Moody’s upgrades Malta’s outlook to stable

Credit rating agency Moody’s Investors Service has confirmed Malta’s A3 government bond rating, but has also changed the outlook on this rating from negative to stable.

Credit rating agency Moody’s Investors Service has confirmed Malta’s A3 government bond rating, but has also changed the outlook on this rating from negative to stable.

It announced three main reasons for the decision to change the outlook on Malta’s sovereign rating, including its expectation that debt metrics will stabilise in 2014 due to an economic recovery and the present government’s commitment to fiscal consolidation.

While Malta’s economic growth was subdued in the first half of the year, a fact Moody’s attributed to electoral uncertainty, the agency expects real GDP growth to recover to 1.3 per cent this year and two per cent next year due to a recovery of domestic demand, even though it notes that this growth remains below Malta’s potential.

Malta’s lack of funding stress and limited contagion risk from the euro area was also cited by Moody’s, which pointed out that while the situation in Cyprus escalated earlier this year, there was no significant effect on the Maltese debt market.

The third main reason, according to Moody’s, is the resilience of the Maltese banking system, “with banks following a very conservative and traditional banking model that has not presented problems for the sovereign even through the worst of the financial crisis.”

It noted that while the banking sector’s size and concentration risk are vulnerabilities, the system is very well capitalised, with a very low reliance on wholesale funding due to its ample liquidity.

According to Moody’s, Malta’s credit rating could be due for an upgrade in the event of a significant improvement in the government’s balance sheet, or if “substantial structural reforms focused on enhancing competitiveness and boosting potential output growth rates” were implemented.

On the other hand, any fiscal slippage which jeopardised the anticipated stabilisation of Malta’s debt burden could lead to a downgrade, as would a significant deterioration of Malta’s economic growth prospects, and a large shock to the financial system hindering its abili- ty to provide funding to the government.

The Labour Party welcomed the credit rating agency’s decision, stating that Moody’s had confirmed that Malta was heading in the right direction just six months after the election of the present Labour government.

It stressed that the outlook had remained negative under Nationalist governments despite repeated assurances that public finances were in a sound state.

Moody’s decision, the party said, clearly showed the difference between a negative party that was all talk and another that was working tirelessly to boost the economy.

Prime Minister Joseph Muscat, on the other hand, took to Twitter to react to the report, seizing the opportunity to make a snide remark directed at his political opponents.

“Moody’s changed outlook from negative to stable. (Simon) Busuttil’s PN changed from negative to more negative,” Dr Muscat quipped.

The Nationalist Party also welcomed Moody’s decision, though in its statement, it also recalled Fitch Ratings’ recent decision to downgrade Malta’s credit rating from A+ to A.

It pointed out that while Fitch expressed concerns about Malta’s financial situation, Moody’s appears to have acted differently after being informed that the government would be presenting a plan showing how it would bring its deficit down.

This, the party said, showed that it had been right when it insisted that the government should present a clear plan on the economy and on job creation.

But it insisted that this plan was no government initiative, but an imposition by the European Commission, which placed Malta under the excessive deficit procedure.

The PN said it hoped that the Maltese will not have to pay for the government’s lack of fiscal discipline through cuts in sensitive sectors, as well as through reduced assistance and incentives for various economic sectors.

It also pointed out that the government is politically responsible for ensuring that its pre-election promises are kept.