Moody's retains negative outlook on Malta's rating

International credit agency Moody's has once again retained a negative outlook on Malta's A3 ratings.

In its latest update opinion issued in June, Moody's says that Malta's foreign currency as well as domestic currency ratings were A3/Prime-2, reflecting moderate external debt and adequate foreign liquidity.

It stated that the country's status as a front-runner to join the European Union in the next enlargement round was "a key rating driver, although domestic political opposition casts doubt on the inevitability of accession".

Moody's says that constraints on the rating include a lack of economic diversification, the large public sector debt, and sizeable structural deficits in the public finances and external accounts.

Internal market rigidities, especially in the labour market, weaken competitiveness and deter productive investment.

Moody's said the economy was particularly vulnerable to volatility in tourism and electronics, and lower export earnings from both sectors resulted in virtually no growth last year and little improvement in the fiscal deficit.

"Both sectors are heavily import-dependent, however, so a steep decline in related imports contributed to a contraction of the current account deficit from worrying levels in 2000. Still, the deficit remained unsustainably large given the fixed exchange rate regime."

On the rating outlook, Moody's has had a negative outlook on Malta's A3 ratings since February 1999.

"The outlook stance reflects the numerous constraints outlined above as well as concerns that needed reforms on the pension system and to labour market practices are deeply contentious politically.

"This is particularly relevant to the ratings outlook since the opposition has threatened to withdraw the country's application to join the EU should they win the next general election."

Apart from the EU issue, Moody's says, maintaining economic stability with an exchange rate peg linked to a strengthening euro could prove to be a struggle for a small, open economy that has serious competitiveness challenges.

Finally, the outlook for growth and external balances this year depends on the prospects for the tourism and electronics sectors "which remain highly uncertain".