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Rating Action:

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

31 Jul 2015

London, 31 July 2015 -- Moody's Investors Service ("Moody's") has today changed the outlook on Moldova's B3 government bond rating to negative from stable. Concurrently, Moody's has affirmed Moldova's B3 rating.

The key drivers for Moody's decision to change the outlook to negative are:

(1) The heightened risks to the government's liquidity position in light of the expected political challenges in securing further multilateral financing support; and

(2) The uncertainty around the implications of the recent banking sector crisis for the government's balance sheet.

The affirmation of Moldova's B3 rating reflects a number of positive credit factors in spite of the drivers that justify the negative outlook. Moody's notes that Moldova benefits from a strong fiscal position at the end of 2014 with, according to most recent data from the Ministry of Finance, a general government debt-to-GDP ratio of 24.8%, which compares favourably with the median of B-rated peers of 48% of GDP.

Furthermore, Moldova's institutional strength is improving, albeit from a very low level, as evidenced by the rise in most of its World Bank Worldwide Governance Indicators since 2011. The signing of the Association Agreement with the European Union (EU) in 2014 will support institutional reforms and, through export and investment opportunities, help to enhance Moldova's low economic strength in the medium term.

Moody's has also today lowered Moldova's local-currency bond- and deposit ceilings to B2 from Ba2. Moldova's other country ceilings remain unchanged. The foreign-currency bond ceiling is B2, while the foreign-currency deposit ceiling is at Caa1. The short-term foreign-currency bond- and deposit ceilings are Not Prime (NP).

RATINGS RATIONALE

RATIONALE FOR THE NEGATIVE OUTLOOK

FIRST DRIVER -- HEIGHTENED RISKS TO GOVERNMENT LIQUIDITY FROM EXPECTED POLITICAL CHALLENGES IN SECURING FURTHER MULTILATERAL FINANCING

The first driver of today's decision reflects the heightened risks to government liquidity from the expected challenges in securing further multilateral financing in light of the volatile political situation in Moldova.

The uncertain political environment in Moldova, characterised by frequent changes in government, has led to delays in agreeing a new programme with the International Monetary Fund (IMF), which in turn has led multilateral lenders to pause financial assistance, mainly related to budget support. For example, the EU has announced that budget support payments can only proceed once the IMF programme is approved.

Moody's expects a contraction in economic growth in Moldova of around 1% in 2015, given the impact of Russia's (Ba1 negative) economic downturn, and the fiscal deficit to widen to 5.3% of GDP. This, together with high domestic short-term debt roll-over needs, which Moody's estimates at around 14% of GDP, has put pressure on the government's liquidity position in the absence of multilateral financing support.

Moody's notes that there has been progress over the past week with the formation of a new government, a process triggered by the resignation of Prime Minister Chiril Gaburici in June 2015. However, even with the new government in place, it is not clear whether the policy conditionality associated with a new IMF programme can be agreed. The new coalition government, per the vote in parliament on 30 July 2015, is supported by just over half of the 101 members of parliament, which will make it challenging to meet the IMF's reform requirements and increases the risk of new elections in 2016.

Furthermore, although Moldova broadly met the requirements of its previous IMF programme (expired in April 2013), it did not conclude its final review, in part due to due to disagreements on fiscal and financial sector policies. Moody's expects that the process leading up to a new IMF agreement, but also the implementation of reforms necessary for funding support, will be contentious, keeping government liquidity risk elevated even if an agreement is reached quickly.

Moldova is taking steps to manage the impact of reduced external financing support on its liquidity position such as cutting non-core expenditure and raising interim financing from domestic markets. In particular, Moody's estimates that the government has been successful in reducing expenditure by around 20% on a cumulative basis relative to target in the first five months of 2015. Nevertheless, Moldova's history of political division increases the risks to the government's liquidity position from further delays in securing multilateral financial support, which drives Moody's decision to change the outlook on Moldova's rating to negative.

SECOND DRIVER -- UNCERTAIN IMPACT ON GOVERNMENT'S BALANCE SHEET FROM BANKING SECTOR CRISIS

The second driver supporting the negative outlook is the uncertain impact on the government's balance sheet from the substantial fraud discovered in the banking sector.

A number of suspicious transactions in late 2014, accounting for around USD1 billion (13% of 2014 GDP), threatened the viability of three of the largest banks in Moldova (together accounting for around one-third of banking system assets). These banks -- Banca de Economii S.A. (not rated), B.C. "Banca Sociala" S.A. (not rated), B.C. "Unibank" S.A. (not rated) -- have been placed under administration by the National Bank of Moldova, the country's central bank. Furthermore, the banks have received an emergency liquidity injection of around 9.5 billion Moldovan Leu (9% of 2014 GDP), which was government guaranteed.

The three banks remain in administration and there has been little progress in reaching a transparent and comprehensive resolution to the banking crisis, in part due to the turbulent political situation. For example, an independent study into the recoverability of the assets transferred abroad has been delayed by the recent resignation of the prime minister. Furthermore, it is not clear what resolution action the authorities intend to take and whether the three banks will be liquidated. As such, it is difficult to identify the precise impact of any government support on the government's balance sheet.

Moody's baseline scenario is for the debt burden to rise by around 16 percentage points to 41% of GDP this year, but the impact could be substantially higher. Apart from the uncertain impact on the government's balance sheet, this crisis highlights the persistent issues around transparency and governance in the banking sector, which add to Moody's assessment of Moldova's weak Institutional Strength and significant Susceptibility to Event Risk.

RATIONALE FOR AFFIRMING THE B3 RATING

The affirmation of Moldova's B3 rating reflects a number of positive credit factors in spite of the drivers that justify the negative outlook.

Although there is considerable uncertainty around the impact of the banking crisis on the government's balance sheet, Moody's notes that Moldova benefits from a relatively robust fiscal position with, according to most recent data from the Ministry of Finance, a general government debt-to-GDP ratio of 24.8% at the end of 2014, which compares favourably with the median of B-rated peers of 48% of GDP. In addition, Moldova benefits from low interest payments relative to GDP as its debt is mainly owed to multilateral creditors on concessional terms.

Furthermore, institutional strength is improving, albeit from a very low level, as most of Moldova's World Bank Worldwide Governance Indicators have improved markedly since 2011. Despite recent political uncertainty, Moody's expects Moldova will continue on the path of closer integration with the EU. The signing of the Association Agreement with the EU in 2014 supports Moldova's institutional reforms and, through export and investment opportunities, helps to enhance Moldova's low economic strength in the medium term, as Moldova benefits from increased access to this wider market. Moody's expects economic growth to recover in 2016, reaching around 3%, reflecting an improvement in the external environment and further integration with the EU.

WHAT COULD CHANGE THE RATING DOWN/UP

Downward pressure could develop if political divisions lead to a further material delay in agreeing and implementing a new IMF programme, which in turn increases the vulnerability of the government's liquidity position. In addition, the lack of a comprehensive resolution to the banking crisis or a solution which results in a significantly higher than expected impact on the government's balance sheet would be credit negative.

Furthermore, Moldova's B3 rating could come under pressure should any shock -- whether related to adverse weather effects on the agricultural sector, a structural decline in workers' remittance inflows, and/or a lack of privatisation receipts -- create difficulties for its debt-servicing capacity. Moldova's rating could also be downgraded if conditions in the Transnistria region were to deteriorate rapidly.

Conversely, Moody's would consider moving the outlook on Moldova's government debt rating back to stable should concrete progress be made on agreeing and implementing a new programme with the IMF, which would unlock budgetary support from multilateral lenders. Furthermore, a comprehensive and transparent solution to the banking crisis which clarifies the uncertainty around the implications for the government's balance sheet would be positive for the credit rating, as would improved transparency and regulatory oversight which reduces the risk of future bank failures.

GDP per capita (PPP basis, US$): 4,979 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.6% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.7% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -1.7% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.7% (2014 Actual) (also known as External Balance)

External debt/GDP: 82% (2014 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 28 July 2015, 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 governance and/or management have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's very low institutional strength has not materially changed. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy 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 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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 following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

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.

Evan Wohlmann
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
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD-Banking & Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on Moldova's B3 government bond rating to negative from stable; rating affirmed
No Related Data.
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