Moody’s lauds Malta’s ‘successful consolidation strategy’, affirms A3 bond rating

Updated with government, Opposition reactions.

Moody's Investors Service has affirmed Malta's A3 government bond rating, but insisted the economic outlook remained negative.

Moody's said the key drivers were the government's successful consolidation strategy, which brought the 2011 fiscal imbalance below the 3% of GDP ceiling under the EU's excessive deficit procedure.

The rating agency also said it expected debt ratios to stabilise in 2013, but pointed out the continued presence of significant risks.

Moody's expects continued positive real output growth for 2012, but well below potential, coming in at a very subdued 0.5%. Growth in 2013 will then recover to 1.1%.

Although the deficit should remain below 3% of GDP, Moody's believes that the fiscal imbalance will increase to 2.9% in 2012, before declining to 2.6% in 2013.

These forecasts imply a continued, but slowing, increase in national debt. The rating agency expects general government debt to rise to 73.7% of GDP in 2012 and 74.5% of GDP in 2013 before trending downward.

Although Moody's expects debt to stabilise in 2013, earlier than it's A-rated peers, Malta's debt will remain well above peer medians.

Moody's noted that Malta's consolidation strategy is mostly underpinned by additional revenue-raising measures, and appears to be optimistic given the weaker economic environment at home and abroad, additional expenditure related to the restructuring of Air Malta, utility subsidies and the current stage of the political cycle, with the deficit traditionally widening in pre-election periods.

"Given these factors and a susceptibility to stop-and-go policies, Moody's believes that there remains a risk of fiscal slippage in 2012. Should instability due to the euro area debt crisis hamper macroeconomic performance, negative debt dynamics could persist beyond 2013 despite a narrowing of the deficit.

"Such ongoing dynamics could lead to a significant further deterioration in the sovereign's key credit metrics and as such underpin Moody's decision to

maintain a negative outlook."

The rating agency said the negative outlook on Malta's sovereign rating could be changed to stable in the event of a sustained improvement in investor sentiment across the euro area, although this is unlikely in the foreseeable future.

"Substantial structural reforms focused on enhancing competitiveness and boosting potential output growth rates would also be credit positive."

Conversely, Moody's said it would view as negative material fiscal slippage that jeopardises debt sustainability.

On Monday, the agency warned of the possibility of a future EU downgrade and said that "deterioration in the creditworthiness of EU member states" could trigger such a move. "It is reasonable to assume the same probability of default by the EU on its debt obligations as the highest rated key member states' probability of default," the agency said.

In July, Moody's changed the outlook for the ratings of Germany, Luxembourg, and the Netherlands to negative from stable, citing uncertainty about the eurozone's ongoing debt crisis. Many EU member states have been struggling with a deep economic stagnancy since the bloc's financial crisis began about five years ago, forcing some of the most affected nations to adopt harsh austerity measures to be eligible to get the EU bailouts.

In a related rating action, Moody's has also affirmed the foreign-and local-currency debt ratings of Malta Freeport Co. at A3, given its status as a government-guaranteed entity.

Government, Opposition reactions

In a statement, the finance ministry said Moody's report welcomed government's efforts at improving the country's financial situation.

 "In its report, Moody's welcomes what it terms the Maltese 'government's successful consolidation strategy' and notes that 'government has successfully achieved its goal of reducing the fiscal deficit'. Such a statement contradicts the Opposition's repeated statements over the past month where the Opposition leader and spokespersons branded Malta's financial position as negative, claiming that it had worsened over the past months.

"Government's rebuttals and explanations have now been confirmed by Moody's independent audit of our country's finances."

The ministry said Moody's assessment acknowledged the pressures on government finances related Enemalta and the Air Malta restructuring process.

On the negative outlook, the ministry insisted that this was down to investor sentiment in the euro area.  "Government had already re-affirmed its commitment to further reduce the budgetary deficit by the end of this year and in Budget 2013, which is critical in ensuring stability, to continue to attract investment and jobs to our shores."

In a statement, the Labour Party said that Moody's assessment on Malta's bond rating confirmed its concerns over inflated expenditure estimates that posed a risk of increasing the deficit.

Labour said government had reached its deficit reduction targets last year because it reduced capital expenditure, rather than addressing recurrent expenditure.

According to Labour, reaching deficit targets by increasing debt remains a major concern over its unsustainability, as the nation is paying more in interest than it is investing in the education sector.