In the first direct presidential election since 1996, Igor Dodon – a leftist pro-Russian – won the second round of the presidential election which was seen as a battle between the pro-EU and the pro-Russia camp. He pledged to restore closer ties with Russia, and is in favour of joining the Eurasian Economic Union led by Russia at the expense of the EU Association Agreement signed in 2014. Given his few constitutional powers, the implementation of his promises is likely to be impeded by the pro-EU government and pro-EU majority in parliament. Days after the election, an action plan for the normalisation of economic relations with Moldova was agreed on, which could lead to better trade relations with Russia, one of the country’s key trade partners. The election took place in a difficult economic and political environment after the 2014 banking sector scandal. It resulted in the closure of three banks, cost around USD 1 bn and highlights the weak governance and relatively high corruption.
Impact on country risk
Moldova is likely to try to improve relations with Russia while also maintaining good relations with the EU as the country benefits from the latter both in terms of financial support and access to markets. As political life is often marked by stalemate, the election of a pro-Russian President – who can dissolve parliament in certain situations – with a parliament and government dominated by pro-EU parties could lead to new deadlock or early elections. One of the country’s key challenges will be to improve governance and restore confidence. In this context the recent approval by the IMF of three-year arrangements under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF) is positive news. Indeed, the programme aims at reinforcing the recent economic stabilisation and advancing a broad structural reform agenda, particularly in the financial sector. On the economic side, the country is recovering from recession. Thanks to lower imports on the back of demand compression and lower fuel prices, the current account deficit has narrowed somewhat from 5% of GDP in 2015 to 3.6% in 2016 but is expected to widen to 5.1% next year. The country risk classifications are likely to remain stable. The short-term political risk, reflecting liquidity, is currently in category 5 as short-term external debt is elevated and access to financial markets relatively limited, which constrains the country’s ability to roll over its short-term debt. On the positive side, foreign exchange reserves cover more than 4 months of imports. The MLT political risk, reflecting solvency, is currently in category 6. This classification is mainly explained by the external debt that has been rising over the past few years and which is likely to reach an elevated level of around 100% of GDP this year. Debt service ratios are relatively moderate. Vulnerabilities arise from the relatively small size of the economy and its reliance on few exports revenues (food exports, private transfers and labour income).
Analyst: Pascaline della Faille, email@example.com