Fitch Ratings, the international rating agency, has today affirmed the Republic of Moldova's Long-term Foreign Currency rating at 'B-' (B minus) Outlook Stable and the Long-term Local Currency rating at 'B' Outlook Stable.
The economic and political situation remains very difficult. The large improvements in the external and government debt ratios over the past five years reflect Moldova's near inability to access international borrowing, the impact of high domestic inflation and a strong exchange rate as well as real GDP growth. Debt ratios have also improved due to heavily discounted debt restructuring deals (most significantly the Gazprom deal of 2004). Moldova remains in arrears on repayments of principal on most of its bilateral external debt although it continues to pay interest on these loans. Private sector debt has also risen sharply and now, excluding energy debts, exceeds that of the public sector. The same is true of private sector arrears which are estimated at just over USD100 million compared to public sector arrears of about USD20m after the recent repayment to Gazprom. Until more normal relations with creditors can be restored, especially the Paris Club, the country is unlikely to graduate from the 'B-' (B minus) rating level and will remain subject to close monitoring.
The economy has grown at a broadly acceptable rate in the past four years (about 6% pa) and will probably continue to do so. This depends partly on continued export growth but especially remittance inflows from Moldovan emigres working abroad, both in the CIS and the west, whose numbers have mushroomed in recent years. Altogether, it is said that about 10-15% of the population, many of them young, have started to work abroad, at least temporarily, mostly since the crisis of 1998. These remittances, which have ameliorated both the FX reserves and the balance of payments (the current account but not the trade balance which continues to deteriorate), appear to be still growing strongly. Although it appears unlikely, at least in the short term, the economy would suffer if these inflows of earnings abroad were not maintained. Apart from this potential vulnerability to remittances, and its immediate cause, poverty driving large scale emigration, Moldova remains a heavily agricultural economy with no industrial base and low investment. It does, however, have a reasonably well educated workforce.
The Communist government which gained power with an absolute majority in 2001 is likely to lose ground in the parliamentary elections due to be held on 6 March 2005 but may still emerge as the largest party.
"It has not proved a particularly ideological administration - the prime minister for example is non-party - but so far it has proved unwilling to pursue the reforms most commentators, particularly the IMF and World Bank, see as necessary. However, there are some indications that the communists are beginning to modify their approach and looking to the EU as a model and for support," said Chris Pryce, Director in Fitch's Sovereign Rating Group.
The opposition parties, whose own record is mixed, will take any reasonable chance to form an administration but even then reform will not come rapidly as resources are limited. Progress towards reinstating an IMF programme would be positive. The last one was suspended in 2003 in protest at the government's lack of progress in introducing market reforms and its arbitrary interference in the affairs of private companies.