Maltese economic analysts breathed a collective sigh of relief yesterday as ratings agency Moody ’s affirmed Malta’s A3 government bond rating while praising the government for having reduced the national deficit.

Government’s consolidation strategy is successful

There was no change in Moody’s economic outlook for the country, which remained negative.

Moody ’s affirmation came just a day after it had cut its EU-wide outlook from stable to negative, prompting significant drops in European stocks.

The American ratings agency ascribed its decision to not cut Malta’s rating to the government’s “successful” consolidation strategy, which had led to a 2.7 per cent deficit by the end of 2011 – below the three per cent threshold allowed by EU rules.

The government has set itself a target of reducing the national deficit even further, to 2.3 per cent, by the end of this year. That would appear to be an ambitious target, with Moody’s saying the target was “optimistic” given fiscal pressures – both national, such as Air Malta and utility subsidies, and international – on government coffers.

Moody’s expects Malta’s economy to grow by half a percentage point this year – lower than the government’s revised growth forecast of one to 1.5 per cent GDP growth for 2012.

A Finance Ministry spokesman welcomed the Moody ’s report and said that the Labour Party ’s repeated claims that Malta’s economy had taken a turn for the worse in recent months had now been rebutted by an independent audit of the country’s finances.

“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,” the spokesman added.

In a hint of veiled criticism, Moody ’s remarked that given “a susceptibility to stop-and-go policies”, there was still a risk of fiscal slippage throughout 2012.

The ratings agency said it expected Malta’s debt to increase slightly to 74.5 per cent during 2013 before starting to fall. Although such a reversal would come earlier than Malta’s ‘A’ rating European peers, Moody’s added the caveat that “Malta’s debt ratios remain well above peer medians”. A change in Malta’s negative rating would require significant improvements in the overall health of eurozone economies, the agency also said.

Substantial structural reforms aimed at enhancing competitiveness and boosting growth could also help improve Malta’s rating, as would an “unlikely” improvement in Malta’s balance sheet.

Moody’s also warned that things could turn sour: deterioration in growth prospects would make it harder to cut the deficit, begin to narrow its debt and make the country less credit-worthy.