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Rating Action:

Moody's assigns B3 ratings to Moldova

12 Aug 2010

Frankfurt am Main, August 12, 2010 -- Moody's Investors Service has assigned a B3 long-term issuer rating and a Not-Prime short-term issuer rating to the local and foreign-currency debt of the Republic of Moldova. The rating outlook is stable.

Moody's decision to assign the B3 rating to the Moldovan government is based on:

(1) the narrowness of the country's economic base, with substantial vulnerabilities due to the role of remittances and the lack of economic and export diversification;

(2) weaknesses in fiscal transparency and accountability which the government -- together with the IMF -- has started to address, although some political uncertainties about the continuity of the process remain; and

(3) relatively high economic vulnerability to external capital flows and exchange rate fluctuations, due in part to the high level of dollarization within the country's banking system.

RATING RATIONALE

"The B3 rating reflects our assessment that Moldova's economic resiliency remains very low, despite having posted robust GDP growth before the global crisis," says Alexander Kockerbeck, a Vice President-Senior Credit Officer in Moody's Sovereign Risk Group. "Going forward, growth is expected to be more subdued as workers' remittances and foreign direct investment have downshifted. On the other hand, lower capital inflows should reduce future macroeconomic volatility, which often follows periods of rapid credit growth."

Remittances from Moldovans working abroad can account for upwards of 30% of GDP in any year and are subject to sharp fluctuations. "The lack of diversification of the economic base and of sources of foreign exchange earnings leaves the economy vulnerable to domestic and external shocks," says Mr. Kockerbeck.

Institutional capacity is developing, although from a very low level. "The government has committed to significantly improve fiscal transparency, accountability and economic policy implementation," notes Mr. Kockerbeck. Moody's says that serious efforts are also being made by the new four-party coalition government to improve the country's investment climate and to push the economy's European integration. However, political uncertainty surrounding upcoming general elections may jeopardize continuity in the economic, institutional and fiscal reform process.

Moldova has made good progress in recent years in improving key general government debt indicators, which were on a clear downward trend until the outbreak of the global crisis. However the country's external debt has continued to increase since 2005, reaching 107% of current account receipts at the end of 2009. Moreover, the relatively high (43%) dollarization of deposits in the domestic banking system and low external liquidity would exacerbate the economy's vulnerabilities in response to external shocks such as currency depreciation.

In conjunction with the sovereign debt ratings, Moody's has also assigned a foreign currency bond ceiling of B2 and a foreign currency bank deposit ceiling of Caa1 to Moldova. The foreign currency bond ceiling reflects the risk the government would impose a moratorium on foreign currency transfer payments by non-governmental entities; the foreign currency bank deposit ceiling reflects the risk the government would impose a freeze on foreign currency bank deposits to conserve scarce foreign currency resources during a crisis.

Additionally, Moldova was assigned long-term local currency bond and bank deposit ceilings at Ba2. These ceilings reflect the broader financial, political and legal country risks faced by locally-funded or -domiciled credit transactions. According to Moody's sovereign rating methodology, a government's own local currency rating is not a constraint on the local currency ratings of other entities domiciled in that country. The long-term local currency bond ceilings cap the ratings of non-governmental entities domiciled in Moldova; the long-term local currency deposit ceiling reflects the ability of the central bank to provide liquidity to the banking system and therefore is close to the long-term local currency bond ceiling.

OUTLOOK FOR THE RATINGS

The outlook for Moldova's government ratings and country ceilings is stable. Moody's expects that the economy will recover in 2010 and 2011 from a sharp setback during the global crisis. Moldovan authorities -- with the help of the IMF -- have ambitious plans to put the economic, institutional and fiscal framework in a solid shape. However, substantial improvements in economic resiliency, government financial strength, and the economy's susceptibility to event risk are not likely in the near term, since the measures and reforms necessary for doing so will take time to be implemented and to yield the desired results. On top of this, for the next 6 to 12 months, uncertainties remain concerning the rhythm and sustainability of the reform process, given political risks.

WHAT COULD CHANGE THE RATING

Diversification of the economy and particularly sources of foreign exchange earnings to reduce the dominance of remittances would help boost economic strength and lower the economy's susceptibility to domestic and external shocks, and would be ratings positive. In addition, upward rating pressures would derive from further progress on implementation of structural reforms to streamline the public sector and improve the business environment, such as through measures to speed business licensing and registration, stronger bankruptcy procedures and legislation to increase competition.

Moldova's rating could come under downward pressure should any shock, whether related to adverse weather effects on the important agricultural sector, a structural decline in workers' remittance inflows, and/or a lack of privatization receipts or multilateral funding, create fresh difficulties for its debt servicing capacity.

PREVIOUS RATING ACTIONS AND METHODOLOGY

The last rating action on the government of Moldova was implemented in October 2009, when Moody's withdrew all the ratings.

The principal methodology that Moody's uses in rating the Republic of Moldova is "Moody's Sovereign Bond Ratings Methodology," published in September 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

New York
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Frankfurt am Main
Alexander Kockerbeck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany

Moody's assigns B3 ratings to Moldova
No Related Data.
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