S&P merges Malta's long-term ratings

Ratings agency Standards and Poor's yesterday said it had converged Malta's long-term local and foreign currency sovereign credit ratings at A. Previously, the long-term local and foreign currency ratings on Malta were A+ and A, respectively.

The agency said the convergence of the long-term local with the long-term foreign currency rating reflected its expectation that Malta would join the European Monetary Union as early as 2008, following the country's entry into ERM-II earlier this month.

Malta's A-1 short-term foreign and local currency ratings were affirmed. The outlook is stable.

"Local and foreign currency rating distinctions do not apply to issuers in EMU, as member states transfer monetary and exchange rate policy responsibilities to the European Central Bank," said Standard and Poor's credit analyst Eileen Zhang. "In addition, however, the convergence of the ratings should be appreciated in the broader context of our positive view on EMU membership."

The agency said that considering the emphasis on fiscal performance and competitiveness that EMU would generate, it regarded membership as favourable for the creditworthiness of Malta.

"As Malta works toward satisfying, and then sustaining, the Maastricht convergence criteria, there could be improvements in the sovereign ratings.

"Given that fiscal criteria remain the major constraint for Malta's entry into EMU, the fiscal turnaround recorded last year, in terms of both the general government deficit and the debt ratio, has improved the prospects of early EMU membership.

The government's plan to reduce the deficit to less than three per cent of GDP by 2006 remains challenging, unless tax collection is improved. The government is expected to remain committed to fiscal consolidation, however, and to implement corrective fiscal measures if needed to achieve its targets.

"We expect that the macroeconomic policy mix will be supported by the gradual reduction in the general government deficit, which should allow for EMU membership as early as 2008.

"Reaching the government's fiscal targets would enable Malta to join EMU in 2008, thereby shielding the country from balance-of-payments risks," said Ms Zhang.

"In addition, the ongoing restructuring effort and the downsizing of the state's presence in the economy should alleviate the burden imposed by state-owned companies on the public finances and improve the prospects for higher potential growth."

She said that under this scenario, Malta's improved credit standing could lead to positive rating actions. Conversely, departure from commitment to fiscal consolidation or significant setbacks to the reform agenda could cause extensive delays to full EMU entry and weaken the government's credit standing.