Moody's downgrades Malta to A3, negative outlook

As anticipated in November 2011, Moody's Investors Service has today downgraded Malta to A3 from A2, negative outlook. Mood’s said it has adjusted the sovereign debt ratings of selected EU countries in order to reflect their susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis and how these risks exacerbate the affected countries' own specific challenges. Reacting to the downgrading the Maltese Ministry of Finance said that government will continue to control public expenditure and work hard to stimulate investment to generate jobs and economic growth.

Moody's actions can be summarised as follows:

- Austria: outlook on Aaa rating changed to negative

- France: outlook on Aaa rating changed to negative

- Italy: downgraded to A3 from A2, negative outlook

- Malta: downgraded to A3 from A2, negative outlook

- Portugal: downgraded to Ba3 from Ba2, negative outlook

- Slovakia: downgraded to A2 from A1, negative outlook

- Slovenia: downgraded to A2 from A1, negative outlook

- Spain: downgraded to A3 from A1, negative outlook

- United Kingdom: outlook on Aaa rating changed to negative

Moody’s said the main drivers of today's actions are:

- The uncertainty over (i) the euro area's prospects for institutional reform of its fiscal and economic framework and (ii) the resources that will be made available to deal with the crisis.

- Europe's increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.

- The impact that Moody's believes these factors will continue to have on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.

To a varying degree, these factors are constraining the creditworthiness of all European sovereigns and exacerbating the susceptibility of a number of sovereigns to particular financial and macroeconomic exposures.

Moody's has reflected these constraints and exposures in its decision to downgrade the government bond ratings of Italy, Malta, Portugal, Slovakia, Slovenia and Spain as listed above. The outlook on the ratings of these countries remains negative given the continuing uncertainty over financing conditions over the next few quarters and its corresponding impact on creditworthiness.

In related rating actions, Moody's has today also downgraded the rating of Malta Freeport Co. to A3 from A2 because Malta Freeport is government-guaranteed and therefore has a negative outlook in line with the outlook of the government. 

Moody's Investors Service listed the main reasons it downgraded Malta's government bond rating to A3 from A2, with the outlook remaining negative:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) Malta's relatively weak debt metrics compared with 'A' category peers and the country's reliance on the strength of the European economy, which will dampen its own growth prospects in the medium term and worsen its debt dynamics.

Moody's is maintaining a negative outlook on Malta's sovereign rating to reflect the potential for a further decline in economic and financing conditions as a result of a deterioration in the euro area debt crisis.

In a related rating action, Moody's has today also downgraded the foreign- and local-currency debt ratings of Malta Freeport Co. to A3 from A2 given its status as a government-guaranteed entity. The outlook remains negative in line with the sovereign rating.

RATIONALE FOR DOWNGRADE

A contributing factor underlying Moody's one-notch downgrade of Malta's government bond rating is the uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework and over the resources that will be made available to deal with the crisis. Moreover, Europe's weak macroeconomic prospects complicate the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness. Moody's believes that these factors will continue to weigh on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions. In addition to constraining the creditworthiness of all European sovereigns, the fragile financial environment increases Malta's susceptibility to financial and macroeconomic shocks given the concerns identified below.

The fragile external environment is exacerbating a number of Malta's own challenges which continue to weigh negatively on the country's debt rating and constitute the second driver of Moody's 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%. The deteriorating growth prospects and the concomitant impact on already weak debt dynamics will further reduce government financial strength and expose it to more constrained, higher-cost funding conditions.

WHAT COULD MOVE THE RATING UP/DOWN

Downward pressure on the rating could develop if Malta's economic growth prospects deteriorate significantly, thereby obstructing fiscal consolidation and leading to a significant further deterioration in the sovereign's key credit metrics. The rating could also be downgraded if an intensification of the euro area crisis were to result in materially higher cost or constrained funding conditions for the government. A further deterioration of macroeconomic conditions in Europe, leading to material fiscal and debt slippage in Malta, could also pressure the rating.

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.

Source: Moody’s Investor Service