Although joining the eurozone eliminates the risk of a currency or balance of payments crisis, the Maltese economy's size and concentration in tourism and electronics mean the island is still vulnerable to shocks affecting these sectors, Moody's Investor Service has warned.

Nevertheless, the external deficit has narrowed significantly and continues to be financed largely through non-debt creating inflows of foreign direct investment.

Moody's carried out in-depth research surrounding the existing rating, outlining the rating rationale for the country's current rating, highlighting the factors that may lower the rating as well as those that may improve it.

Moody's rates Malta's debt at A1, reflecting the country's progress regarding real convergence to the rest of the EU. In 2007, Malta's GDP per capita was more than 60 per cent of the eurozone average and the fourth highest level of the 12 newest EU states.

The agency says Malta's credit rating would move upward should fiscal restraint continue, if the deficit was eliminated and if there was a further reduction in the general government debt ratios to bring them closer to the average of other new EU members.

Malta's rating is one of the lowest among eurozone members.

Moreover, implementation of structural reforms that enhance real economic convergence and mitigate the aging challenges for public finances would also exert upward pressure on the rating.

On the other hand, the rating is likely to be downgraded should fiscal slippage re-emerge, leading to a substantial accumulation of debt over a prolonged period that would imperil Malta's convergence with the rest of the eurozone.

Moody's says that the credit strengths of Malta include a relatively high standard of living, even by standards of new EU members, together with its increasingly vibrant economic activity.

Malta is a net external creditor mainly thanks to net foreign assets of the domestic banking system and the advantages conferred to a small, open economy by EU and euro membership.

Despite having a high level of gross external debt, which is largely accounted for by non-resident bank deposits, Malta is an overall net external creditor.

Malta has benefited from its accession to the EU in May 2004 and the related strengthening of its economic and social institutions. These trends have enhanced the economy's flexibility and resilience, which will be necessary to cope with the strength of the euro, Moody's says.

Apart from the high debt burden, additional rating concerns relate to productivity and competitiveness challenges. Malta has a relatively wide current account deficit, which exceeded four per cent of GDP in 2007.

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