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
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
SECOND DRIVER: THE RISKS TO THE POST-PANDEMIC RECOVERY OF
THE MALTESE ECONOMY, PREDOMINANTLY STEMMING FROM THE COUNTRY'S
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
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
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 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
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
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%
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
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
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For further specification of Moody's key rating assumptions and
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Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Asst Vice President - Analyst
Sovereign Risk Group
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MD - Sovereign / Sub Sovereign
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