Malta's ratings upgraded

Credit rating agencies Moody and Standard and Poor's upgraded their ratings for Malta yesterday after the island was given the final approval to join the eurozone.

Moody's said Malta's ratings for long-term foreign and local currency government bond and long-term country ceilings for foreign currency bank deposits were upgraded from A3 to A2.

The outlook on the ratings was changed to positive. Moody's had previously held both Malta and Cyprus (which is also about to adopt the euro) under review for a possible upgrade.

Malta's short-term country ceiling for foreign currency bank deposits was also upgraded to P-1 from P-2.

"Moody's views the eventual adoption of the euro by these two countries as a credit positive because it will all but eliminate the risk of a currency crisis and thereby isolate their economies from external financial shocks," Tristan Cooper, vice president and senior analyst in Moody's London office said.

The agency said yesterday's positive rating action was further supported by the strengthening of economic fundamentals.

It pointed out that in recent years Malta (as well as Cyprus) had successfully implemented a programme of fiscal consolidation that had narrowed fiscal deficits and reversed the previous upward trend in their public debt burdens.

Both countries' long-term ceilings for foreign currency bonds remain at Aa1 with a positive outlook, while their country ceilings for local currency bonds and bank deposits remain at Aaa. Malta's short-term country ceiling for foreign currency bonds remains at P-1.

The news was acknowledged as an expression of confidence in the country by Prime Minister Lawrence Gonzi yesterday afternoon during a press conference with representatives of unions, employers and the business community. Dr Gonzi said the upgrade by the international financial institution showed that Malta was a good place for investment, and deemed the result a certificate of the government's effort to curb public debt, the deficit and inflation - the three main criteria used by Brussels to determine whether Malta was fit to adopt the euro next year.

Standard & Poor's affirmed its A long-term and A-1 short-term sovereign credit ratings on Malta and said the outlook was stable.

At the same time, the transfer and convertibility assessment on Malta was raised to AAA from AA in view of Malta's forthcoming membership of the eurozone.

"The ratings on Malta reflect the government's achievement in reducing the general government deficit to within the Maastricht treaty requirements for EMU entry, despite a period of economic stagnation earlier this decade," Standard & Poor's credit analyst Ana Mates said. "The ratings also factor in the strong political institutions that underpin Malta's progressive macroeconomic policy."

The agency said the Ecofin decision to approve Malta's euro application meant that Malta would accede to EMU in January 2008, shielding it from potential balance-of-payments pressures thereafter. This provided the ratings with further support.

"The ratings remain constrained, however, by Malta's small and open economy, which is vulnerable to external shocks, as well as by the sizable, although declining, public debt burden."

S&P pointed out that Malta has the third-highest GDP per capita among the 2004 EU entrants, estimated at $17,300 in 2007. The opening of the Maltese market to EU competition had exposed certain weaknesses.

Restructuring in traditional manufacturing sectors was underway and the government's effort to diversify into new services sectors should reduce Malta's reliance on the export-oriented tourism and electronics sectors. Nevertheless, this process would take time.

"We expect continued fiscal consolidation, reduction of general government debt, and implementation of the economic reform agenda currently underway," Ms Mates said.

"As the ongoing restructuring of the traditional economic sectors and the diversification into new services sectors continues, Malta's creditworthiness is likely to improve as these reforms gradually result in a more competitive economy with higher growth prospects.

"Conversely, the ratings would come under pressure in the case of sustained and significant fiscal deterioration, especially given the imperative for fiscal discipline in EMU, which Malta is joining in January 2008, or if there are significant setbacks in implementing the reform agenda."