Moody’s changes Malta’s outlook from negative to stable

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International credit rating agency Moody’s confirmed Malta’s long-term rating at A2, changing its outlook from negative to stable.

Malta’s rapid exit from the FATF gray list and its resilient economic growth underpinned Moody’s decision to change its outlook.

He added that the A2 rating assertion “balances Malta’s wealthy and fast-growing economy as well as strong affordability and moderate exposure to event risk sensitivity against the small size of the lender.” economy and the high volatility associated with it, as well as a great openness to international trade.

Moody’s rating affirmation also takes into account Malta’s performance in line with its peers on institutions, governance strength and fiscal strength.

While Malta’s local and foreign currency caps remain unchanged at Aaa, Moody’s said Malta had a wealthy, fast-growing economy and strong debt capacity that put it on par with its peers in terms of institutions, sound governance and fiscal soundness.

The agency said the main factors changing the outlook on Malta’s A2 ratings are:

  • Malta’s economic diversification supports its resilient growth prospects despite the expected global slowdown;
  • As the energy crisis challenges public finances, Moody’s expects gradual fiscal consolidation to continue;
  • Malta’s removal from the Financial Action Task Force (FATF) gray list reflects the authorities’ commitment to institutional reform.

Moody’s projects Malta’s real GDP to grow by 6% in 2022, supported by strong growth in the first half of the year, with Malta’s real GDP standing nearly 5% above its pre-pandemic level from 2% in the euro area at the end of the second quarter of the year.

The agency said domestic demand and the export of services supported the recovery, with private consumption benefiting from a rebound in the tourism sector as international travel resumes.

Moreover, the increase in employment and investment is also supporting domestic demand. Record labor shortages reflect a strong labor market in all fields, with employment gains in several sectors such as construction, transportation and professional services.

In the context of the military conflict in Ukraine, Moody’s pointed out that Malta had no direct energy dependence on Russia and that energy subsidies had helped control Malta’s inflation rate.

“As in other European countries, high gas and oil prices, combined with rising inflation for food, non-energy industrial goods and services, are negatively affecting household incomes and corporate margins. , albeit to a lesser extent than in most other European countries Moody’s expects Malta’s average inflation to reach 5.9% this year, mainly driven by service prices, with government measures offsetting higher prices for energy on the price index. To date, government measures have helped keep Malta’s inflation (7.4% in October) the third lowest in the Eurozone.”

Global price spike poses risk to tourism sector

Looking ahead, Moody’s said that in 2023 and 2024 Malta’s real GDP growth is expected to reach 3.0% and 3.5%, respectively, below the economy’s potential of 3.5% at 4%.

At the same time, average inflation is expected to reach 3.8% and 2.7% respectively in 2023 and 2024.

However, Moody’s said “the likelihood of a sharp decline in tourism activity due to new health concerns is now much lower than a year ago, although the global price spike poses a risk. for the travel and hospitality industry.

In addition, Moody’s forecasts assume continued growth in Malta’s diversified services industry: as noted by the European Commission, the Maltese economy is performing well in high value-added service sectors, such as financial, information and communication and recreational activities such as online gambling.

Additionally, Moody’s expects that Malta’s potential growth will likely be driven by the return of labor inflows, capital investment and total factor productivity in the coming years.

Moody’s expects gradual fiscal consolidation to continue

While noting that Malta has built up fiscal buffers in the run-up to the coronavirus pandemic, with the country recording a surplus in 2019, Moody’s said that “however, the large deficits recorded in 2020 (9.4% of GDP) and 2021 (7.8% of GDP) brought the debt-to-GDP ratio to 56.3% at the end of 2021, and anticipation of further weakening of fiscal measures in 2022 informed our negative outlook in August 2021.”

Looking ahead, Moody’s expects Malta’s general government deficit to continue to decline over the two years and will reach 5.8% of GDP in 2022, 5.6% of GDP in 2023 and 4.7% of GDP in 2024 according to its reference scenario.

“Revenue growth is expected to remain strong, benefiting from continued solid economic growth. On the spending side, the phasing out of pandemic support measures should ease government spending in 2022 and beyond, while energy support measures will work in the opposite direction.

Moody’s expects Malta’s debt-to-GDP ratio to reach 57.1% in 2022, 59.5% in 2023, peaking at 61.2% in 2025 before declining thereafter.

However, Moody’s believes there is a risk of higher budget deficits given the high uncertainty and the government’s overall policy approach to mitigating the impact of the military conflict in Ukraine on energy prices for consumers and businesses.

From a debt affordability perspective, prudent debt management by the Maltese authorities largely insulates the country from a sharp increase in interest payments, given the long average maturity of Malta’s debt ( 8.9 years in 2021).

Moreover, the fact that almost all of Malta’s debt is denominated in euros and that a majority (76.2% in 2021) is held by domestic investors are additional mitigating factors.

Moody’s expects the change in ECB monetary policy to only increase Malta’s interest payments gradually over time. In its base scenario, Moody’s forecasts that Malta’s interest-to-income ratio will fall from 3.1% in 2021 to 4.5% in 2024, and that the interest-to-GDP ratio will fall from 1.1% in 2021 to 1, 6% in 2024. The measures are broadly in line with the A2 median: a slightly higher debt burden is mitigated by high debt affordability.

Rapid exit from the gray list reflects Malta’s commitment to institutional reforms

Malta’s gray listing by the FATF has posed risks to the economic outlook and the banking sector while challenging the country’s institutions and reputation, Moody’s said, however the rapid exit ‘marks a significant achievement for Malta’ .

Moody’s said Malta had made “significant progress” in addressing strategic AML/CFT deficiencies previously identified by the FATF and strengthening its beneficial ownership regime and Financial Intelligence Analysis Unit (FIAU).

“In Moody’s view, Malta’s rapid exit from the ‘grey list’ reflects a strong and continued commitment by local authorities to comply with international standards and improve the country’s institutional structure.”

The exit, he said, “is likely to improve the business climate by significantly reducing the reputational risk associated with greylisting, shifting focus to Malta’s traditional strengths such as a tax environment competitive, an existing entrepreneurial ecosystem and the widespread use of English. ”

Moody’s expects Malta to continue to engage with the financial community to ensure a robust regulatory framework, which should support the island’s financial competitiveness on a sustainable basis.

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