- Moody’s confirms Malta’s credit rating

Moody’s Investor Service changed Malta’s foreign currency ceiling and government bond rating to positive from stable but warned that ratings could go down if there was a derailment of Malta’s plans for euro adoption. The agency states, “The eventual adoption of the euro by the seven countries will mean the elimination of currency transfer risk that will result in an upward adjustment of their country ceiling to Aaa at the time of entry into the eurozone.”

In its report on Malta, Moody’s said the country had benefited from EU accession and the related strengthening of its economic and social institutions. Further benefits would be gained from the adoption of the euro, which Malta was aiming for in 2008. The agency states, “This target should be achievable assuming that the government remains committed to its programme of fiscal consolidation.”

The agency said that Malta’s rating is constrained by a number of factors:

1)High and rising level of public debt which at about 77% was the highest among the new member states. Although the government had made progress towards reducing the fiscal deficit it remained relatively high and was only expected to approach the Masstricht criterion of 3% of GDP this year

2)Other negative factors were low growth, a gradual erosion of competitiveness, particularly in tourism and manufacturing

3)Poor performance of some public enterprises and the narrow economic base

4)The small size of Malta’s economy and its reliance on tourism and electronics made it vulnerable to potential exogenous shocks

Moody’s said it decision to change Malta’s outlook from stable to positive reflected the positive credit implications associated with participating in the Exchange Rate Mechanism (ERMII). Adoption of the euro would mean the elimination of currency transfer risk that would result in an upward adjustment of the country ceiling to Aaaa at the time of entry into the eurozone.

“Moody’s believe that the prospect of entry into EMU is a deterrent to destabilising capital flows, thereby strengthening the government’s creditworthiness.”

The agency warned that a return to fiscal slippage leading to the further accumulation of public debt and the derailment of Malta’s plans for adopting the euro could force the rating down, but a sustained commitment to fiscal prudence leading to euro adoption would push the rating up.