Fitch Ratings affirms Moldova's long-term foreign currency issuer default rating at “B+” with a stable outlook
As noted in the Fitch Ratings report, Moldova's “B+” rating reflects the commitment to policies that have allowed maintaining macroeconomic and financial stability despite a number of potentially destabilizing shocks. The 'B+' rating also takes into account Moldova's low level of government debt, manageable debt repayment profile and availability of external financial assistance, and higher GDP per capita compared to peers. These factors are counterbalanced by the small Moldovan economy's high exposure to geopolitical risks due to the war in Ukraine, the frozen conflict and potentially destabilizing foreign interference in domestic politics, as well as a structurally large current account deficit and high net external debt. As noted, Moldova is highly exposed to the effects of the war in Ukraine due to geographic proximity, Russian interference in domestic politics and military presence in Transnistria, and the risk that domestic political developments could disrupt the current reorientation of foreign policy toward the West. In 2024, Moldovan President Maia Sandu was re-elected for a second term, and the country approved by a narrow margin a referendum to enshrine the goal of EU membership in the constitution. Parliamentary elections are due in July 2025, with the risk of external intervention remaining high. Fitch Ratings estimates that Moldova's current account deficit widens to 16% of GDP in 2024 due to weak export performance, declining remittances and rising imports. The current account deficit is projected to remain at a high level of 13.9% of GDP in 2025 due to a slow recovery in Europe and rising energy imports. As the current account deficit is only partially covered by low FDI inflows, net external debt, estimated at 29.7% of GDP at end-2024, is projected to continue to rise. Total international reserves reached $5.5 billion at end-2024. The availability of official financing will maintain reserve coverage at 5.2 months of current external payments in 2025-2026, above the projected median “B” value of 4.2. Moldova's external liquidity ratio (ratio of liquid external assets to short-term external liabilities), projected at 175% in 2025, is higher than that of its peers. Fitch Ratings experts point out that Moldova's pro-European government has continuously received financial and technical assistance since 2021. Moldova is in the pre-selection phase of EU accession negotiations, and the EU has provided significant financial support (€250m) to help Moldova cope with the energy price shock and deliver the benefits of economic integration through a 3-year €1.9bn Growth Fund. In December 2024, Moldova completed the 6th review under the 40-month Extended Credit Facility (ECF) and Extended Funding Facility (EFF) and the 2nd review of the program supported by the Resilience and Sustainability Facility (RSF). Analysts note that Moldova's state budget deficit has narrowed to 3.9% of GDP in 2024 due to strong revenue growth and lower-than-budgeted expenditures, including lower execution of capital expenditures. Although details are not yet available, the implementation of the EU Growth Fund, including public investment projects, could lead to a temporarily higher deficit to average 4.8% of GDP in 2025-2026. Total government debt is estimated at 38.5% of GDP at end-2024, below the median of 50% in the “B” forecast, but expected to approach 43% by 2026. About 63% of government debt is denominated in foreign currency, but this debt is held by official creditors and mostly on concessional terms. The government has no external commercial debt. Interest expenses are relatively low - 1.4% of GDP or 4.1% of state revenues (below the median of 12.9% for the “B” rating). Experts emphasize that Moldova is facing its third energy shock since 2021, as Russian gas supplies to Transnistria were interrupted, affecting the country's electricity supply. Improved external buffers, availability of external financing, and alternative energy imports helped Moldova avoid significant disruptions, in addition to higher electricity prices. Closer links to European electricity markets, increased domestic production (including renewables), and energy efficiency measures will reduce exposure to Russia-linked energy sources. However, inflation accelerated to 9% year-on-year in January due to adjustments in gas, electricity and heating tariffs combined with higher prices for some foodstuffs (due to drought in 2024). Although EU funding to subsidize electricity bills and limited domestic demand price pressures may mitigate the impact of higher electricity prices, Fitch Ratings experts forecast annual inflation to average 9.5% in 2025, up from 4.7% in 2024 and above the projected 'B' median of 5%. Inflation risks are driven by second-round effects from higher energy prices. Experts note that Moldova's combination of macroeconomic policies, including a credible commitment to inflation targeting and exchange rate flexibility, has supported its ability to weather external shocks. The National Bank of Moldova raised its discount rate by 290 basis points to 6.5% in January-February in response to the energy price shock. The NBM's monetary policy is likely to be balanced, avoiding the risk of second round effects, while avoiding excessive tightening of domestic financing conditions. Experts point out that a series of energy and geopolitical shocks have negatively affected GDP growth in recent years. Drought and weak external demand led to a contraction of 1.9% in Q3 2024 after growing by an average of 2.4% in 1H24. “We estimate that growth was 0.1% in 2024 and 2025 growth, forecast at 1.7%, will be weighed down by higher inflation, and a weaker-than-expected recovery in the EU, including Romania (37% of exports). However, energy support measures (facilitated with EU's emergency funding) and the expected initial disbursements of the EU's Growth Facility could support a domestic demand pick up in 2H25. // 10.03.2025 - InfoMarket.
