Moody's Rating Agency affirmed the Moldovan government's long-term foreign and local currency ratings at B3 and changed the outlook from negative to stable.
According to Moody's Investors Service, the impact on Moldova's credit profile from Russia's invasion of Ukraine was less severe than expected at the time of Moody's last rating action in April 2022. Moldova has significantly improved its energy security, and access to new energy supplies will be available through next winter, although significant vulnerabilities remain. Moody's expects that substantial financial and technical assistance from international organizations will continue to strengthen Moldova's creditworthiness, contributing to economic recovery, mitigating liquidity risks and supporting the gradual progress of structural reforms. At the same time, the event risk associated with the protracted war and unstable domestic politics remains high. As noted, the affirmation of the B3 rating balances Moldova's limited economic resilience to withstand shocks with the country's moderate sovereign debt burden. The affirmation of the rating also reflects Moody's expectation that significant international financial assistance will continue to help reduce the government's liquidity risks and Moldova's external vulnerabilities. As noted, Moldova's local and foreign currency ceilings remain unchanged at Ba3 and B2 respectively. The 3-step gap between the local currency ceiling and the sovereign rating reflects elevated political risks, somewhat elevated external vulnerabilities, and moderate predictability of the government and institutions. The 2-level gap between the foreign currency ceiling and the local currency ceiling reflects very limited capital account openness, weak policy effectiveness, and somewhat elevated external debt, causing the foreign currency ceiling to be lower than the local currency ceiling. Moody's Investors Service says that Moldova's energy resilience has been higher than the agency expected, thanks to significant technical and financial assistance from international organizations, which confirms the stable outlook on the B3 ratings. It emphasizes that Moldova has concluded new gas sourcing arrangements after Russia cut off gas supplies in late 2022, including from the EU via a pipeline from Romania (Ungheni-Iasi), and the switch to fuel oil for heating has contributed to a reduction in natural gas consumption. The authorities are also building up external gas storage reserves through an EBRD credit line, which Moody's believes is likely to provide a reserve for several months into next winter. In addition, synchronization with the Continental European Electricity Grid allows Moldova to import electricity from the EU when needed, although capacity remains limited. In particular, Moldova was able to import the vast majority of its electricity from Romania in November 2022 when domestic supplies from the MGRES were interrupted, albeit at a higher price. Moody's experts believe that ongoing efforts to improve the electricity infrastructure, including the planned construction of a new high-voltage transmission line with Romania by 2025, will significantly enhance Moldova's energy resilience. As noted, Moldova continues to receive extensive financial assistance, given the substantial involvement of international partners and the government's strong commitment to implement the program's conditions. In addition, there has been registered an inflow of remittances from abroad, which will continue to support consumption. Moody's expects economic activity to remain volatile and weak in 2023, before real GDP growth returns to potential levels of around 4% in 2024. At the same time, liquidity risks will continue to be mitigated by substantial financial support, even though the fiscal outlook is fraught with risks associated with war and further energy price spikes. Moody's expects the public sector fiscal deficit to reach around 6% of GDP in 2023 and remain elevated as the government seeks to refocus fiscal policy on development objectives. As a result, the public debt burden will rise to about 37% of GDP in 2024, although it will remain below the median of B-rated sovereign states. Foreign reserves also benefit from large inflows of international financial assistance, which will provide an important buffer against external vulnerability risks. The stable outlook also reflects heightened risks from political developments that limit Moldova's creditworthiness. Domestic political instability in Moldova will remain high as it is exacerbated by increased Russian interference in domestic affairs. Nevertheless, public support for Moldova's EU membership aspirations remains strong, even though a significant portion of the population also continues to view Russia as an important political and economic partner. Local elections in November 2023 will be a key test of public support for the government's policies ahead of the next parliamentary elections due in 2025. Moody's experts note that the affirmation of Moldova's B3 rating reflects the country's limited economic resilience given its narrow economic base, which affects Moldova's ability to absorb shocks. The unfavorable demographic situation affects the country's growth potential, as high emigration rates with limited employment opportunities and relatively high poverty rates contribute to a rapid decline in the working-age population. Moldova's limited ability to absorb shocks is also reflected in its weak institutions, although the institutional framework is gradually improving as part of the EU accession process. Moody's expects annual inflation to fall sharply to high single digits this year after peaking at over 34% in 2022, with the National Bank remaining one of Moldova's most credible institutions. The banking sector is expected to continue to show a high degree of resilience to shocks, thanks to previous reforms. Finally, Moody's expects that significant international financial assistance will continue to help mitigate government liquidity risks and external vulnerabilities, especially in the absence of any international bond issuance, reinforces the affirmation of the B3 rating. // 21.08.2023 – InfoMarket
