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Fitch Changes Moldova s Outlook to Stable

Fitch Changes Moldova s Outlook to Stable

Fitch Ratings has today changed the Outlooks on Moldova's Long-term foreign and local currency Issuer Default Ratings (IDR) to Stable from Positive. The agency affirmed Moldova's Long-term foreign currency IDR at 'B-' (B minus), Long-term local currency IDR at 'B', Short-term foreign currency IDR at 'B' and Country Ceiling at 'B-' (B minus).

The revision to a Stable Outlook reflects the deterioration in Moldova's external finances and continued inflationary pressures. The country has been hit by significant negative external shocks which have clouded the near-term outlook. The price of Russian gas exports to Moldova has continued to rise this year and Moldovan wine exports to Russia were banned by the Russian government for most of 2006 and 2007. Furthermore, Moldova experienced a drought in 2007 which led to a sharp drop in agricultural output. The impact of these shocks has been widely felt throughout the economy. The current account deficit widened to almost 18% of GDP in 2007 while Fitch estimates economic growth slowed to 3% in 2007. Inflationary pressure remains in double-digits.

Moldova remains susceptible to negative political and economic shocks in view of its high trade deficit, rising external debt burden, low external liquidity and exposure to trade with Russia with which it remains in dispute over the separatist province of Transnistria (although Fitch believes the risk of renewed conflict with Transnistria is low). The Moldovan economy faces many structural weaknesses, including a large government sector and a poor business climate. At over 50% of GDP, Moldova has a large structural trade deficit that is partly offset by workers' remittances which Fitch estimates were around 20% of GDP in 2007. Private sector external indebtedness has been rising rapidly and at 32% of GDP in 2007, Moldova's net external debt burden is higher than the 'B' range median of 6%. At USD1,320 at market exchange rates, per capita income is low by eastern European standards although it is just above the 'B' range median of USD1,240.

Nevertheless, Moldova's ratings are supported by a number of factors. Moldova's government debt level has continued to fall, and at 29% of GDP in 2007 was just under the 'B' range median of 33%. Moldova recorded a small budget deficit in 2007 and the government is targeting budgets close to balance in the medium-term although Fitch believes parliamentary elections in 2009 could lead to fiscal pressures. Furthermore, the Moldovan government became a net public external creditor in 2007 (official reserves have risen to over USD1.5bn, or over three months' import cover in June 2008) and at 68%, Moldova's government debt/revenue ratio is the lowest in the 'B' range. Moldova is on track with its three-year Poverty Reduction and Growth Facility (PRGF) with the IMF, which expires in mid-2009.

Source: Fitch Ratings


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