Fenech: Moody's downgrade forced by Eurozone instability

The ratings company lowered the two bond ratings to A2 from A1, leaving the ratings six notches below the coveted Aaa rating.

Noting that Malta's lower medium-term economic growth rates leave it at risk for further economic shocks, Moody's also said that the country has exhibited weak debt metrics for some time.

Any worsening of the euro-area debt crisis could affect Malta's real economy, Moody's added, pointing to the nation's small open economy and its reliance on external demand and tourism.

"The impact of such a possible shock would arise from second-round effects, given that the primary blow would be felt by core European countries, which represent Malta's main trading partners and tourist markets," the firm wrote.

Still, Moody's said it could lift Malta's negative outlook to stable if its economy proves resilient in the face of a large economic shock and if its debt metrics improve.

In a statement, Finance Minister Tonio Fenech said the government “understands” the downgrading, even though Malta still had an ‘A’ credit rating.

“As clearly stated in Moody’s reports, Malta’s country ceilings for bonds and bank deposits are unaffected by today’s rating action and remain at Aaa, in line with the euro area’s ceilings.”

Fenech expressed disappointment that the deteriorating global economic outlook and continued instability in the euro area and their potential adverse impact on Malta’s economy had forced the reclassification “notwithstanding government’s efforts to successfully address the economic crisis and Malta’s continued efforts towards sustainable finances.”

Fenech said Moody’s acknowledged the limited impact on the Maltese economy of the 2008/9 financial crises. He said government had assisted manufacturing companies facing drops in demand, improved the tourism product and postponed deficit reduction targets, saving over 5,000 jobs.

“Malta’s open economy, while resilient in the face of the economic turmoil of the last three years, will always be exposed to international economic realities,” Fenech said.

“Malta has managed to continue to sustain above-EU average growth rates and significantly lower levels of unemployment when compared to our EU partners, because of the various structural reforms that continue to be implemented and the incentives we have given to small business and industry to sustain economic growth.

“So it would be highly imprudent to steer government’s economic and financial management policy away from its current emphasis on continued macroeconomic stability and economic growth,” the finance minister said.

“While taking note of Moody’s concerns, the government is committed to take all necessary actions to strengthen and ensure the country’s economic and financial stability.”