considered by the IMF Board in September, subject to the authorities' implementation of a number of prior actions focusing on the central bank independence, financial sector oversight and fiscal transparency. The envisaged new programme will preserve macroeconomic stability and progress achieved under the previous programme, and ensure that further structural reforms are implemented. Reforms will be particularly focused on governance and institutions. While policy credibility has been strengthened in the context of the successful completion of the IMF programme earlier this year, governance challenges and low policy predictability persist against the backdrop of Moldova's volatile political landscape, and continue to be a key risk to the continuation of structural reforms.

SECOND DRIVER: FAVORABLE METRICS SUPPORT FISCAL STRENGTH DESPITE DETERIORATION INDUCED BY THE PANDEMIC

The second driver of the affirmation of the B3 rating relates to Moldova's fiscal metrics, which -- despite the expected deterioration in the context of the coronavirus crisis -- remain relatively favorable compared with rating peers.

Moldova's public debt burden stood at 27.4% of GDP at end-2019, well below the B-rated median of 53.6% of GDP. As a result of a large fiscal deficit and the economic contraction foreseen this year, Moody's expects public debt to rise significantly to about 36% of GDP by the end of 2020. That said, the debt trajectory remains exposed to the risk of weaker than expected growth and exchange rate depreciation given the large share of foreign currency denominated debt. Prior to the coronavirus outbreak, Moldova had a track record of small fiscal deficits (averaging 1.4% of GDP over the past five years) which in part reflected the under-execution of capital expenditure. With the pandemic, Moody's expects the fiscal deficit to temporarily increase, exceeding 8% of GDP in 2020 from 1.4% in 2019, as a result of the coronavirus' dampening impact on revenues as well as newly introduced expenditure measures to mitigate the impact of the pandemic.

Moldova's debt affordability metrics are strong and compare favorably with rating peers. The government's interest payment burden, with interest payments absorbing around 3% of revenue in 2019, is very low and compares favorably to the B-rated median (8% of GDP in 2019), reflecting a high share of concessional debt with low funding costs. Moody's expects debt affordability to also remain strong this year and next, assuming most of the additional financing will remain on concessional terms.

THIRD DRIVER: SUSCEPTIBILITY TO EVENT RISK IS DRIVEN BY POLITICAL RISK WHILE EXTERNAL SUPPORT CONTAINS BANKING SECTOR, LIQUIDITY AND EXTERNAL VULNERABILITY RISKS

The third key factor underpinning the affirmation of Moldova's B3 rating is the country's susceptibility to event risk, which is predominantly driven by political risk. Moody's assessment of Moldova's political risk reflects both the volatile domestic political environment and the geopolitical risk related to the unresolved Transnistria conflict.

After a period of relative stability, the domestic political volatility has increased since the elections in February 2019. The coalition that was formed after several months of post-election uncertainty -- comprising the Party of Socialists of the Republic of Moldova (PSRM) and the ACUM electoral bloc -- collapsed already in November 2019. A PSRM-led government was formed shortly thereafter, followed by the formation of a coalition with the Democratic Party (PDM). That coalition lost recently its parliamentary majority.

The presidential election is expected for November and the recent ruling of the country's constitutional court prevents the parliament from being dissolved within six months before the expiration of the president's mandate, making parliamentary elections before the end of the year unlikely. An increase in volatility of the domestic political environment in the context of the upcoming presidential elections would carry liquidity and external risks, as there is a risk that it could result in delay or suspension of international financial assistance.

The banking sector risk remains contained given the substantial progress made in addressing the vulnerabilities of the financial sector under the IMF programme. The continued reform momentum is expected to contribute to preserve financial stability. Moody's expects government liquidity risk and external vulnerability risk to remain contained as bilateral and multilateral financing are expected to cover a significant share of the increasing fiscal and external financing needs in 2020.

RATIONALE FOR STABLE OUTLOOK

The stable outlook balances Moldova's reform progress made under the recently concluded IMF programme against structural economic challenges that constrain the country's credit profile and limit shock-absorption capacity, including with respect to the coronavirus pandemic, and a volatile political landscape that could derail the reform momentum or result in a less prudent fiscal policy, limiting the financing options. The stable outlook also reflects Moody's expectations that the support from the international institutions will bolster Moldova's external and liquidity profiles.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Moody's takes into account of the impact of environmental (E), social (S) and governance (G) factors when assessing sovereign issuers' economic, institutional and fiscal strength and their susceptibility to event risk. In the case of Moldova, the materiality of ESG to the credit profile is as follows.

Environmental considerations are relevant to Moldova's credit profile as the significant reliance on the agricultural sector makes the country vulnerable to climate change. Rural livelihoods are dependent on agriculture, which accounted for more than 10% of the gross value added and employed about 20% of the population. In particular, droughts can create economic, fiscal and social costs for the sovereign.

Social considerations are material to Moldova's rating, mainly related to unfavourable demographics. Since Moldova gained independence in 1991, around a third of the country's population has emigrated, mainly because of a lack of job opportunities and relatively higher poverty levels. According to UN forecasts, the contraction in Moldova's working-age population is likely to accelerate. Although the large amount of remittances has improved recipients' welfare, the declining population will be a major constraint on the economy as it weighs on labour input. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

Governance considerations are material to Moldova's credit profile through relatively weak rule of law and high levels of corruption. The country's scores are very low on institutional factors, as measured by the WGIs, reflecting moderate government and policy effectiveness.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATING - UP

Evidence that progress on structural reforms continues, resulting in a strengthening of the country's governance and institutional profile, would exert upward pressure on the rating. Improving longstanding structural economic impediments that weigh on economic resilience, including the weak business climate and labour shortage, would also support 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 programme and/or in a less prudent fiscal stance that could lead to a lasting erosion of the government's fiscal metrics. The emergence of liquidity pressures due to larger than projected financing needs or an increase of external vulnerability risk due to a larger than expected deterioration of the balance of payments position could also result in downward rating pressure. Although not likely, Moldova's rating could also be downgraded if conditions in the Transnistria region were to deteriorate significantly.

GDP per capita (PPP basis, US$): 7,703 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.6% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 7.5% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -1.4% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -9.7% (2019 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: b3

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

On 28 July 2020, a rating committee was called to discuss the rating of the Moldova, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. 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 these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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/ Sub Sovereign
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.
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