Moody’s decision to reclassify Malta from A1 to A2 is understandable when one considers the economic situation in Europe, particularly the fact that some countries are going through a crisis, Finance Minister Tonio Fenech said yesterday.

However, the government is somewhat disappointed with the Moody’s report, he said.

“The agency emphasised that the reclassification was not for lack of effort by Malta to address the economic crisis. Rather, Moody’s said Malta dealt with the 2009 crisis well and the impact was small. But because of what is happening in the rest of the world and because our economy is small and open, there will be an impact on Malta’s economy,” Mr Fenech told The Times Business.

Mr Fenech added that despite economic growth and falling unemployment, Malta had to ensure it pursued the government’s plan to reduce the national debt so as not to face the consequences.

“We should not be disheartened. As the report said, our economy is strong and can withstand this crisis. Moody’s is also confident that Malta can deal with a second round crisis,” he added.

In a statement, the Ministry of Finance said it was disappointed that Moody’s felt the reclassification was necessary because of the deteriorating global economic outlook and the continued instability in the euro area, notwithstanding the government’s efforts to successfully address the economic crisis and Malta’s continued efforts towards sustainable finances.

The ministry said that in the context of the European sovereign debt crisis, the Maltese government understood Moody’s decision to reclassify Malta’s foreign and local-currency government bond ratings while maintaining Malta’s ‘A’ credit rating.

As clearly stated in Moody’s reports, Malta’s country ceilings for bonds and bank deposits were unaffected by the rating action and remained at AAA, in line with the euro area’s ceilings, it said.

“It is also to be noted that Moody’s acknowledge the limited impact on the Maltese economy of the 2008-2009 crisis and that this impact was only limited because of the government’s efforts to assist manufacturing companies that faced severe declines in external demand, to promote the tourism product, and invest in the development of new routes,” the ministry said.

The ministry explained that the government’s decision to postpone the deficit reduction targets to finance the impetus package in the 2009 Budget saved more than 5,000 jobs and ensured that Malta’s manufacturing sector capacity was increased rather than slashed.

“However, the government acknowledges the fact that this decision, as Moody’s put it, meant that the expected improvement in the government balance sheet, post entry to the EMU, did not materialise.”

The ministry observed that Malta has managed to continue to sustain above EU average growth rates and significantly lower levels of unemployment because of the various structural reforms that continue to be implemented and incentives given to small business and industry.

“The Maltese economy is growing at a healthy rate. Investment, including foreign direct investment, has increased. Merchandise exports have increased substantially. Likewise, the services sectors – tourism, financial services and others – are contributing substantially to the country’s current economic and employment growth.

“The number of gainfully occupied persons is increasing. Unemployment is on the decline. Our public finances are also being consolidated as planned. Indeed the latest Eurostat financial data show that Malta’s debt at 68 per cent is well below the euro area average of 85.1 per cent,” the ministry said.

It said the government will take measures to consolidate the country’s public finances and ensure their long-term sustainability, safeguard and improve Malta’s international competitiveness, promote Malta as an attractive base for local and foreign direct investment and support any viable enterprise that could face temporary difficulties.

“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 ministry said.

Labour leader Joseph Muscat said the Moody’s downgrade was a matter of concern, but it came as no surprise to Maltese families, who had long been struggling to make ends meet, while the government claimed that the economy was improving.

“We expect honesty regarding the true situation of government finances,” Dr Muscat said.

Malta, Dr Muscat said, needed real, sustainable economic growth which the people could benefit from.

Labour’s finance spokesman Karmenu Vella said the current situation could partly be attributed to the international situation, but it was also undeniable that the government’s debt and borrowing requirements had been rising steadily since 2004, well before the international financial crisis began.

Labour MEP Edward Scicluna, an economist, said Moody’s downgrade was the result of Malta not doing enough to improve its financial health.

“We were upgraded on joining the euro on the premise that we were being accepted by a club of top advanced European countries and therefore we would abide by their rules and perform by their standards,” Prof. Scicluna pointed out.

“The schism between the strict northern euro countries and the Mediterranean euro ones is having stark results. We tried our best to convince the agencies that we were above the Mediterranean group, but obviously have not succeeded. The latest NSO GDP revision showing that Malta was hit no differently from any other EU country during the crises was significant. Our economic plans submitted lately to the EU were also not convincing enough since we failed to show the actions we will be taking to consolidate our public finances.”

Malta Financial Services Authority chairman Joseph Banister said: “The rating is based on a prediction that what is going to happen in the eurozone in the future is going to affect Malta. This may be so but it is also clear, as the report points out, that Malta withstood the financial crises of 2007-2008.”

Edward Rizzo, director of Rizzo Farrugia & Co. (Stockbrokers) Ltd, explained that the Moody’s downgrade translated primarily in Malta being perceived as a higher credit risk, albeit only minimally higher.

“One would have to read the entire report to be able to better understand the motivations behind the downgrade but this is certainly an eye-opener,” Mr Rizzo explained.

“However, A2 is still a very good rating which is defined as upper medium grade in the rankings table of the main international credit ratings agencies.”

Mr Rizzo added that under the ranking tables used by his firm to explain credit ratings to its own clients, A2 (or single A using the metrics of other credit rating agencies) fell within the bracket that considered an issuer of bonds with such a rating as having a strong capacity to meet financial commitments, although somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions compared to issuers in higher rated categories.