Moody's confirms Malta's A3 rating

Moody's investors service has confirmed Malta's investor grade rating for long-term foreign currency bonds at A3, but it warned that any derailment of Malta's plans to adopt the euro could force the rating down.

In a May 31 opinion the agency said its rating partly reflected Malta's relatively high level of development and prosperity. Malta's GDP per capita was estimated at €16,200 (at purchasing power standards) in 2005, which was 69 per cent of the EU average and 23 per cent higher than the average of the EU's 10 new member states. Malta also enjoyed relatively low inflation and unemployment, the agency said.

It said EU membership had led to a strengthening of Malta's economic and social institutions, enhancing the economy's flexibility and resilience. Further gains would be made from the adoption of the euro, with the 2008 adoption target appearing "achievable" if the government remained committed to its programme of fiscal consolidation.

Malta's rating, however, was constrained by a number of factors, notably the high level of public debt which at the end of 2005 amounted to 75 per cent of GDP, the highest level among the new member states. Other negative factors included low GDP growth, a lack 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 manufacturing made it vulnerable to potential exogenous shocks, Moody's said.

It recalled that the rating outlook on the Malta government bond rating has changed to positive from stable last March in view of the positive credit implications of Malta's participation in the Exchange Rate Mechanism (ERM II). Adoption of the euro would mean the elimination of currency transfer risk and it was likely to deter destabilising capital flows, thereby strengthening the government's creditworthiness.

A sustained commitment to fiscal prudence leading to euro adoption could therefore change the rating upwards, whereas a return to fiscal slippage leading to the accumulation of more public debt, and the derailment of Malta's plans for adopting the euro, could see the credit rating going the other way.