Frustration over credit rating downgrading

Moody’s, the credit rating agency, has certainly sent a number of countries, including Malta, reeling into a bad mood with its latest set of rate adjustments.

Malta has been downgraded to A3 from A2 and given a negative outlook. At first, the government was a bit mild in its reaction, arguing that the slowdown in economic growth abroad presented major challenges for financial sustainability and, therefore, strengthened its decision to rein in its spending and focus its investment on those economic sectors that generated most jobs. But it did not take long to express outright disappointment at the rating, with Finance Minister Tonio Fenech saying, among other things, that Malta should not be lumped with others through this “unfortunate blanket approach”.

Moody’s has given more than one reason for the downgrading. It said that the ratings were lowered due to the uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region. These, it said, would continue to weigh on already fragile market confidence and Malta’s relatively weak debt metrics compared with those of A category peers and the country’s reliance on the strength of the European economy, which would dampen its own growth prospects in the medium term and worsen its debt dynamics. Also, growth prospects appeared to be poorer for Malta than for its peers.

It is not yet certain what kind of a new slowdown is expected in Europe but if the fears are confirmed Malta will also be expected to feel the impact. It is difficult to say at this stage how this will affect the government’s efforts to consolidate its financial situation. But the prospect of fresh difficulties makes it even more important for the Administration to keep to its plans to cut spending. Doing so successfully may perhaps enable it to once again support firms that may find themselves in difficulties without disrupting its financial consolidation plans. It is a balancing act that needs skilful management.

Mr Fenech was right when he said that in reality the downgrade had little impact on Malta because most of the government’s borrowing was done locally. In fact, even though the government was borrowing at lower interest rates, government stocks are invariably oversubscribed. The problem only lies in the fact that the downgrading gives the island a bad image.

However, what is particularly interesting and, at the same time, ironic is that in its first so-called alert mechanism report, the European Commission has said that Malta does not pose any serious macroeconomic problems.

Close to an election, every Administration is tempted to be more generous than over the first years of a legislature, even if this is not financially feasible. But this is no longer possible today as greater EU scrutiny will expose any wayward decisions. What will help put the island’s economy in a better position to withstand new difficulties are the kind of reforms that the International Monetary Fund and others have been suggesting for a long time.

In its last report on Malta, the IMF called for further reforms, particularly over pensions, the restructuring of Air Malta and Enemalta and a better alignment of wages to productivity. While the airline’s restructuring is well in hand, the proposal over wages and productivity is a very hard nut to crack. Yet, cracking it is one of the keys to making Malta more competitive. But the island does not appear to be all that keen to grapple with this problem.