Credit rating agency Moody’s this week maintained Malta’s A1 government debt credit rating as well as the country’s stable outlook, against a troubled southern European financial scenario that has seen widespread public finance turmoil in countries such as Spain, Portugal and Greece.
As plus points for the country’s finances, the rating agency cited its relatively high gross domestic product per capita and its European Union and eurozone membership.
On the downside, it warned of credit challenges in the form of Malta’s “very small and relatively concentrated economy” and the onus of “maintaining competitiveness in order to sustain productivity and income growth”.
Overall, the assessment was largely positive, with Moody’s observing how the rating reflects Malta’s “high levels of economic and institutional strength, high government financial strength and very low susceptibility to event risk”.
The country, according to Moody’s has also made “progress towards real convergence with the rest of the eurozone”, a fact on which it based its assessment of high economic strength. But despite the positive assessment, the country’s credit rating still remains one of the eurozone’s lowest.
Moody’s observed that competitiveness in some traditional export industries, such as the textiles and electronics sectors, was decreasing as a result of real income convergence. But, on the other hand, market liberalisation and the country’s EU and eurozone membership were boosting new export-oriented activities such as pharmaceuticals, e-gaming, engineering, and financial and business services.
The agency however signalled that “some rating concerns remain due to the still relatively low diversification of the economy”.
In terms of its finding of high institutional strength, Moody’s commented that “the country has clearly benefited from its accession to the EU and the Economic and Monetary Union through the related improvement of its economic and social institutions.
The government, Moody’s notes, made significant progress towards fiscal consolidation in the years prior to EMU accession, but the fiscal situation has deteriorated since then, and the country missed the Maastricht deficit criterion of three per cent of GDP in 2008 and 2009 by “considerable margins”. Malta’s susceptibility to event risk is very low, mainly because its adoption of the euro has effectively eliminated the risk of a balance of payments crisis, Moody’s notes, adding the observation that “Malta’s banks also weathered the global financial crisis relatively unscathed”.
It did warn of the banking sector that “concentration risk is considerable, and banks are highly exposed to the local real estate sector”.
With an A1 rating, Moody’s observes that Malta’s rating is one of the lowest among eurozone members, and as such the current rating “would likely tolerate some deterioration of the debt metrics or a gradual loss of competitiveness, provided that any such development be in line with peers and relatively short-lived”.
Malta’s rating could improve, Moody’s observed, “should fiscal restraint meaningfully reduce the deficit and result in a strengthening of debt affordability”.
“Moreover,” it added, “implementation of measures that mitigate the impact of rising pension and health care costs for public finances would also exert upward pressure on the rating.”
On the other hand, the rating would likely be downgraded “should prolonged fiscal slippage re-emerge, leading to a substantial accumulation of additional government debt”.