Moody’s Investors Service has today affirmed Malta’s A3 Government bond rating and changed the outlook to stable from negative.

The decision to change the outlook on Malta’s sovereign rating was driven by the following key drivers:

1) Moody’s expectation that debt metrics will stabilize in 2014 given an economic recovery and the newly elected government’s commitment to fiscal consolidation.

2) Malta’s lack of funding stress and limited contagion risk from the euro area.

3) The resilience of the Maltese banking system, with banks following a very conservative and traditional banking model that has not presented problems for the sovereign even through the worst of the financial crisis.

The first key driver underpinning today’s rating action is Moody’s expectation that Malta’s government debt metrics will stabilise in 2014 given the country’s economic recovery and the newly elected government’s commitment to fiscal consolidation.

Moody’s noted that output growth continued to moderate in 2012 falling to 0.8% from 1.6% in 2011. This subdued pace of growth has persisted into the first half of 2013 due to electoral uncertainty; however, the rating agency expects that real GDP growth will recover, albeit remaining below potential, to 1.3% in 2013 and 2.0% in 2014 as domestic demand recovers underpinned by low unemployment and rising real wages.

“The 2013 budget was adopted before the current Government fully began operating. Budgetary measures for 2013 are only likely to take full effect in the second half of the year given delays associated with recent elections and government transition. The authorities remain committed to the medium-term objective of consistently reducing the fiscal imbalance.”

As a result, Moody’s said it believes that Malta’s fiscal deficit will narrow slightly to 3.1% in 2013, from 3.3% in 2012, and remain broadly unchanged in 2014 at 3%. Consequently, debt ratios will stabilize at 74.2% in 2014, from 73.5% in 2013.

The second key driver informing Moody’s decision to change the outlook to stable, it said, “is the absence of funding stress by the sovereign, as evidenced earlier this year when the situation in Cyprus escalated without significant contagion to the Maltese Government debt market. Overall, contagion risk has remained limited and the government’s cost of funding has continued to decrease.”

Although funding dynamics are not without vulnerabilities given the linkages between the sovereign and the banking system, the domestic funding pool is deep, very flexible and accommodating to the funding needs of the sovereign, which ultimately reduces the government’s exposure to volatility of funding costs, Moody’s said.

“The third key driver is the resilience of the banking system, with banks following a very conservative and traditional banking model that has not presented problems for the sovereign even through the worst of the financial crisis.”

Moody’s notes that the “core domestic” segment of the banking system continues to report favorable indicators. Although the sector’s size and concentration risk are vulnerabilities, the system is very well capitalized and has a very low reliance on wholesale funding due to its ample liquidity. “High deposit levels (at about 185% of GDP) highlight the amount of domestic wealth available to cover the sovereign’s financing needs and anchor systemic liquidity.”

Moody’s said that the Government’s ratings could be upgraded in the event of a significant improvement in the government’s balance sheet, leading to greater convergence of its fiscal metrics with ‘A’ category medians. Substantial structural reforms focused on enhancing competitiveness and boosting potential output growth rates would also be credit positive.

Conversely, Moody’s said ti would view as negative material fiscal slippage that jeopardizes the anticipated stabilisation of its debt burden. “Downward pressure on the rating could develop if Malta’s economic growth prospects deteriorate significantly, thereby obstructing fiscal consolidation. The rating could also be downgraded if the financial system were to undergo a large negative shock that hinders its ability to provide funding to the sovereign.”

GDP per capita (PPP basis, US$): 27,022 (2012 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.8% (2012 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.8% (2012 Actual)

Gen. Gov. Financial Balance/GDP: -3.3% (2012 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.2% (2012 Actual) (also known as External Balance)

External debt/GDP: 526.4% (2012 Actual)

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

Moody’s said that on the 30th September 2013, a rating committee was called to discuss the rating of Malta, Government of. “The main points raised during the discussion were: The issuer’s governance and/or management, has not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has improved. The systemic risk in which the issuer operates has not materially changed. The issuer has become less susceptible to event risks.”

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