Moody's rating agency this evening affirmed Malta's A3 rating and negative outlook. It praised the government for fiscal consolidation, particularly for bringing the deficit below 3% at the end of last year but warned of slippage later this year.
"The consolidation strategy is mostly underpinned by additional revenue raising measures, and appears to be optimistic given the weaker economic environment at home and abroad, additional expenditure related to the restructuring of Air Malta, utility subsidies and the current stage of the political cycle, with the deficit traditionally widening in pre-election periods."
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The agency said the key drivers for today’s affirmation were:
1) The government’s successful consolidation strategy, which brought the 2011 fiscal imbalance below the 3% of GDP ceiling under the excessive deficit procedure.
2) The expectation that debt ratios will stabilise in 2013, curbing further deterioration of key credit metrics that are already weaker than ‘A’ category medians.
3) The continued presence of significant macroeconomic and fiscal downside risks.
Moody’s said that although the general government deficit should remain below 3% of GDP, the fiscal imbalance will increase to 2.9% in 2012, before declining to 2.6% in 2013. These forecasts implied a continued, but slowing, increase in the sovereign’s debt ratios. The rating agency expects general government debt to rise to 73.7% of GDP in 2012 and 74.5% of GDP in 2013 before trending downward.
"Although Moody’s expects that debt will stabilise in 2013, earlier than in other ‘A’ category peers, Malta’s debt ratios will remain well above peer medians.
"Nevertheless, Moody’s notes the continued presence of significant macroeconomic and fiscal downside risks. Further plans for fiscal consolidation target a deficit of 2.2% of GDP in 2012 and 1.8% in 2013.The consolidation strategy is mostly underpinned by additional revenue raising measures, and appears to be optimistic given the weaker economic environment at home and abroad, additional expenditure related to the restructuring of Air Malta, utility subsidies and the current stage of the political cycle, with the deficit traditionally widening in pre-election periods. Given these factors and a susceptibility to stop-and-go policies, Moody’s believes that there remains a risk of fiscal slippage in 2012.
"Should instability due to the euro area debt crisis hamper macroeconomic performance, negative debt dynamics could persist beyond 2013 despite a narrowing of the deficit. Such ongoing dynamics could lead to a significant further deterioration in the sovereign's key credit metrics and as such underpin Moody’s decision to maintain a negative outlook."
As part of today's affirmation, Moody's has also revised Malta’s country ceilings as follows: the long-term foreign currency bond ceiling was adjusted to A1 from Aaa; the long-term foreign currency deposit ceiling was adjusted to A3 from Aaa; the short-term foreign currency deposit ceiling was adjusted to P-2 from P-1; and the country risk ceiling was adjusted to A1 from Aaa.
The ceiling adjustments reflect the increased risk of economic and financial dislocations within the euro area, which affects all sovereigns within the monetary union.
GOVERNMENT REACTION
In a statement, the government noted that Moody’s had confirmed Malta’s rating and outlook on the same day the outlook for the whole European Union was changed to negative and it had welcomed Government’s efforts at improving the country’s financial situation.
It noted that in its report, Moody’s welcomed what it termed as the Maltese “Government’s successful consolidation strategy” and noted that “Government has successfully achieved its goal of reducing the fiscal deficit”.
"Such a statement contradicts the Opposition’s repeated statements over the past month where the Opposition Leader and spokespersons branded Malta’s financial position as negative, claiming that it had worsened over the past months. Government’s rebuttals and explanations have now been confirmed by Moody’s independent audit of our country’s finances," the ministry said.
"It is pertinent to note that in its assessment, Moody’s acknowledged the pressures on Government finances related to the need to support Enemalta in not increasing its tariffs following the recent spikes in the price of oil and the restructuring process of Air Malta.
"While the credit rating agency maintains a negative outlook on Malta’s sovereign rating because of what is happening around us (according to Moody’s a “sustained improvement in investor sentiment” in the euro area is “unlikely in the forsseebabel future”, it expresses confidence that Malta will further narrow its deficit and sustain its successful consolidation strategy."
The ministry said it has already re-affirmed its commitment to further reduce the budgetary deficit by the end of this year and in Budget 2013, saying that was critical to ensuring stability, to continue to attract investment and jobs.
OPPOSITION'S REACTION
The Opposition said in a statement that Moody’s confirmed its concern, which had been also confirmed by the International Monetary Fund and the European Union, that the government was blowing up its estimates for this year increasing the possibility of deficit growth.
Last year, the government reached its deficit aims because it reduced capital expenditure,( not on the new Parliament), rather than addressing recurrent expenditure.
It was clear from the Prime Minister’s declaration that the government would be playing a similar game this year.
Moody's also confirmed the PL’s concern on the ever-growing debt and the deficit had to be seen in this context.
The PL said that if the deficit targets were reached through an increase in debt, the situation would become more unsustainable than now, when the interest on debt was higher than the expenditure on education.
Noting that Moody’s had retained a negative outlook, the PL acknowledged that this time at least, GonziPN did not come out with a hysterical attack on the agency, as it had done a few months ago.