Moody's changes Malta's rating outlook to stable

Moody's, the rating agency, has changed its outlook on Malta's A3 country ceilings for foreign currency bonds and bank deposits to stable from negative.

The change also affects the A3 rating of the guaranteed debt of the Freeport Terminal (Malta)Ltd., Moody's said on its website.

According to the agency, the outlook change was prompted by the outcomes of the recent referendum and general election, both of which, it said, irrevocably secured Malta's future in the European Union.

"This historical decision signals new development opportunities for the small island economy. While election results provide a clear new mandate to the government to press forward with the EU harmonisation effort, crucial progress is still needed in certain sensitive areas that promote the further liberalisation of the economy to comply with the EU acquis communautaire, such as the gradual reduction of the dominant public sector as an economic actor."

Moody's notes that public finances have registered sizable deficits in recent years, and government debt has exceeded the 60 per cent ceiling set by the Maastricht criteria.

Malta's budget for 2003 does not provide for significant cost cutting, and public finances are still overburdened by generous social security benefits, the agency says.

Moreover, studies for the much-needed reform of the pension system have still not been concluded.

Moody's anticipates that the government's privatisation plans may accelerate because of EU membership rules pertaining to economic liberalisation, competition policy and state aid. However, it expects no significant proceeds from sales of public assets in the near future.

Moody's notes that Malta will be receiving significant EU funding during the first three years of membership to help the country catch up with the average EU level of economic development. However, these "structural funds" will have no immediate impact on the deficit because they will chiefly flow to infrastructure and training projects.

"Far-reaching structural reforms - most of which are guaranteed by compliance with the acquis - will support the country's A3 rating over the medium term. In the absence of such reforms, the economy will remain structurally uncompetitive, and public finances will deteriorate further."

The rating agency said that it would be monitoring the government's progress in meeting these challenges.