Malta's credit rating 'stable but low'

Malta has a stable credit rating that is however one of the lowest among the eurozone members, Moody's Investors Service said.

Moody's July Global Credit Research rated Malta's government debt at A1 that would "likely tolerate some reversal of the government's currently virtuous debt dynamics or a gradual loss of competitiveness, provided that any such deterioration be moderate and relatively short-lived".

The rating reflects the country's progress regarding real convergence with the rest of the eurozone: Last year Malta's GDP per capita was more than 60 per cent of the Economic and Monetary Union (EMU) average and the fourth highest level of the 12 newest EU member states.

Despite having a high level of gross external debt, which is largely accounted for by non-resident bank deposits, Malta is an overall net external creditor.

Malta has benefited from its accession to the EU in May 2004 and to the EMU in January 2008 through the related strengthening of its economic and social institutions. These trends have clearly enhanced the economy's flexibility and resilience, Moody reported.

According to the report, Malta's ratings are constrained by the high level of government debt: At the end of 2007 gross general government debt amounted to more than 60 per cent of GDP (the second-highest level among the new member states) even though it is somewhat lower than the eurozone average.

However, the report says, the government made significant progress towards fiscal consolidation in recent years. Since 2006, the deficit has been below the Maastricht criterion of three per cent of GDP.

Apart from the debt burden, rating concerns relate to the relatively low diversification of the economy and the high level of subsidies (about twice the EU average) and state aid (four times the EU average), Moody said.

Moody reported that Malta's rating would move upward should continued fiscal restraint meaningfully reduce or eliminate the deficit and bring a further reduction in the general government debt ratios to levels closer to the average of other new EU members.

Moreover, implementation of structural reforms that enhance real economic convergence and mitigate the aging challenges for public finances would also exert upward pressure on the rating.

The rating would likely be downgraded should fiscal slippage re-emerge, leading to a substantial accumulation of government debt over a prolonged period that would imperil Malta's convergence to the rest of the eurozone, Moody said.

Listing Malta's strengths and challenges, the report said that the credit strengths of Malta included: relatively high GDP per capita; net external creditor mainly thanks to net foreign assets of the domestic banking system; and advantages conferred to a small, open economy by EU/EMU membership.

The credit challenges included: high, albeit gradually declining government debt burden; relatively concentrated, small economy; and maintaining competitiveness in order to sustain productivity and income growth.