NEWS | Wednesday, 28 November 2007

Moody’s confirms Malta’s credit rating with a warning
Charlot Zahra

International credit rating agency Moody’s has confirmed its Aa1 ceiling for Malta’s foreign currency debt and A2 for the country’s foreign currency bank deposits. The outlook has remained positive.
The rating for bonds issued by the Government of Malta was also confirmed at A2 with a positive outlook (after being upgraded from A3 last July).
The adoption of the euro on January 1 would push Malta’s credit rating further upwards. However the credit rating agency warned that “a return to fiscal slippage leading to the renewed accumulation of public debt over the longer term” would lead to a downfall in Malta’s credit rating.
In its latest credit opinion on Malta, issued two weeks ago, Moody’s highlighted as credit strengths the country’s “relatively high” GDP per capita, the fact that Malta has a “more advanced” economy than most other EU Member States, the fact that Malta is a net external creditor and the final EU approval for the country to adopt the euro as from next January.
On the other hand, the credit rating agency has highlighted as challenges to the country’s credit rating the country’s “high, albeit gradually easing” public debt burden, challenges related to the country’s competitiveness and the fact that Malta is “a small island economy vulnerable to external shocks”. Moody’s foreign currency country ceiling for bonds is based on the foreign currency government bond rating of A2 (…) and Moody’s assessment of a very low risk of a payments moratorium in the event of a government bond default.
Malta’s ratings partly reflect the country’s relatively high level of development and prosperity. “Malta’s GDP per capita was around 70 per cent of the Eurozone average in 2006 and the fourth highest level of the twelve new EU member states,” Moody’s said in its report.
Despite having a high level of gross external debt, which is largely accounted for by non-resident bank deposits, Malta is an overall net external creditor.
The report said that “Malta has benefited from its accession to the EU in May 2004 and the related strengthening of its economic and social institutions, which has enhanced the economy’s flexibility and resilience.
“Further benefits will be gained from the adoption of the euro, which is scheduled to occur on 1 January 2008 following the European Union’s final approval in July 2007,” the international credit rating agency said in its report.
According to Moody’s, Malta’s rating is constrained by a number of factors. “Most important is the high level of public debt, accumulated through previous years of fiscal slippage.
“At end-2006, the general government’s gross debt amounted to around government has made significant progress towards reducing its fiscal deficit over the past three years and the deficit is estimated to have fallen below the Maastricht criterion of 3 per cent of GDP in 2006.
“Furthermore, privatization receipts are contributing to a gradual decline in the public debt burden. However, it remains to be seen whether such fiscal rectitude can be sustained over the longer term given rising health and pension costs,” the international credit rating agency said.
“Additional negative factors include a lack of competitiveness in some sectors – particularly in tourism and manufacturing – the poor performance of some public enterprises, and the narrow economic base.
“The small size of Malta’s economy and its reliance on tourism and electronics manufacturing makes it vulnerable to potential exogenous shocks.
“Malta has a relatively wide current account deficit, which exceeded 5 per cent of GDP in 2006, although it is narrowing and continues to be financed largely through non-debt creating inflows of FDI,” Moody’s noted.
Malta’s government bond ratings were placed on positive outlook following the EU’s final decision in July 2007 that Malta be allowed to adopt the euro on 1 January next year.
“Moody’s views the adoption of the euro as a credit positive because it will all but eliminate the risk of a currency crisis and thereby isolate Malta from external financial shocks,” the credit rating agency said in its credit opinion on Malta.
Asked by BusinessToday to elaborate more on the factors that are affecting negatively Malta’s competitiveness and what should be done to improve the country’s competitiveness, Tristan Cooper, Senior Analyst, Sovereign Ratings said:
“Like some other new EU member states, Malta faces competitiveness challenges in a number of important sectors including tourism, manufacturing, and agriculture.
“The key to Malta improving its competitive stance is to accelerate progress in the structural reforms outlined in the EU’s Lisbon Agenda. Malta has a relatively oversized and inefficient public sector, a low level of spending on research and development, rigidities in its internal market for energy, a low level of female employment, and a high drop-out rate among university students.
“While Malta has certainly made some progress in these areas in recent years, with successes such as its restructuring of the ship building sector, overall it has a comparatively lacklustre record when it comes to implementing Lisbon Agenda structural reforms,” Cooper told BusinessToday.
Questioned what the country should do to achieve long-term sustainability of its public finances irrespective of the fact that receipts from privatisations are one-off entries that cannot be replicated, Cooper said:
“We see the most important long-term fiscal challenges as being age-related expenditure pressures. These include rising demand for government services in the areas of health, social security, and pension provisions.
“Given that the level of government revenue to GDP is already quite high in Malta (around 41 per cent), there is limited flexibility on the revenue side of the fiscal account.
“Hence, expenditure will have to be rationalised in these areas over the longer term if the relatively high debt burden is to continue its downward path,” he warned.

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