Moody’s Investors Service (“Moody’s”) affirmed on Friday, Malta’s long-term issuer and senior unsecured ratings at A2.

In a statement, Moody’s said that “concurrently the outlook has been changed to negative from stable.” Moody’s has also affirmed the backed senior unsecured debt rating of Freeport Terminal (Malta) Limited at A2, while also changing the outlook to negative from stable on that rating, in line with the sovereign’s ratings.

The rated senior debt instruments issued by Freeport Terminal (Malta) Limited are backed by unconditional and irrevocable guarantees from the Maltese government, Moody’s said.

It explained that “the key drivers” behind the negative outlook on the A2 rating are:

1) The significant increase in Malta’s government debt burden, which Moody’s expects to be higher than for A2 rated peers, as well as the risks to the fiscal outlook stemming from the uncertainties tied to the broader economic recovery;

2) The risks to the post-pandemic recovery of the Maltese economy, stemming predominantly from risks associated with the recovery of the country’s tourism sector;

3) The addition of Malta to the “grey list” of the Financial Action Task Force (FATF) over concerns related to anti-money laundering supervision, and the broader risks this poses to the economic outlook and banking sector.

Moody’s went on to say that “the affirmation of the A2 ratings reflects the fact that the increase in the government debt burden is mitigated by the government’s strong debt affordability metrics.”

“It also reflects the relative resilience of the non-tourism-oriented parts of the Maltese economy, the resilience of the banking system to the pandemic shock as well as the government’s efforts to tackle some of Malta’s longstanding institutional challenges tied to the rule of law, control of corruption and anti-money laundering supervision,” it said.

Malta’s local and foreign currency country ceilings remain unchanged at Aaa.

First Driver

Moody’s said that as with Malta’s rating and regional peers, the economic impact of the pandemic and the support measures adopted to mitigate its impact on the economy and public health led to a sharp deterioration of the public finances in 2020.

“That said, Malta’s headline deficit of 10.2% of GDP in 2020 was the second highest in the EU and by far the highest among its A2 rated peers. The increase in the deficit coupled with the sharp economic contraction in 2020 caused the government debt-to-GDP ratio to increase to 54.8% from 42.0% in 2019,” it said.

However, Moody’s said that it expects Malta’s fiscal deficit will further increase to 12.4% of GDP in 2021, the highest in the EU on current projections, as the government will need to continue providing exceptional support to companies and workers that have been hard hit by the pandemic, most notably in the tourism sector.

“Coupled with Moody’s expectations for a relatively subdued economic recovery for Malta in 2021, this leads the rating agency to project an increase in government debt to a level of 66.4% of GDP by the end of this year, while the median debt burden of its A2 rating peers is projected to peak at 58.7% in 2021, up from 45.6% in 2019,” it said.

Moody’s said it expects a “slight further increase in Malta’s debt burden in 2022 and 2023,” and the rating agency expects that Malta’s debt burden will be about 10 percentage points (pps) of GDP higher than the median of A2 rated peers in 2023, while it was 3.6 pps lower than the corresponding median in 2019.

Moody’s forecasts assume that the headline deficit will more than halve to 6.1% of GDP in 2022, which in turn presupposes that most of the current exceptional support measures to the economy can be phased out by the start of that year.

However, it said that “if the evolution of the pandemic and the associated travel restrictions entail that Malta’s tourism sector will struggle to stage a robust and sustained recovery from 2022 onwards, the government could be forced to further prolong these measures.”

While Moody’s forecast incorporates the government’s proposed equity injections (totalling around 2% of GDP) to the state-owned airline Air Malta, which has struggled financially under the pandemic-induced drop in air travel, a more prolonged slump in tourism and air travel to Malta could “further magnify risks from such state-owned enterprises.”

Although Moody’s said that it does “not currently expect that negotiations on international corporate tax harmonisation within the OECD’s base erosion and profit shifting framework will produce a result that significantly diminishes Malta’s corporate tax revenue or its attractiveness to foreign companies, the negotiations on the detailed proposals are on-going and such an outcome cannot be excluded.”

In addition, Moody’s stressed that “the on-going infringement procedure launched by the European Commission (EC) against Malta’s citizenship-by-investment scheme could eliminate government revenues from the scheme if the Commission succeeds in its efforts to repeal the programme.”

Given the differences between the EC and Malta on the issue, Moody’s said that it expects that the legality of the scheme will need to be resolved by the European Court of Justice.

Second Driver

Moody’s said that the Maltese economy contracted by 7.8% of GDP in 2020 due to the economic impact of the coronavirus pandemic; “the sixth sharpest contraction of any European Union (EU, Aaa stable) member state, driven by the trade, travel, accommodation and food sector which accounted for more than a fifth of 2019 gross value added (GVA).”

It said that the sector contracted by 35% in 2020, partly driven by a pandemic-induced decline in private consumption, but above all a 76% decline in the number of tourist arrivals compared to 2019.

Although Moody’s said that it expects the economy to return to growth of 3.5% in 2021, the rating agency does not expect tourism-related activities to be a principal driver behind this.

Although passenger arrivals at Malta airport picked up in June this year, they remained at 28% of 2019 levels and the continued recovery of the tourism sector during the crucial peak of the summer season in July to September has been thrown into doubt by the government’s mid-July decision to require that all arrivals in Malta over the age of 12 be fully vaccinated or undergo a 14-day hotel quarantine, Moody’s said.

While the population of Malta has the highest vaccination rate in the EU, Moody’s said that the change in travel restrictions follows a sudden spike in infection rates in early July, largely concentrated among tourists.

Although Moody’s forecasts a further pick-up in growth rates in 2022 and beyond, the uncertainty around the continued evolution of the pandemic, including the likely emergence of new coronavirus variants which could lead to renewed travel restrictions in Malta and key source countries, poses material risks to the recovery of the tourism sector and the economic outlook also beyond 2021.

Malta’s potential growth rate was slowing from high levels already prior to the pandemic, and some of the drivers risk being exacerbated by the current crisis, such as a difficulty of sourcing non-EU labour due to the vaccination requirement for foreign arrivals in Malta, it said.

Furthermore, Moody’s said that Malta will receive a significantly lower allocation of grants relative to GDP under the EU’s post-pandemic recovery fund Next Generation EU than most other tourism-dependent sovereigns in Southern Europe.

Requested grant funding totals around 2.5% of 2020 GDP for Malta against 4.8% for Government of Cyprus (Ba1 stable), 6.2% for Government of Spain (Baa1 stable) and 10.7% for Government of Greece (Ba3 stable.) Moody’s views these funds as being a key factor in mitigating the economic impact of the pandemic-induced decline in tourism on these sovereigns’ economic strength.

Third Driver

Moody’s said that the decision by the intergovernmental Financial Action Task Force (FATF) in June 2021 to place Malta on its so-called grey list of jurisdictions under increased monitoring over concerns tied to anti-money laundering supervision, “poses further risks to the economic outlook and the banking sector over the coming 12-18 months and beyond.”

Moody’s added that it “expects the decision will increase due diligence requirements for firms and banks in Malta and their international partners, and also further complicate some Maltese banks’ efforts to maintain stable correspondent banking relationships, above all for the clearing of US dollar transactions.”

It said that “the Maltese government has agreed an action plan with FATF and targets the removal of the jurisdiction from the grey list by the end of 2022.”

While both FATF and the Council of Europe’s anti-money laundering body MoneyVal have recognised the progress made to date in strengthening the supervisory framework in Malta, Moody’s said that it expects that “Malta will also need to build up a track record demonstrating the effectiveness of this framework in practice which it may not be able to do in 12-18 months.”

Moody’s stated that it expects that the longer Malta remains on the grey list, “the larger the broader impact on the economy and banking system will be, as enhanced regulatory burdens will increasingly weigh on the activities of Malta-based entities and their international partners. Ultimately, this increases the risk that some of these entities will reassess their current or future business operations in Malta.”

Moody’s stressed that “although the Maltese authorities over the past year have made significant reform efforts to remedy long-standing institutional shortcomings in areas such as the control of corruption, the rule of law and the supervision of money laundering risks, a failure to be removed from the FATF grey list within the next 12-18 months would also reflect negatively on Malta’s strength of institutions and governance.”

The full report is available to read by clicking here.

Permalink: Moody’s affirms Malta’s A2 ratings, changes outlook to negative from stable