Fitch rating positive but keep champagne corked – Fenech

Finance Minister Tonio Fenech yesterday welcomed Fitch’s confirmation of Malta’s A+ long-term currency and local currency rating and its stable outlook forecast but warned that there was “still more to do”.

Malta’s debt remained at levels well above the 40 per cent median rate of other A rated countries

The government had no intention of resting on its laurels, he said.

Describing the Fitch report as a “positive development”, Mr Fenech nevertheless insisted that it was not cause for celebration. Ratings, he said, were “not an exam. They are a statement of fact”.

While acknowledging that government debt, which stands at 68 per cent, needed to be reduced, the minister said that it still stood at healthier levels than that of many other eurozone countries.

“When you compare Malta’s economic performance to its European counterparts, we are performing fairly well.” The importance, he insisted, was that economic growth was used to fuel debt reduction.

In its report affirming the island’s A+ rating, Fitch confirmed Malta’s weathering of the international financial crisis and commended the country’s conservative approach to banking.

It forecast growth of no greater than two per cent for 2012, although it remarked that growth could exceed three per cent in subsequent years if European recovery took hold.

The report however warned that low rates of investment could impinge on growth rates and remarked that Malta’s debt remained at levels well above the 40 per cent median rate of other A rated countries.

Labour finance spokesman Karmenu Vella said that the report “confirmed the optimism we had already expressed about the stability of Malta’s banking sector but also confirmed doubts we have had about the sustainability of Malta’s economic growth”.

Fitch’s primary analyst for Malta’s report, Chris Pryce, echoed the sentiments expressed by Mr Fenech. “Malta’s debt is high but it isn’t inordinately high by European standards. We do think it should be lower but outstanding debt is more a reflection of high borrowing in the 1990s and early 2000s than recent years.”

Pressed as to whether this was damning Malta with faint praise, Mr Pryce conceded that debt levels were “a weakness” but, despite that, “our judgment was that Malta’s A+ rating was still justified”.

Financial analyst John Cassar White said that, aside from the headline rating, “there wasn’t all that much difference” between Fitch’s report and that issued by Moody’s last month. Moody’s had downgraded Malta’s rating and given it a negative outlook.

“Fundamentally, the only difference between the two rating agencies is their headline figure. Such ratings are very much a subjective opinion,” Mr Cassar White said.

There was one difference between the two agencies, Mr Cassar White noted. “When analysing debt, Moody’s also analyses government guarantees for entities such as the Malta Freeport or Enemalta, which could become debt if these companies go under.”

Mr Pryce confirmed that Fitch did not take these government guarantees into consideration but said that they did not constitute “a particularly large amount in the case of Malta”.

Mr Vella agreed with Mr Cassar White’s labelling of rating agencies as “subjective”, likening such ratings to property evaluations. “If you ask five architects to value the same house, you’ll get five different figures,” he said.

Overrated?

The ratings and outlooks issued by international rating agencies such as Fitch, Moody’s or Standards and Poor carry significant sway with investors on international markets and can – as in the case of Ireland – send governments into spiralling crises by making it more expensive for them to borrow money.

When one coupled their influence with their less-than-impeccable credentials in forecasting economic crises, questions have been raised as to whether such agencies are overly powerful.

This week, the European Commission tabled proposals that seek to curb their power. The regulations would prevent agencies from rating bailed-out countries and require them to give governments a three-day notice before issuing a downgrade.

Financial analyst John Cassar White was unequivocal. “They have too much power and they aren’t regulated. The greatest criticism one can make of them is that they failed to predict any part of the 2008 crisis,” he said.

According to Finance Minister Tonio Fenech, “rating agencies need to appreciate the responsibility they carry” although he felt that, following the 2008 financial crisis, “agencies are now being more diligent” in their analyses of countries.

Mr Fenech suggested that having some form of European supervisory institution to monitor rating agencies “wouldn’t be a bad idea”.

Labour finance spokesman Karmenu Vella was pragmatic in his assessment. “Whether we like it or not, such rating agencies are a fact of life. The irritant is that such ratings are so subjective.”

Pushed to comment on the issue, Fitch’s ratings director, Chris Pryce, was understandably circumspect. “Governments approach rating agencies because they want to borrow from the public,” he said. Ultimately, Mr Pryce concluded, governments “know they have a better chance of borrowing money at a lower rate with a rating than without one.”