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Rating Action:

Moody's changes Moldova's rating outlook to stable from negative; B3 rating affirmed

13 Jan 2017

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

No Related Data.
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