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Rating Action:

Moody's affirms Malta's A2 ratings, changes outlook to negative from stable

06 Aug 2021

Paris, August 06, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Malta's long-term issuer and senior unsecured ratings at A2. Concurrently the outlook has been changed to negative from stable. Moody's has today 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.

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.

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.

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

RATINGS RATIONALE

RATIONALE FOR THE NEGATIVE OUTLOOK

FIRST DRIVER: THE INCREASE IN MALTA'S GOVERNMENT DEBT BURDEN AS WELL AS THE FURTHER RISKS PRESENT TO THE FISCAL OUTLOOK

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.

However, Moody's 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.

As Moody's expects a slight further increase in Malta's debt burden in 2022 and 2023, 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, 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 does not currently expect that negotiations on international corporate tax harmonization 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, 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 expects that the legality of the scheme will need to be resolved by the European Court of Justice.

SECOND DRIVER: THE RISKS TO THE POST-PANDEMIC RECOVERY OF THE MALTESE ECONOMY, PREDOMINANTLY STEMMING FROM THE COUNTRY'S TOURISM SECTOR

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). 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 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. While the population of Malta has the highest vaccination rate in the EU, 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. Furthermore, 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: THE ADDITION OF MALTA TO THE "GREY LIST" OF THE FINANCIAL ACTION TASK FORCE OVER CONCERNS RELATED TO ANTI-MONEY LAUNDERING SUPERVISION

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[1], poses further risks to the economic outlook and the banking sector over the coming 12-18 months and beyond. Moody's 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.

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 recognized the progress made to date in strengthening the supervisory framework in Malta, Moody's 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 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.

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.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Malta's ESG Credit Impact Score is moderately negative (CIS-3), reflecting moderately negative exposure to environmental and social risks, balanced by a very strong governance profile.

Malta's overall E issuer profile score is moderately negative (E-3). As a small island economy, Malta faces moderate physical climate change risks, as well as risks related to water resources.

We assess Malta's S issuer profile score as moderately negative (S-3), reflecting low exposure to social risks across most categories, with the notable exception of demographics. Although Malta faces risks related to population ageing, strong labour immigration over recent years has so far proven effective at moderating labour market pressures.

Malta receives a positive G issuer profile score of (G-1). Although concerns remain over the control of corruption in Malta and the small size of the jurisdiction can be a constraint on institutional capacity, on the whole, the country benefits from a strong institutional environment supported by its EU and euro area membership.

RATIONALE FOR THE AFFIRMATION OF THE A2 RATINGS

The affirmation of the A2 ratings reflects the fact that the increase in Malta's debt is mitigated by the government's strong debt affordability as well as its reliable domestic funding base. It also reflects the fact the Maltese economy remains diversified for its small size, and that the non-tourism-related sectors of the economy have generally remained resilient to the pandemic shock. The affirmation also reflects the resilience of Malta's large banking sector to the pandemic shock, although asset quality and profitability have been negatively impacted by the crisis. Furthermore, the decision to affirm the ratings also reflects the efforts undertaken by the Maltese government since 2020 to tackle some of the country's institutional shortcomings tied to the control of corruption, rule of law and the supervision of money laundering-related risks.

GDP per capita (PPP basis, US$): 42,856 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -7.8% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.2% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -10.2% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -3.6% (2020 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: a3

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

On 03 August 2021, a rating committee was called to discuss the rating of the Malta, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FACTORS THAT COULD LEAD TO AN UPGRADE

An upgrade of the ratings is currently highly unlikely given the negative outlook. However, Moody's would consider returning the outlook to stable if the tourism sector can produce a strong and sustained recovery, underpinning a robust overall economic recovery and a rapid improvement in the public finances from 2022 onwards. A stabilization of the government debt burden at levels closer to the A2-rated median would support an overall stabilization of the outlook. The removal of Malta from the FATF grey list within the next 12-18 months would also support Moody's assessment of Malta's institutions and governance strength and contain the collateral damage of the grey listing on the broader economy and banking sector, thus also supporting a stabilization of the outlook. Continued efforts to strengthen the broader institutional environment in Malta, and evidence that adopted reforms are producing concrete results would also be credit positive.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Moody's would consider downgrading Malta's ratings if the evolution of the pandemic and the associated travel restrictions prevent a sustained recovery of Malta's tourism industry to take hold in 2022 and beyond. A continued increase in the government debt burden to levels materially above that of the A2 rated median, would also support a downgrade of the ratings. Furthermore, a failure to be removed from the FATF grey list by the end of 2022 would also exert downward pressure on the ratings, as this would magnify risks to the broader economy and banking sector and demonstrate remaining institutional weaknesses. Evidence that the government is backtracking on its broader institutional reform programme or that this is not producing the intended results would also be credit negative, as would the crystallization of risks for the banking sector tied to the economic recovery and grey listing.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Financial Action Task Force, https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-june-2021.html 04-Aug-2021

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Petter Bryman
Asst Vice President - Analyst
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Alejandro Olivo Villa
MD - Sovereign / Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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