OREANDA-NEWS. May 21, 2013. In its annual credit report on Moldova, Moody's Investors Service says that Moldova's B3 government bond rating reflects the country's very low GDP per capita, small-scale economy, high dependence on workers' remittances and limited future growth potential.

Furthermore the unresolved Transnistria conflict and weaknesses in the political system exacerbate credit risk. The outlook on the ratings is stable. The rating agency's report is an annual update to the markets and does not constitute a rating action. Moody's determines a country's sovereign rating by assessing it on the basis of four key factors -- economic strength, institutional strength, government financial strength and susceptibility to event risk -- as well as the interplay between them.

Moldova's very low economic resilience is a product of its very low economic strength and low institutional strength. Moody's assessment of very low economic strength is driven by Moldova's very low GDP per capita; small-scale economy; high dependence on workers' remittances; and limited future growth potential. Furthermore, Moldova's low institutional strength reflects weak government effectiveness; high levels of corruption; a lack of transparency; as well as country-specific problems, in particular the unresolved Transnistria conflict and weaknesses in the political system.

The moderate level of government financial robustness is based on a combination of medium government financial strength and moderate susceptibility to event risk. Moody's medium score for government financial strength is based on Moldova's sound fiscal metrics, such as a low government debt-to-GDP ratio and low debt servicing costs. However, government financial strength is constrained by Moldova's limited access to external liquidity and shallow domestic capital markets. Moldova's moderate assessment of susceptibility to event risk reflects political, economic and financial risks, which could lead to a multi-notch downgrade. Moody's foresees political event risk related to tensions between the main political parties in parliament and the unresolved territorial conflict over Transnistria.

Economic event risk is largely driven by the substantial current account deficit, as well as gas debt arrears accumulated in Transnistria. Moody's considers risks stemming from the banking sector to the sovereign's balance sheet as low; although there are modest concerns relating to the deteriorating balance sheet of a state-controlled bank and the potential impact this would have on the sovereign. Moldova's B3 rating could come under downward pressure if the Transnistria situation were to deteriorate rapidly, or following a reversal in the economic reforms that have taken place under a three-year IMF programme that started in January 2010.

Downward rating pressure could also emerge if external liquidity shortages come to the fore following a prolonged sharp drop in remittances or exports. Conversely, Moldova's B3 rating could come under upward pressure if Transnistria related issues are viably addressed, internal politics become less polarised or the reform momentum, under pressure from the IMF and EU, continues. Rising per capita income and improvements in the long-term growth potential could also trigger an upgrade.