Credit rating agency Moody’s downgraded Malta’s credit rating to A3, on a par with Spain and Italy, as it reviewed the rating or outlook of 9 EU member states. But Finance Minister Tonio Fenech argues that comparing Malta to the two troubled countries proves the rating does not assess the situation completely
Malta is one of six EU member states to have their sovereign debt rating downgraded by credit rating agency Moody’s this week, while a further three saw their outlook changed to negative.
The agency also notes that growth forecasts for Malta appear poorer than for its peers, and that economic growth this year was likely to be “significantly lower” than government’s forecast of over 2%.
Italy and Malta saw their A2 rating downgraded to A3, while Slovakia and Slovenia’s rating was downgraded from A1 to A2. Portugal was downgraded from Ba2 to Ba3 while Spain was downgraded by two notches, from A1 to A3.
Austria, France and the UK retained their Aaa rating – the highest possible under Moody’s system – but the agency changed their outlook to negative. The outlook remained negative in all other six countries.
Moody’s also downgraded the rating of Malta Freeport Co. from A2 to A3, in line with the country.
The agency explained that there were two main reasons behind Malta’s downgrading. The first, which is applicable to all other countries whose rating or outlook was changed, is “uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.”
But Moody’s also refers to Malta’s “relatively weak debt metrics compared with ‘A’ category peers and the country’s reliance on the strength of the European economy, which will dampen its own growth prospects in the medium term and worsen its debt dynamics.”
It said that a negative outlook on Malta’s rating would be maintained to reflect a potential further decline in economic and financing conditions as a result of a possible deterioration in the eurozone’s debt crisis.
Moody’s noted that growth prospects for Malta appeared poorer than for its peers, given its dependence on tourism from the euro area as the main source of economic growth. This, it said, will hinder attempts to narrow the country’s fiscal imbalance. Moreover, lower business confidence and tighter credit conditions would weaken private sector investment, it said.
“The deteriorating growth prospects and the concomitant impact on already weak debt dynamics will further reduce government financial strength and expose it to more constrained, higher-cost funding conditions,” the agency said.
When asked on the downgrading on Monday morning, Prime Minister Lawrence Gonzi insisted that the decision was based on what was happening overseas. He said that Malta had a very open economy which was very much affected when other countries did badly.
The prime minister insisted that Malta had no problem servicing its debt, pointing out how government bond issues were still being oversubscribed. Dr Gonzi also that Malta’s debt was on the way down and that the government’s decision to cut public sector expenses by €40 million aimed to further consolidate public finances.
Dr Gonzi did not directly refer to Moody’s prediction that economic growth is set to be significantly slower than what the government forecast, but this was seized upon by the Labour Party, which noted that the agency was not the only one to make such a prediction.
The party observed that while the government could obviously not be blamed for the effect of the euro crisis, Moody’s also referred to Malta’s weak debt metrics. It said that the agency emphasised that the government was not managing public debt properly, adding that this was of great concern. Moody’s statement also contrasted with the government’s own claims, it said.
Alternattiva Demokratika, meanwhile, said that the current political instability in Malta was not helping matters, even though the downgrade itself was very much related to what was happening overseas. It argued that since the Nationalist Party did not appear to have a parliamentary majority, and since MP Franco Debono appeared intent on keeping the country guessing, the only way out was a general election and national consensus on electoral reforms which would allow for “true pluralism.”
A press conference was subsequently called by Finance Minister Tonio Fenech, who said that he was disappointed at Moody’s decision. He argued that the agency did not specifically address Malta’s situation, and had not taken into account the government’s measures to ensure it was prepared, including the reduction in public sector expenses.
He said that the Labour Party’s analysis was amateurish, accusing the party of misrepresenting the facts and its leader Joseph Muscat of failing to understand the issue.
The minister noted that Malta’s economy was set to grow further next year, even though a number of foreign entities’ forecasts were lower than that of the government.
He acknowledged that it may be difficult to meet the government’s forecast, but nevertheless stressed that it remained more optimistic since it took into account microeconomic issues which others did not. These included a manufacturing industry which was more reliant on Germany and less reliant on Italy than other countries in a similar position as well as positive tourism indicators.
Mr Fenech argued that Moody’s appeared to have lumped Malta in with other countries, and questioned the validity of putting the country on the same footing as Italy and Spain when those two countries’ situation was significantly worse. Malta, he added, needed to show that it was acting differently.
The minister accused Labour of damaging the country’s interests by their scaremongering, stating that at this time all sides needed to pull the same rope. But he also noted that credit rating agencies’ tendency to be overcautious may also damage investors’ perceptions of Malta, pointing out that the European Commission had expressed itself on the matter.