Transition: retrospectives and perspectives
Chapter III. External Relations
The Investment Policy and External Debt
Sorin Hadarca
A. The Investment Policy
The author emphasizes the importance of foreign investments for the Moldovan economy due to the advantage these have over the foreign loans in that they do not need to be reimbursed. Moldova's low country rating and the increased risk rate have decreased foreign investment. This trend is likely to persist, as will the growth in foreign debt payments. These and the tough fiscal system will keep levels of foreign direct investment low.
Urgent measures need to be taken to improve the investment climate in Moldova such as improving Moldova's image, cutting down the foreign debt, improving the country's financial rating, securing a sustainable, incremental development rate, making the investment opportunities more transparent through well defined investment targets, and reducing the fiscal burden.
B. External Debt
Moldova's external debt grew at a accelerated pace until 1997, due to high demands for currency needed to finance imports and consolidate currency reserves. A period of relative stabilization in Moldova's foreign debt followed, and in 2000 its growth declined mainly at the expense of the growing private debt.
The burden of foreign debt payments has decreased significantly in the 2000s, when there was an increase in Moldova's GDP and exports. Moldova's main creditors are multilateral and bilateral, and negotiations within the Paris Club may be held with the latter. The US dollar prevails both in the private and the public foreign debt. The public debt is administered in a more efficient way due to the fact that economic agents, the contractors of private debt, receive fewer credits and have fewer chances to vary the currency composition of their credit portfolio. Short-term credits have always been minimal, with long and medium-term credits preponderant. The average payment term was about 15 years as of 2001. Moldova's long-term currency capability was for the first time rated by Moody's in 1997 at Ba2, two degrees short of the investment rating, then the rating was gradually lowered until it reached Ca in 2002, which is almost qualifying it as a default country. FitchIBCA is currently rating Moldova even lower at DD4.
Credits of official assistance for development are the most favorable ones for Moldova and constitute the most widely spread form of credits contracted by the public sector. The credits from the International Monetary Fund are the main sources of consolidation of Moldova's international reserves, currently at 18.4 percent of Moldova's overall debt. Moldova has issued so far two Euro-obligations in very attractive conditions due to their high degrees of flexibility. The terms of paying back the Euro-obligations are favorable for restructuring as well, due to their seven-year payment term, their interest rate below the one set at the moment of extension of the payment term, and their favorable schedule.
Moldova lacks the budget and currency means to pay its debts on time. This caused FitchIBCA to reduce Moldova's financial rating to DD in June 2002, which is very close to technical default.
While debt financing has always suffered of a positive gap in Moldova, the author makes an overview of Moldova's options for refinancing and restructuring its foreign debt. Among other things, the author refers to the CIS-7 initiative whereby a number of international financial institutions offer CIS Member States assistance in relieving their foreign debt burden in exchange for a clear commitment to carry on the reform process and boost regional cooperation.
Referring to Moldova's financial prospects, the author points out that the foreign debt pressure is going to be difficult to sustain in the coming years, even if the government forecast of 17 percent GDP growth is fulfilled. Hence, the short- and medium-term foreign debt payments need restructuring, and the ensuing gap needs to be covered by more credits from the IMF and the World Bank.
The author concludes that the evolution of Moldova's foreign debt since it emerged in 1992 went through a number of stages. In the first phase the foreign debt was accumulated due to the structural changes experienced in the first years of independence. The debts for energy payments also contributed to an accelerated growth of foreign debt in conditions of low GDP. The second phase was marked by the regional financial crisis, the moratorium over Russia's internal debt, the restructuring of Ukraine's foreign debt, and the devaluation of national currencies of the CIS states. The latter trend affected Moldova as well, and resulted in higher difficulty in paying its foreign debt. The current stage saw an economic re-launch; the need to restructure debt and lift its weight off the GDP is more urgent now than ever, as is the need to restore Moldova's long-term financial credibility.
Among the recommendations with regard to the administration of foreign debt, over the short term the author suggests solving the problem of liquidities through restructuring the debt payments due in the next years, and solving the problems of foreign credibility and foreign debt stock over the long term.
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