January 22 (SeeNews) - Moldova's credit profile reflects the country's low economic strength, weak institutions and its vulnerability to external shocks, Moody's Investors Service said in a new annual report on Monday.
Moody's expects Moldova's economy to grow by around 3.5% in 2018, similar to the previous year. In 2017, domestic demand was supported by the pick-up in remittances on the back of a stronger recovery in Russia and Europe.
This also led to higher imports and an overall negative contribution to growth from net exports. Over the medium-term, a growth rate of around 4% is forecast, Moody's said in its 'Government of Moldova - B3 stable, Annual credit analysis' report.
Moody's last changed the outlook on Moldova's government bond rating one year ago, from negative to stable, and affirmed the country's B3 rating.
"Moldova's moderate and volatile growth prospects are linked to the agricultural sector's vulnerability to weather-related shocks, the associated high concentration of exports and the economy's heavy reliance on foreign remittances," Daniela Re Fraschini, a Moody's Assistant Vice President -- Analyst and the report's author, said.
"A key challenge facing Moldova is to shift the economy away from its reliance on remittances to support domestic consumption, which fuelled much of the domestic demand-driven growth pre-2009, and towards a growth model based on investment and the development of goods- and services-exporting industries."
Moldova scores poorly on the Worldwide Governance Indicators, the quantitative indicators Moody's uses in its assessment of institutional strength. The country scores particularly poorly on control of corruption and is positioned in the 9th percentile in Moody's rated universe, down from the already low 13th percentile one year ago, according to the report, which does not constitute a rating action.
The country's credit strengths include the relatively low, although increasing, debt burden and low debt-servicing costs due to a reliance on predominantly concessional international financing. Moldova is also only moderately susceptible to event risk in each category of political, banking, external and government liquidity risk.
Moody's estimates that the budget deficit will widen to close to 3% of GDP in 2017 from 2.1% in 2016, broadly in line with revised budget that was approved in October 2017. However, based on budget execution for the first 11 months of the year, the deficit might be lower than projected. The general government deficit is projected to stand at 2.9% of GDP in 2018.
Upward pressure on Moldova's sovereign rating could arise if the contingent liability risks posed by the country's weak banking system were to diminish meaningfully or the new resolution framework proves to be sufficiently robust to avoid additional liabilities on the government's balance sheet, Moody's said.
Conversely, Moldova's government rating could be downgraded if the authorities do not continue the reforms associated with the International Monetary Fund (IMF) programme. It would also be negative if the medium-term fiscal consolidation effort fails, the rating agency concluded.
Moldova's economy expanded by 5.4% year-on-year in real terms in the third quarter of 2017, mainly on the back of successful performance in the agricultural sector and rising consumption, the most recent data available from the country's statistical office showed.
In December, the IMF decided to make available to Moldova $22 million (18.5 million euro) under the current three-year funding arrangement.
Moldova already received a total of $57.5 million in two tranches under the current three-year credit facility of $183.1 million, approved in November 2016.
In June, the Council of the European Union and the European Parliament agreed on providing 100 million euro ($106.5 million) to help Moldova fund its structural reforms.
(1 euro= 20.6992 lei)