Malta bond ratings cut on threat of contagion
by Daniel Mason
07 September 2011
Malta's bond ratings have been downgraded by Moody's because of poor growth forecasts and weak debt metrics, which have left it "susceptible to contagion" from the rest of the eurozone.
The credit rating agency lowered the island nation's foreign and local currency bond ratings from A1 to A2 and said the outlook was negative, meaning there remains potential for a further downgrade in the future.
Malta is vulnerable to economic shocks because of the decline in its output since the 2008 financial crisis, Moody's said in a statement yesterday. It added that an expected improvement in the government's balance sheet had not materialised and debt levels were set to stay above those which would justify the higher rating.
The Maltese government predicted that output growth would decline from 3 per cent before the crisis to 2.3 per cent because of a decline in fixed capital investments. But Moody's noted that the International Monetary Fund forecasts lower medium-term growth of 2 per cent.
Malta's bond ratings were raised on its accession to European monetary union, based on an expectation of increased growth and an improved government balance sheet – but these benefits had "not materialised" and due to the financial crisis debt rations actually weakened, Moody's said.
"The deteriorating global economic outlook and continued instability in the euro area heighten the risk of a new economic shock throughout Europe as fears of contagion intensify," read the rating agency's statement. It added that although the impact of the 2008 crisis on Malta was limited, the country's real economy was "susceptible to contagion" because of its reliance on external demand and tourism.
Malta's debt metrics, taking into account the low growth forecasts, do not compare well with A1-rated countries such as Estonia and the Czech Republic, Moody's said. And it warned that a further downgrade might be on the cards if the government fails to meet deficit reduction targets or balance sheet shocks to financial institutions.
The Maltese government has expressed disappointment with the decision, with the Ministry of Finance remarking in a statement: "While taking note of Moody's concerns, the government is committed to take all necessary actions to strengthen and ensure the country's economic and financial stability."
The credit rating agency lowered the island nation's foreign and local currency bond ratings from A1 to A2 and said the outlook was negative, meaning there remains potential for a further downgrade in the future.
Malta is vulnerable to economic shocks because of the decline in its output since the 2008 financial crisis, Moody's said in a statement yesterday. It added that an expected improvement in the government's balance sheet had not materialised and debt levels were set to stay above those which would justify the higher rating.
The Maltese government predicted that output growth would decline from 3 per cent before the crisis to 2.3 per cent because of a decline in fixed capital investments. But Moody's noted that the International Monetary Fund forecasts lower medium-term growth of 2 per cent.
Malta's bond ratings were raised on its accession to European monetary union, based on an expectation of increased growth and an improved government balance sheet – but these benefits had "not materialised" and due to the financial crisis debt rations actually weakened, Moody's said.
"The deteriorating global economic outlook and continued instability in the euro area heighten the risk of a new economic shock throughout Europe as fears of contagion intensify," read the rating agency's statement. It added that although the impact of the 2008 crisis on Malta was limited, the country's real economy was "susceptible to contagion" because of its reliance on external demand and tourism.
Malta's debt metrics, taking into account the low growth forecasts, do not compare well with A1-rated countries such as Estonia and the Czech Republic, Moody's said. And it warned that a further downgrade might be on the cards if the government fails to meet deficit reduction targets or balance sheet shocks to financial institutions.
The Maltese government has expressed disappointment with the decision, with the Ministry of Finance remarking in a statement: "While taking note of Moody's concerns, the government is committed to take all necessary actions to strengthen and ensure the country's economic and financial stability."
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