Moody's downgrades Malta's credit rating to A3, outlook negative

Malta is facing detoriorating growth prospects that will expose the government to "constrained, higher-cost" funding conditions, Moody's Investors Service said yesterday as it downgraded the island along with five European nations.

Malta, Portugal, Slovenia, Italy and Spain received one-notch downgrades and still have negative outlooks, Moody's said. Moody's actions follow similar moves take by Standard & Poor's an Fitch Ratings last month where multiple downgrades were made all at once. Like S&P and Fitch before it, Moody's cited concerns with the ongoing debt crisis, how it is being handled and the impact on the region's various economies were at the heart of the downgrades.

Moody's is maintaining a negative outlook on Malta's sovereign rating, reflecting the potential further decline in economic and financing conditions as a result of the deterioration in the euro area debt crisis. In a related rating action, Moody's also downgraded the foreign- and local-currency debt ratings of Malta Freeport to A3 from A2 given its status as a government-guaranteed entity.

Moody's said the two drivers for Malta's downgrade were the uncertainty from the eurozone area, which was weighing on an already fragile market confidence; but also Malta's relatively weak debt metrics compared with other 'A' category peers, and the country's reliance on the strength of the European economy.

This, Moody's said, would dampen Malta's growth prospects and worsen its debt dynamics.

The uncertainty over the euro area's prospects for institutional reform and austerity programmes keep wieghing on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions. While this is making it harder for European countries to get more financial credit, the fragile financial environment has increased Malta's susceptibility to financial and macroeconomic shocks.

This fragile environment is also exacerbating Malta's own challenge to keep its debt down, which Moody's said is the second driver of its downgrade. Malta's debt metrics are among the weaker of the 'A'-rated sovereigns.

"Growth prospects over the medium term also appear poorer for Malta than for its peers, given the country's dependence on tourism from the euro area as its main source of economic growth. This will hinder the narrowing of the fiscal imbalance.

"Lower business confidence and tighter credit conditions are likely to result in weak private-sector investment, and real output growth is likely to be significantly lower than the government's forecast of over 2%."

Moody's said Malta's deteriorating growth prospects and the impact this will have on its debt-reduction efforts will "further reduce government financial strength and expose it to more constrained, higher-cost funding conditions."

Moody's warned the rating could further be downgraded if Malta's economic growth prospects deteriorate significantly, specifically if its deficit-reduction programme is obstructed. A further worsening in the eurozone crisis that would make government lending even more costlier, would also lead to a further downgrade.

Conversely, the negative outlook on Malta's sovereign rating would be changed to stable in the event of a sustained improvement in investor sentiment across the euro area. "Although unlikely in the foreseeable future, the government's ratings could move upward in the event of a significant improvement in the government's balance sheet, leading to greater convergence with 'A' category medians. Substantial structural reforms focused on enhancing competitiveness and boosting potential output growth rates would also be credit-positive."

Government reaction

The Maltese Finance Ministry today said Moody's downgrade was down to the impact on investor confidence that the deteriorating financial and economic situation in Europe was having. "The slowdown in economic growth presents major challenges for financial sustainability and strengthens the government's decision to rein in spending and focus investment on those economic sectors which create more jobs."

The ministry also said Malta was one of only two countries to have reduced its deficit in 2010, at the height of the financial crisis, leading to the lifting of the EU's excessive deficit procedure. The government said it would continue to offer incentives to encourage investment and job creation, and it would continue to boost sectors such as tourism where the MTA had been given a bigger budget.