Event

On Sunday 24 February, parliamentary elections took place in Moldova in a difficult context marked by allegations of poisoning, vote-buying, foreign interference and changes in the election system in favour of one party. None of the main parties won the majority of the seats. The votes were rather divided with the pro-Russian party (the Socialist Party of the President Igor Dodon) winning most of the seats (35 seats), followed by the pro-EU democratic party (30 seats) of Plahotniuc, an oligarch. The latter party was ruling the country and suffered large losses as its image was tarnished by corruption allegations and the 2014 banking sector scandal (which resulted in the closure of three banks and cost around USD 1 billion, i.e. more than 10% of the 2014 GDP). The opposition bloc (the pro-EU ACUM bloc) that campaigned against corruption and ruled out forming a coalition government with the socialists and democrats, is the third party in terms of seats (26). Șor party won 7 seats and independents won the 3 remaining seats. Given the inconclusive results, the parties now have to negotiate in order to form a government.

Impact

Moldova is a parliamentary republic where the president has limited formal power. Hence, it is the new government that has the power to influence the future of the country largely divided between pro-Russia and pro-EU parties. Since the signature of the EU association agreement in June 2014, the relation between the EU and Moldova has deteriorated amid concerns that key reforms were not adopted. Following the decision of the Supreme Court to invalidate the election of the mayor of the capital Chisinau in June 2018, the EU suspended its financial assistance programme. On the positive side, exports of goods to the EU have increased since 2014.

The formation of the next government is likely to be challenging given the fragmented parliament and as political life is often marked by stalemate. In this context, protest and organisation of new parliamentary elections might not be ruled out. Furthermore, the president already mentioned that he was ready to call another election if parties failed to agree on the formation of a government. Renewed political gridlock may further delay the adoption of reforms required by the EU and the IMF. Under the auspices of the IMF programme signed in 2016, reforms have gradually been adopted in various areas including the banking sector. That said, there are delays in the review of the IMF programme which ends in November 2019.  Political deadlock might lead to further delays and there is a risk that the programme ends without additional review and thus off track as did the EFF programme (January 2010-April 2013). Last but not least, reforms are not irreversible given the large vested interests.

In this context, Credendo country risk classifications are likely to remain stable in the coming months. The short-term political risk, reflecting liquidity, is currently in category 5/7. Although it is on a downward trend, short-term external debt remains 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 almost 5 months of imports. They have increased compared to their 2015 level but again, depending on the evolution of the political situation, renewed pressure on reserves might not be ruled out. The MLT political risk, reflecting solvency, is currently in category 6/7. This classification is mainly explained by the external debt ratios that have been rising since 2016 even though they are now on the decline. This ongoing trend should be confirmed as it partly depends on the macroeconomic policy of the forthcoming government. Besides, the current account deficit remains large. 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 P.dellaFaille@credendo.com