Updated Saturday

The Nationalist Party this afternoon welcomed a report by ratings agency Moody's which affirmed Malta’s A3 government bond rating and changed the outlook to stable from negative.

The PN said the Moody's report also confirmed that, contrary to what the prime minister had said, Malta was required to present the EU with a programme of measures to narrow the deficit. The programme will be presented on Monday.

Moody's in its report yesterday said the decision to change the outlook on Malta’s sovereign rating was driven by the following key drivers: -

* Moody’s expectation that debt metrics will stabilise in 2014 given an economic recovery and the newly elected government’s commitment to fiscal consolidation;

* Malta’s lack of funding stress and limited contagion risk from the euro area;

* The resilience of the Maltese banking system, with banks following a very conservative and traditional banking model that has not presented problems for the sovereign even through the worst of the financial crisis.

Moody’s said that the first key driver underpinning today’s rating action was its expectation that Malta’s government debt metrics would stabilise next year given the country’s economic recovery and the newly elected government’s commitment to fiscal consolidation.

Output growth continued to moderate last year falling to 0.8 per cent from 1.6 per cent in 2011. This subdued pace of growth persisted into the first half of this year due to electoral uncertainty; however, the rating agency expects real GDP growth to recover, albeit remaining below potential, to 1.3 per cent in 2013 and two per cent next year as domestic demand recovers underpinned by low unemployment and rising real wages.

Moody’s noted that the 2013 budget was adopted before the current Government fully began operating.

Budgetary measures for this year are only likely to take full effect in the second half given delays associated with recent elections and government transition. The authorities remained committed to the medium-term objective of consistently reducing fiscal imbalance.

As a result, Moody’s believes that Malta’s fiscal deficit will narrow slightly to 3.1 per cent this year, from 3.3 per cent last year, and remain broadly unchanged in 2014 at three per cent. Consequently, debt ratios would stabilise at 74.2 per cent in 2014, from 73.5 per cent in 2013.

The second key driver in forming Moody’s decision was the absence of funding stress by the sovereign, as evidenced earlier this year when the situation in Cyprus escalated without significant contagion to the Maltese government debt market.

Overall, contagion risk remained limited and the government’s cost of funding continued to decrease. Although funding dynamics were not without vulnerabilities given the linkages between the sovereign and the banking system, the domestic funding pool was deep, very flexible and accommodating to the funding needs of the sovereign, which ultimately reduced the Government’s exposure to volatility of funding costs.

The third key driver was the resilience of the banking system, with banks following a very conservative and traditional banking model that had not presented problems for the sovereign even through the worst of the financial crisis.

“Moody’s notes that the ‘onshore’ segment of the banking system continues to report favourable indicators.

“Although the sector’s size and concentration risk are vulnerabilities, the system is very well capitalised and has a very low reliance on wholesale funding due to its ample liquidity. High deposit levels (at about 185 per cent of GDP) highlight the amount of domestic wealth available to cover the sovereign’s financing needs and anchor systemic liquidity.”

PN STATEMENT

In a statement over the signature of deputy leader Mario de Marco, the PN said the Moody's report was important for Malta's prospects to attract investment and create jobs.

The PN noted that Moody's gave a positive outlook for Malta -  in contrast to Fitch -  after the former was informed that the government would present a plan for a reduction of Malta's deficit to below 3%.

The confirmed how the Fitch downgrade was the result of the government's failure to present such a plan, even though the government had tried to blame the former administration.

The present government had left everybody guessing over how it would narrow the deficit, whereas the PN had repeatedly insisted that a credible plan needed to be presented.

It was not being shown that, contrary to what the prime minister had declared, the government needed to present the European Commission an economic partnership programme to reduce the deficit by at least 0.4% of GDP (€30m) by the end of this year.

The programme, due to be presented on Monday, was imposed by the country by the European Commission.

Contrary to what the prime minister had said when Malta was put under the Excessive Deficit Procedure, Malta had been ordered by the European Commission to take a number of measures to make up for excessive spending by this government, such as on new salaries, promotions and privileges for those close to the government.

The PN hoped it would not be the ordinary Maltese who would have to pay for the government's mistakes through reduced spending for important sectors including social services, education, health and training.

The government was also politically bound to keep its electoral promises.

See the Moody's reports in full below.