Malta’s credit rating will not be immediately impacted by its FATF greylisting but the risk of reputational damage could reduce foreign investment, Fitch Ratings have said.
The US-based rating agency said that the structural weaknesses identified in Malta’s anti-money laundering framework by the Financial Action Task Force were already baked into its A+/Stable outlook rating for Malta, as well as its BBB/Negative outlook rating for local banks.
Fitch said that it expects the overall impact of greylisting to be contained by a combination of Malta’s contingency planning, the banking sector’s sound credit metrics and its generally reduced risk appetite, though it added that it was “difficult to assess” greylisting effects at this stage.
Fitch last issued a rating report for Malta early in June, saying at the time that the country had made significant progress in improving its anti-money laundering framework but that questions remained about “how sustained recent improvements will be.”
The FATF greylisting decision, announced last week, means Malta must address three key areas of weakness before enhanced monitoring procedures placed on it by the global financial watchdog can be lifted.
Unlike the Council of Europe’s Moneyval committee, which focuses its analysis on the laws and legal frameworks that countries have in place to combat financial crime, the FATF also takes implementation and enforcement into account.
Evidence of greylisting a mixed bag
In an analysis note published on Wednesday, Fitch warned that the reputational damage that greylisting brought with it could lead to capital flowing out of Malta and worse-than-projected economic performance.
However, it said that empirical evidence about the impacts of greylisting was a mixed bag: “repeated greylisting of Panama and greylisting of Iceland in 2019 and 2020 had limited economic effects,” it said.
Fitch’s cautionary words stand in contrast to the bullish tone adopted by Finance Minister Clyde Caruana, who said last week that economic growth and public finance projections would remain unchanged despite the FATF decision.
The rating agency noted that Malta’s outsized banking sector and regulatory authorities have had “more time to prepare contingency plans than those in some other countries”, given that Malta had been put on alert about a potential greylisting in 2019, following a Moneyval report that year.
Fitch cited the example of Bank of Valletta, which had managed to find alternative arrangements for clearing US Dollars “without any material repercussion on its operations” after ING Bank and Raiffeisen Austria terminated their arrangements with the Maltese bank.
Greylisting could nevertheless hurt the banking sector in other ways, Fitch said, citing examples of transaction costs rising or cross-border transaction flows for the whole banking sector being reduced.
Correspondent bank relationships fell by 20 per cent between 2011 and 2019, with Fitch saying perceived shortcomings in Malta’s anti-money laundering framework may have contributed to that decline.