Like all other economists, the economists of rating agencies do not have a crystal ball to forecast the future of a country. They are also usually reasonably prudent, too prudent, some would say, and do not speculate on the sustainability of a country's economic model. But they credibly interpret current economic developments. Governments would do well to analyse their comments objectively.

The latest Moody’s report on Malta’s credit rating sends mixed messages. Some are comforting while others are concerning.

In the last few years, the improvement in public finances has enabled the government to be generous in its aid to businesses and individuals during the pandemic. This has understandably come at a high cost.

Malta’s headline deficit of 10.2 per cent of GDP in 2020, expected to increase to 12.4 per cent in 2021, is “the second-highest in the EU and, by far,  the highest amongst its A-rated peers”.  This may seem a nebulous comment to most people but is a sobering one for those who know that, sooner or later, the government will have to start informing the people how it plans to return to fiscal rectitude.

Moody’s sounded quite downbeat on the prospects of a quick return to normality in the tourism sector, contrary to the hubris often associated with the Malta Tourism Authority and the minister for tourism.

There are still too many uncertainties that prevent people from travelling despite the health authorities’ generally good management of the health emergency.

The impact of the FATF greylisting is one of the main reasons Moody’s decided to change the rating outlook for Malta from stable to negative. The government needs to prove to local and international observers that its plans on institutional reform go beyond good intentions. There is too much at stake, especially for the banking sector, if the efforts to turn the page on good governance practices are either weak or unconvincing.

The sale of passports is another obstacle for Malta regaining a stable outlook from Moody’s and other rating agencies. Rather than abandon this high-risk strategy, the government has decided to challenge the EU’s directive to scrap the present citizenship-by-investment scheme and go to the European Court of Justice for a decision.

The government’s mantra of continuity in economic strategy exposes the country to another risk.

The mood of the great majority of countries on the tolerance of tax havens is changing rapidly. As remarked by Moody’s, tax harmonisation is unlikely to become a reality anytime soon but a negative outcome as a result of changes in the taxation of international companies “could significantly diminish Malta’s corporate tax revenue and its attractiveness to foreign companies”.

Before the pandemic, Malta’s potential growth rate was already slowing from its previous high levels. An economic growth model that comes with increasing dependence on the importation of non-EU labour might not be sustainable in the longer term.

Few could argue that Moody’s confirmation of their rating of Malta at A2 is not a welcome event. But the government needs to examine why the outlook has been changed to negative.

Prime Minister Robert Abela’s commitment not to consider an increase in taxation in the next budget indicates that he does not acknowledge the risks that the economy is facing.

The long-term sustainability of an economy facing significant challenges is a far more critical issue than allowed for by short-sighted and narrow electoral tactics.