Moldova: Risk Assessment

Country Rating¹

Rating: D

Business Climate Rating¹

Rating: C

Risk Assessment²

Dependence on the external environment
The conclusion of a $575-million agreement with the IMF in January 2010 facilitated the country's emergence from the recession. The competitiveness gains resulting from the depreciation of the Moldavian leu and the cancellation of foreign trade restrictions thus enabled the economy to benefit fully from the rebound in foreign demand. The farm sector capitalized on the poor harvests in Ukraine, Russia, and Kazakhstan to improve its export performance while also benefiting from the rise in prices. The recovery of remittances moreover supported domestic demand despite high unemployment. In 2011, the external environment will remain the crucial factor determining economic conditions in Moldavia. With the economic slowdown in Europe expected to have a negative influence on foreign demand and remittances, the support of official financial institutions will prove crucial. The liberalization of the economy and the improvement in the business environment, if they bear out, will moreover be likely to attract foreign investors and foster productivity gains. Besides, inflation is expected to ease thanks to the renewed macroeconomic stability. Prices will remain below their pre-crisis levels.

The banking system is still weak
The fiscal consolidation undertaken under IMF auspices is expected to shave a point off public spending in 2011, by focusing on current spending and sparing investment and social spending. The programme is expected to balance the primary account by 2013, which would limit public-sector debt to a manageable 36% of GDP. As regards external accounts, the contraction of domestic demand in 2009 followed by the depreciation of the Moldavian leu resulted in a sharp decline in imports and a contraction in the current account deficit. With the economic recovery, however, and despite the resumption of remittances, the current account deficit will likely grow once again, and would be partly covered by FDI. In the same way, the external debt will likely grow significantly. But now representing 75% of GDP, the high level of external debt begs the question of its sustainability: the debt service represents 20% of export revenues. A new shock could thus cause difficulties on refinancing, particularly for the banks. Besides their foreign debt, they appear weak and suffer from a high proportion of nonperforming loans, extensive dollarization, and a small deposit base.

A major political risk
The holding of national elections for the fourth time in two years (three legislative elections and one referendum) has yet to produce a large enough majority to name a new president. Although the political crisis will thus likely persist in 2011, the risk of social unrest appears under control. Meanwhile, relations with Romania have improved with the conclusion of a treaty on the border regime (and not on the border demarcation question). But the difficulties over the status of Transnistria remain unresolved. Economic statistics for that self-proclaimed but not recognized republic are reported independently of Moldavian national statistics, and tend to be particularly opaque. Its leadership refused to meet with IMF teams in 2010, which report colossal public deficits and foreign debt - respectively 20% and 300% of GDP - due to arrears on gas deliveries from Gazprom.

Strengths

• Small open economy that attracts foreign investment
• Desinflationary environnement
• Support of the international financial community
• Strengthening relationship with the European Union

Weaknesses

• Heavy dependence on remittances from migrant workers
• Unstable political situation and social unrest
• Increasing unemployment and impoverishment of rural areas
• Underdeveloped banking facilities
• High emigration and declining population
• Limited financial intermediation