Moody's rating agency changes Moldova’s outlook from stable to negative.
At the same time, it affirmed the long-term issuer ratings in foreign and local currency at B3. As Moody's Investors Service notes, the decision to change the outlook on Moldova's ratings from B3 to negative reflects the increased risks of geopolitical developments related to the ongoing war in Ukraine, given Moldova's proximity to the conflict, the potential source of instability in Transnistria and Moldova's very significant energy dependence on Russia. As noted, although this is not Moody's baseline scenario, the crystallization of these political risks, including the possible extension of the conflict to Moldova or prolonged disruption of gas supplies, will seriously affect Moldova's economic and fiscal prospects, which Moody's expects will not be fully compensated by increased financial assistance from the European Union and international financial institutions. In a more detailed analysis, the experts of Moody's Investors Service emphasize that although the economic importance of the Transnistrian region has significantly decreased since the Soviet Union, Transnistria still plays an important role in Moldova's energy security, given that gas pipelines from Russia pass through the region and the main gas-fired power plant of the country is located there. Moldova is also at risk of sustained gas supply disruptions from Russia during this escalation of geopolitical tensions, especially given the recent election of a pro-European government that positions Moldova as "non-aligned" with Russia. Moldova's tense relationship with Russia has often led to tense negotiations with Gazprom, including most recently in October 2021. Moldova has recently strengthened its energy security, which could help the country withstand periods of disruption. The completion of the Romanian pipeline expansion helps diversify gas supplies to Moldova, and the recent synchronization of Moldova's electricity grid with the EU will allow it to import electricity directly from Europe. In addition, EU support can help mitigate the financial impact of buying more expensive energy from Europe. For example, in October 2021, the EU allocated 60 million euros to help Moldova cope with a spike in energy prices. Nevertheless, Moldova's ability to fully replace Russian gas imports with these alternative sources has not been tested, and pipeline capacity from Romania is unlikely to be sufficient to meet all of Moldova's needs during the colder months. In addition, more widespread power outages in Europe would significantly reduce the ability of EU countries to provide assistance. Moldova is also vulnerable to any damage to pipelines as a result of hostilities in Ukraine, because that is how it gets most of its gas. The election of a pro-EU majority government focused on anti-corruption reforms in July 2021 strengthened financial and technical assistance from international organizations and donors, putting Moldova in a good position to obtain additional financial assistance to mitigate the negative economic and fiscal consequences of the military conflict. Moldova's official application for EU membership following Russia's invasion of Ukraine may also facilitate access to additional financial and technical assistance, even though Moody's considers EU membership a distant prospect. Moody's expects continued support from the EU and institutions such as the IMF while Moldova copes with the difficult situation. According to the UN, about 400,000 people have crossed the border into Moldova, and about 100,000 people (about 4 percent of Moldova's population) are expected to remain in the country. Given Moldova's unfavorable demographic situation, an influx of skilled labor could partially mitigate the negative impact of high emigration and Moldova's aging population on the country's medium-term growth prospects, provided that these refugees choose to remain in the country. Experts also point out that Moldova is in a relatively better position than some other countries in the region to manage the economic and fiscal consequences of the military conflict. Income from remittances is an important source of financing consumption, but at around 14% of GDP in 2020 remains less important than in many other CIS countries. Moreover, according to the National Bank of Moldova, the country's dependence on remittances from Russia has fallen in recent years to about 14% of the total in 2020, while remittances from the EU account for about half of the total. The experts note that the negative outlook suggests that a rating upgrade is unlikely in the near future. The outlook may change to stable if geopolitical tensions - both in the broader region and between Moldova and Transnistria - decrease and, in turn, the risks to Moldova's creditworthiness associated with the military conflict decrease. Moldova's ratings could be lowered if geopolitical risks associated with Russia's ongoing invasion of Ukraine crystallize. For example, if conditions in Transnistria deteriorated significantly, threatening internal stability, or evidence of a large mobilization of Russian troops in the region is registered, significantly increasing the likelihood of military conflict spreading to Moldova. In addition, a negative factor for the rating will be a prolonged interruption of Russian gas supplies to Moldova, which cannot be mitigated by technical and financial support from the EU. // 18.04.2022- InfoMarket.
