Over the last few weeks, two rating agencies issued assessments on Malta’s debt, an exercise that has considerable implications for investors looking at this country to realise projects that are still on the drawing board.
In early September, Moody’s lowered the government’s debt rating to A2 from A1 and revised the outlook to negative. Fitch was more optimistic on the country’s public debt and, on Tuesday, confirmed the A+ rating with a stable outlook.
Can these apparently conflicting assessments be reconciled?
While there is no doubt that the perspectives of the two agencies on the future prospects of Malta’s economy are somewhat different, the variations are less striking when one considers what they actually said in their reports. Moody’s, for instance, showed more concern about the debt level when it said: “When Malta’s guaranteed debt is added to the total actual debt, total debt to GDP reaches 80 per cent – a level that is even more inconsistent with an A1 rating”. Fitch took a more positive view and noted that Malta’s debt “fell short of the agency’s earlier expectation of 70 per cent and looked set to stabilise at 68 per cent in 2011”. It then adds that “Malta government debt ratio remains well above the comparable A peer group median of 40 per cent – a major rating weakness”.
Both rating agencies acknowledge that Malta appears to have weathered the global economic crisis of 2008 fairly well and the economic prospects for the immediate future look quite good. But, even here, Moody’s takes a rather less optimistic view, especially with regard to public finances and the risk of contagion from the troubled eurozone countries. In fact, its report mentions the “future potential problems related to structural rigidities in the fiscal accounts and the government’s reliance on continuous one-offs measures to consolidate the government’s deficit” as one of the reasons for its downgrading of Malta’s debt. Fitch is, again, more optimistic about potential economic growth, which, it forecasts, can “possibly be above three per cent per annum” – significantly higher than what Moody’s and the European Commission predict.
Economic analysis is not an exact science and it is normal to have two economists who disagree on the assessment of a particular economy. What really matters is that Malta’s political and business leaders, who are ultimately responsible to steer the economy to prosperity, have a clear action plan on how to address economic weaknesses and enhance strengths.
Last June, the European Commission, whose opinion has more significant implications on the way Malta manages its economy, made its recommendation to the Council regarding the formulation of their opinion on this country’s economic prospects for 2011- 2014. In many ways, the recommendations by Brussels are similar to those of Moody’s and Fitch. They include: a continued emphasis on the need to correct excessive deficit in 2011 and beyond and defining the required broad measures and embed the fiscal targets in a binding rule-based fiscal framework; taking action to ensue the sustainability of the pensions system and the formulation of a “comprehensive active aging strategy”; and “focus education outcomes more on labour market demands”. These recommendations were reiterated more recently by the Commission in its monitoring report on the implementation of reforms aimed at improving Malta’s competitiveness.
While it is encouraging that Fitch is taking a more positive view on Malta’s short- and medium-term economic prospects, the action plan for long-term reforms remains tough and its implementation time-critical.