Positive signal for the country’s economy: Moldova has returned to its pre-war level, thanks to its resilience
Moody’s rating agency has upgraded the outlook of the Republic of Moldova from negative to stable and has maintained the rating at B3. This significant change granted to our country reflects notable progress in managing the economic and financial aspects of the country. Transitioning from a negative perspective to a stable one indicates that the agency now has confidence that Moldova has successfully addressed some of the major challenges it faced in the past and that there are signs of medium-term improvement in terms of economic stability.
In April 2022, the rating agency Moody’s downgraded the B3 rating outlook to negative as a result of the Russian invasion. In May 2022, the Deputy Prime Minister and Minister of Economic Development and Digitalization, Dumitru Alaiba, had intense discussions with Moody’s analysts in London, where he participated in the largest conference for frontier markets organized by JP Morgan. Deputy Prime Minister Dumitru Alaiba argued that Moldova will be able to withstand external pressures, benefiting from strong support from development partners. Meanwhile, the institutional framework has significantly improved in recent times.
In June 2023, Ion Gumene, the Secretary of State for the Ministry of Finance, had another round of discussions with Moody’s analysts in London. Ion Gumene demonstrated that the Republic of Moldova was resilient in terms of energy and economy throughout the war due to international partners. Furthermore, the status of a candidate country for the EU and the determination of the authorities to accelerate the accession processes will boost structural reforms.
Moldova has made significant progress in the field of energy.
Moody’s notes that Moldova’s energy resilience has proven to be stronger than expected, benefiting from significant technical and financial support from international institutions. The fact that the authorities have established external gas storage reserves based on the loan facility provided by the EBRD has provided and will continue to provide a safety cushion. Furthermore, synchronization with the European electrical network ENTSO-E has enabled Moldova to import electricity from the EU, although the capacity is still limited. The ongoing efforts to improve the electrical infrastructure, including the planned development of a new high-voltage power line with Romania by 2025, would significantly enhance Moldova’s energy resilience. However, Moody’s assesses the energy sector of the Republic of Moldova as vulnerable due to imported electricity from the Transnistrian region and potential interruptions in case of damage to the Ukrainian energy infrastructure.
Support from partners will accelerate economic recovery and investments.
Moody’s expects that international partners’ support will bolster economic recovery, mitigate liquidity risks, and boost reform momentum. The EU has committed to mobilize up to 1.6 billion euros as part of the economic and investment plan, which will contribute to supporting investments. Moody’s estimates that economic activity will remain volatile and weak in 2023, but economic growth is expected to be close to 4% in 2024. The agency anticipates that the government’s overall budget deficit will reach approximately 6% of GDP in 2023 and will remain high due to the government’s efforts to redirect fiscal policy towards achieving development goals. As a result, government debt is expected to increase to approximately 37% of GDP in 2024, according to Moody’s. However, this will remain below the average for countries with the same B rating. Moody’s notes that gradual progress on structural reforms continues, supported by Moldova’s candidacy status with the EU. Despite the very challenging geopolitical environment, the government is making progress on the nine reform criteria that need to be met in order to open official accession negotiations with the EU.
The government’s plan to improve the country’s rating.
The authorities consider that the rating of the Republic of Moldova can be improved to at least B2, one step higher than the current B3 rating. According to Moody’s report from February 2023, the macroeconomic and institutional indicators used in the rating composition methodology signal a rating range between B1 and B3. However, the current B3 rating persists due to the perception of high political risks, limited capital account openness, and weak institutional efficiency.
Therefore, the government plans to accelerate structural reforms by strengthening the capacities of state institutions, reforming the justice system, and implementing measures that would lead to the irreversibility of the European course. Additionally, the authorities aim to integrate Moldova into international financial markets by: supporting multiple state and privately-owned companies to access regional and international stock exchanges, attracting more foreign investors into government securities by connecting with Clearstream and Euroclear systems, and issuing a eurobond to finance strategically important infrastructure projects.
Additionally, the Government aims to hire at least one more rating agency, which would improve the country’s credit rating and participate in international conferences on financial markets to enhance Moldova’s country risk perception.
All of these will be able to achieve the government’s objective of shifting the perspective from stable to positive from Moody’s and subsequently improving the rating to B2.
Moody’s Investors Service, commonly known as Moody’s, is one of the most renowned financial and credit rating agencies in the world. This provides independent assessments of solvency and credit quality for corporate and government bond issuers, as well as for financial institutions. Moody’s ratings have a significant impact in the financial world, especially in investment and lending decisions.