Last Updated on Thursday, 12 August, 2021 at 10:48 am by Andre Camilleri
The government has drafted its action plan to get Malta off the FATF grey list and is currently discussing to see whether any refinements are required, Finance Minister Clyde Caruana told The Malta Independent on Sunday.
Caruana also pledged to reduce the deficit to under 6% of GDP in the upcoming budget.
The finance minister was asked for a reaction to the news that international credit rating agency Moody’s has downgraded Malta’s outlook to ‘negative.’
Moody’s affirmed Malta’s rating at A2, but cited high government debt, the recent grey listing by the Financial Action Task Force and pandemic risks to the recovery of the tourism sector when downgrading the country’s outlook.
Reasons for change in outlook
Moody’s noted that Malta’s 10.2% deficit for 2020 was the second-highest in the EU. Coupled with a sharp economic contraction, the debt-to-GDP ratio increased to 54.8% from 42.0% in 2019.
The agency said it expects Malta’s fiscal deficit to further increase to 12.4% of GDP in 2021, the highest in the EU on current projections.
It projects that the debt-to-GDP ratio will increase to 66.4% this year, as a result of subdued economic activity.
While it expects economic growth to return to 3.5% in 2021, Moody’s said 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 numbers are expected to pick up in 2022, the uncertainty brought about by the pandemic and the potential emergence of new virus variants pose risks to the recovery of the sector.
The third reason for the outlook downgrade is related to the recent grey listing by the FATF.
Malta failed the assessment and was told it needs to beef up policing resources and prosecution numbers. The government says it’s action plan aims to take Malta off the grey list within 18 months. Prime Minister Robert Abela said last week Malta was “redoubling” its efforts to return to the white list.
Moody’s said it expects that the longer Malta remains on the greylist, 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.
Minister says Malta addressing concerns
In a statement issued by the Department of Information yesterday, the government noted that Malta’s A2 rating had been confirmed but failed to mention that the country’s outlook had been revised to ‘negative.’
However, in comments to The Malta Independent on Sunday, Caruana acknowledged that the country is facing challenges.
“It is true that the deficit is high, but I am committed to bringing it down to less than 6% in the upcoming budget. This will lead us to having a stable debt-to-GDP ratio. This addresses Moody’s first concern.”
On the tourism sector, Caruana said “the circumstances are what they are” given the pandemic.
On the FATF grey listing, Caruana said the government has concluded the action plan. “We are now discussing whether there need to be any refinements to it.”
In explaining why it confirmed Malta’s A2 rating, Moody’s said the decision 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 noted that the economy remains diversified and that non-tourism related sectors have remained resilient despite the pandemic.
Moody’s also noted the resilience of Malta’s banking sector and 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.