Moody's changes Malta's outlook to positive

Moody's Investors Service said yesterday it had changed Malta's foreign currency ceiling and government bond rating to positive from stable but warned that the rating could go down if there was a derailment of Malta's plans for euro adoption.

The agency issued positive rating revisions for seven of the countries poised to join the European Monetary Union and underlined the benefits of ERMII membership from a credit rating perspective.

"The eventual adoption of the euro by the seven countries will mean the elimination of currency transfer risk that will result in an upward adjustment of their country ceiling to Aaa at the time of entry into the eurozone" the agency said.

In its report on Malta, Moody's said the country had benefited from EU accession and the related strengthening of its economic and social institutions. Further benefits would be gained from the adoption of the euro which Malta was aiming for in 2008.

"This target should be achievable assuming that the government remains committed to its programme of fiscal consolidation."

The agency said Malta's rating is constrained by a number of factors, notably the high and rising level of public debt which at about 77 per cent was the highest among the new member states. Although the government had made progress towards reducing the fiscal deficit, it remained relatively high and was only expected to approach the Maastricht criterion of three per cent of GDP this year.

Other negative factors were low growth, a gradual erosion of competitiveness, particularly in tourism and manufacturing, the poor performance of some public enterprises and the narrow economic base. The small size of Malta's economy and its reliance on tourism and electronics made it vulnerable to potential exogenous shocks.

Moody's said it decision to change Malta's outlook from stable to positive reflected the positive credit implications associated with participation in the Exchange Rate Mechanism (ERMII). Adoption of the euro would mean the elimination of currency transfer risk that would result in an upward adjustment of the country ceiling to Aaa at the time of entry into the eurozone.

"Moody's believe that the prospect of entry into EMU is a deterrent to destabilising capital flows, thereby strengthening the government's creditworthiness."

The agency warned that a return to fiscal slippage leading to the further accumulation of public debt and the derailment of Malta's plans for adopting the euro could force the rating down, but a sustained commitment to fiscal prudence leading to euro adoption would push the rating up.

Another ratings agency, Standard and Poor's, on February 28 affirmed its A long term and A-1 short term sovereign credit ratings on Malta, saying the outlook was stable.