International ratings agency Fitch yesterday revised Malta's outlook for foreign currency rating to positive, reflecting the possibility of the island joining the euro area in 2008.

Fitch also took the same step with six other EU acceding countries since adherence to the euro is widely seen as reducing a country's vulnerability to balance of payments problems.

Before any of the countries' ratings are actually upgraded, they will need to offer a convincing programme to meet the Maastricht criteria for joining the euro.

In Malta's case, the key problem is the budget deficit, which will have to be not more than three per cent of GDP in 2006 - if Malta is to join the euro area in 2008, analyst Lionel Price said. This year's deficit is likely to exceed seven per cent of GDP.

"We shall therefore be studying the forthcoming budget with even keener interest than normal to see how likely the Maltese government is to fill the hole in its finances," Mr Price said.

All 10 countries due to enter the EU on May 1 will be committed to adopt the euro eventually with the earliest any of the member states entering the euro area being January 2007.

ERM II (exchange rate mechanism) participation can enhance a country's creditworthiness, as it strengthens the credibility and likelihood that it will meet the Maastricht criteria and therefore join the euro within three to four years.

There are no formal requirements to enter ERM II though Malta, Cyprus, Estonia, Hungary, Latvia and Lithuania are expected to be the first, Fitch said.

Poland and Slovakia might yet decide to join them, with the Czech Republic saying it will join ERM II later.

Statistics given by Fitch show that Malta's fiscal deficit as a percentage of GDP is the second highest among the acceding states. Percentages range from two per cent of GDP in Lithuania to 8.4 per cent in the Czech Republic.

With regard to public debt, only two countries - Malta (70.2 per cent) and Cyprus (60.5 per cent) - are over the Maastricht criteria of 60 per cent of GDP.

Inflation in Malta, at 0.3 per cent is however among the lowest of the candidates, with Slovakia, at 8.5 per cent, having the highest.

Fitch says that the monetisation and financial services sector have reached "mature levels" only in Cyprus and Malta, where the ratio of public sector credit to GDP was over 120 per cent.

Forecasting figures on present trends, Fitch envisages that inflation in Malta in 2005 will be 1.7 per cent and the deficit and debt 4.2 and 69.9 per cent of GDP, respectively.

Fitch says that with the exception of Cyprus and Malta, all new EU members are projected to remain well within the ceiling on general government debt.

"These two will have to deliver a more ambitious fiscal programme than presently projected in a way that allows for meeting the debt criterion as well."

Fitch believes this should be easily achievable and, therefore, this criterion will not pose an obstacle to euro adoption.