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Financial rating and foreign competitiveness of Moldova
Iurie Gotisan, 18 November 2004
Following the visit Fitch experts to the Republic of Moldova, the agency reexamined long-term rating for the Republic of Moldova. The country rating would remain unchanged, i.e. B-, and this because Moldovan Government has a limited capacity to contract foreign loans and therefore has to tight its public spending.
Moreover, Fitch experts say the pace of reforms in Moldova is too slow, privatization is carried inadequately, public debt is swelling, whereas relations with IMF have been frozen. 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. Republic of Moldova bears many risks as regards investments. Therefore, general tendency of Moldova's credibility index seems quite bleak.
Entities or issues carrying the same rating are of similar but not necessarily identical credit quality, still interestingly enough Moldova lags behind all CIS countries, apart from Turkmenistan having a CCC- rating. Also, experts were concerned about high trade balance deficit reaching 515 million USD in the first nine months of the year. Even considerable remittances of Moldovans working abroad, as well as transfer to current account, were not able to slow down the swelling deficit.
According to the Ministry of Finance, in January - October 2004 Republic of Moldova reimbursed foreign debt worth 93 million USD. At the same time, to address the debt issue, Parliament amended the Law on State Budget, thereby enabling National Bank to grant a 50 million USD loan to the Government for it to redeem foreign debt. After all, it is not the mission of the National Bank to credit and fill budget wholes from its foreign currency reserves.
The move would propel inflation up and depreciate national currency. This has happened in Latin America in the 80's when the country's insolvency coupled with interference of politics in financial system resulted in the highest inflation ever. Going back to Moldova, amidst worsening relations with foreign creditors and IMF reluctance to credit policies spurring inflation, such moves not only will be useless in putting the fire down, but on the contrary would fuel it, as there are no guarantees that Government would reimburse the credit.
Given the lack on internal a sources, an alternative solution might be the urgent restructuring of foreign debt by means of Paris Club. However, good relations with IMF is a binding condition for the debtor to meet in order to initiate restructuring negotiations, which is not exactly the case of Moldova. Therefore, in order to restructure debts, Moldova would have to keep the path of reforms and most importantly observe the Memorandum signed with the Fund, especially as Moldova already managed to breach some of the provisions. On the other hand, similarly to international monetary organisations putting forward conditions Moldova should comply with, the state itself should act likewise with its debtors. Generally speaking, Government should be more persistent when dealing with administration of state enterprises, especially when privatization is not a solution.
From the time IMF mission left Moldova on November 3, it was clear that the country would not get foreign funding at least until mid-2005, which bears some risks for the economy. At the same time, according to officials from Ministry of Finance revenues provided for in the state budget would be revised, that is reduced. This would in turn bring some changes in the expenditures. At this time Government has a narrow berth for manoeuvres, especially as Minister of Finance stated earlier that because of lower revenues than forecasted there was a 1 billion Lei budget "whole".
Moreover, the forecasts I made in the previous issue of e-journal that macroeconomic targets would not be achieved, shortly proved to be right as the Parliament amended the Law on State Budget as regards economic forecasts for this year (Romanian only). Unless Government finds new sources of funding or gives up on some of its social and economic programs, it would have to resort again to the help of National Bank of Moldova, which as already mentioned might have disastrous consequences.
Besides funding domestic policies it is also necessary to reimburse foreign debt. It would be nearly impossible to restructure those debts without an agreement with IMF. Given the lack of foreign preferential credits, there is no way Government would manage to meet its financial commitments other than to dig into National Bank's foreign currency reserves. However, exhausting those resources would propel the prices further upwards and give rise to speculations on the national currency market. Among the immediate effects of such a more one may expect swelling prices, depreciation of the national currency, and most importantly more expensive imports of strategic goods on the eve of winter.
Remittances coming from Moldovan citizens working abroad would lower those risks, however Moldovans might well decide to keep the currency in their pockets if they smell price hike. This in turn would wield extra pressure on the exchange rate. Internal debt is already too high. Even if Government manages to balance its external financial position, it will do so on the expense of the internal one. Depending on the gravity of economic crisis, it may morph into a social and political crisis.