New York, January 13, 2017 -- Moody's Investors Service ("Moody's") has today affirmed Moldova's
B3 government issuer ratings and changed the outlook to stable from negative.
RATINGS RATIONALE
The key drivers for changing the rating outlook to stable are the following:
(1) Reduced government funding risks as a result of the new IMF credit
facility that began in November 2016, which unleashed additional
multilateral and bilateral financing.
(2) The adoption of new banking regulatory framework intended to enhance
the governance of the banking system, which reduces the likelihood
that additional contingent liabilities from the sector would need to be
assumed by the government or central bank.
The rationale for affirming the B3 government rating reflects the calmer
political environment after multiple changes of government leadership
in 2014-15 when a huge bank fraud was being unearthed. Government
debt has risen sharply due to the costs of covering the central bank's
recapitalization of the banking system but debt remains manageable,
with debt affordability still low because of the high share of concessional
debt in the government's debt mix. That said, Moldova's
rating remains significantly constrained by the country's high levels
of poverty, a small economic base, structural impediments
to growth and very weak institutional strength. Also reflected
in the B3 rating is political risk related to the separatist Transnistria
conflict.
Moody's made no changes to Moldova's country ceilings.
The country ceilings for long-term foreign- and local-currency
debt as well as long-term local-currency deposits remain
at B2 whereas the long-term foreign-currency bank deposit
ceiling stays at Caa1.
RATIONALE FOR CHANGING THE RATING OUTLOOK TO STABLE FROM NEGATIVE
FIRST DRIVER: REDUCTION IN GOVERNMENT FUNDING RISKS
The first driver for changing the outlook to stable is the reduction in
government funding risks. The new IMF credit facilities (an Extended
Credit Facility and an Extended Fund Facility (ECF/EFF)) approved in November
unleashed official lending that had been withheld for more than a year.
When Moldova was cut off from official external lending for about 17 months
from mid-2015 due to concerns raised by the banking crisis,
the government was forced to finance its budget deficits exclusively from
the country's small domestic market (including the new debt raised
to reimburse the central bank for the bank bailout), which is more
expensive and generally carries shorter maturities. The government
along with the private sector also amassed external payment arrears to
suppliers.
The resumption of the IMF programme and subsequently, World Bank
and EU financing, allowed the government to start paying down its
domestic debt and put a schedule in place for clearing the arrears.
As soon as external financing resumed, the government started repaying
its domestic debt in net terms. So long as the government remains
on track with IMF programme criteria, inflows of foreign grants
will also resume, constituting an important source of deficit financing,
along with loans at concessional rates. However, the IMF
criteria are ambitious, and the operating environment remains difficult,
such that we do not rule out intermittent delays in programme disbursements.
SECOND DRIVER: ADOPTION OF NEW BANK REGULATORY FRAMEWORK ALONG WITH
OTHER REFORMS
The second driver for stabilizing the outlook relates to the adoption
of key structural reforms both in connection with the IMF program and
in technical consultation with the IMF and other multilateral lenders
and donors. The ECF/EFF approval required the Moldovan authorities
to implement several prior actions, many of which concerned long-delayed
banking sector regulatory reforms.
The central bank's operational independence has been enhanced,
its management has been replaced by independent professionals and the
rules governing the surveillance and supervisory capacity of other regulatory
institutions have been strengthened. These measures will increase
transparency regarding who owns stakes in banks and strengthen related-party
lending restrictions and anti-money laundering initiatives.
These measures should reduce the likelihood that additional contingent
liabilities from the sector would need to be assumed by the government
or central bank.
That said, effective implementation of the reforms will likely be
dependent on continued technical support from the IMF. The banking
system remains extremely fragile: two of the three big banks currently
operating are under central bank supervision and the third is under its
administration. The new regulations are untested and rely heavily
on legal enforcement in a country where judicial corruption is rampant,
therefore financial stability is vulnerable to significant implementation
risks. In particular, the identification and unwinding of
related-party lending remain important challenges to the success
of the revamped framework, and the time that such processes take
prior to the new resolution system can become operational will likely
exceed expectations.
Another new structural reform relates to the old age pension system.
Changes introduced as of 1 January 2017 are likely to improve fiscal sustainability
and potentially raise the underlying growth rate. The reform aims
to lengthen working lives by gradually raising the retirement age from
60 for men and 57 for women to 65 and 62, respectively, over
the next ten years in response to the ageing and shrinking of the working
age population. Pension payments are being unified across professions.
On average, taking into account the incentives put in place to stay
longer in the workforce, the payments will be higher than before
the reform whereas indexation of benefits will be more systematic.
As a consequence, these changes have been readily accepted by the
population.
Similarly, the pending rollout of a comprehensive public administration
reform is meant to increase its productivity and potentially curb the
influence of vested interests. In this case, however,
the effort is to streamline and strengthen government functions,
which will be unpopular. The number of government ministries will
be cut from 16 to nine, with some being eliminated and others combined.
Following staff reductions, the plan is to improve the compensation
of those civil servants that stay on in order to reduce corruption.
Already the wages in tax administration functions have been doubled as
part of the effort. Revenue mobilization is also part of the strategy,
such as by broadening and deepening the tax base and increasing energy
tariffs to cost recovery levels.
RATIONALE FOR AFFIRMING MOLDOVA'S B3 GOVERNMENT RATING
All in all, the reforms undertaken in recent months and those in
planning stages represent important progress in rationalizing Moldova's
economy and avoidance of new financial crises. An Association Agreement
and Deep and Comprehensive Free Trade Agreement (AA/DCFTA) with the EU
became effective in July 2016, which reflects the growing importance
of the EU as a trading partner as well as source of funds.
Still, the government's track record of consistent reform
implementation is poor due to weak institutions and high levels of corruption.
The economy is also subject to significant structural impediments to growth
-- including continued mass emigration and a still-fragile
banking system -- as well as the volatility engendered by the economy's
heavy reliance on agriculture. Very low wealth levels and the country's
small and narrow economic base will continue to constrain creditworthiness.
For these reasons, the government's rating is well-positioned
at B3.
FACTORS THAT COULD LEAD TO UPWARD RATING PRESSURE
Upward pressure on the rating could arise if the contingent liability
risks posed by the country's weak banking system were to diminish
further and meaningfully or the new resolution framework proves to be
sufficiently robust to sharply reduce the risk of additional liabilities
crystallizing on the government's balance sheet. In either
case, timely compliance with the current IMF program over the next
year would be a crucial condition to assure that banking reforms make
additional progress. Addressing long-standing structural
impediments to achieving higher growth rates would also provide upward
rating pressure.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Moldova's government rating could be downgraded if the authorities
fail to continue the work associated with the IMF program and lose official
support, or alternatively, should they fail to comply with
the medium-term fiscal consolidation effort in order to avoid substantial
further deterioration in the government's debt and debt service
requirements.
The principal methodology used in these ratings 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.
GDP per capita (PPP basis, US$): 5,047 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.5% (2015
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 13.5%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -2.3%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.5% (2015 Actual)
(also known as External Balance)
External debt/GDP: 98.0% (2015 Actual)
Level of economic development: Very Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 10 January 2017, 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 institutional strength/
framework, have not materially changed. The systemic risk
in which the issuer operates has decreased. Other views raised
included: The issuer's economic fundamentals, including its
economic 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 decreased.
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.
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
