FATF greylist drives Moody’s ‘negative outlook’ for Malta

Credit rating agency reaffirms Malta’s A2 rating over succesful post-COVID recovery programme

A revival of Malta’s tourism fortunes is essential if it is to recover from its large deficit and debt due to its pandemic support measures
A revival of Malta’s tourism fortunes is essential if it is to recover from its large deficit and debt due to its pandemic support measures

Credit rating agency Moody’s has affirmed Malta’s ratings at A2 on the back of its post-COVID recovery. But it has changed its outlook to negative from stable over the FATF’s greylisting of the Maltese financial centre.

Moody’s said the FATF’s greylisting over concerns on anti-money laundering supervision posed risks to the economic outlook and the banking sector.

“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.”

The Maltese government has agreed an action plan with FATF and targets the removal of the jurisdiction from the greylist by the end of 2022. While both FATF and the Council of Europe's anti-money laundering body MoneyVal have recognized the progress made to date in strengthening the supervisory framework in Malta, Moody's expects that Malta will also need to build up a track record demonstrating the effectiveness of this framework in practice which it may not be able to do in 12-18 months.

Moody also gave Malta a moderately negative CIS-3 score for its environment, social and governance record (ESG): as a small island economy, Malta faces moderate physical climate change risks, as well as risks related to water resources, but despite concerns over the control of corruption in Malta “on the whole, the country benefits from a strong institutional environment supported by its EU and euro area membership.”

“The decision to affirm the ratings also reflects 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,” Moody’s said.

COVID measures

Malta’s headline deficit of 10.2% of GDP in 2020 was the second highest in the EU and by far the highest among its A2 rated peers.

The increase in the deficit during the COVID-19 pandemic caused the government debt-to-GDP ratio to increase to 54.8% from 42.0% in 2019.

The fiscal deficit will further increase to 12.4% of GDP in 2021, the highest in the EU on current projections, as the government will need to continue providing exceptional support to companies and workers that have been hard hit by the pandemic, most notably in the tourism sector.

Moody’s forecasts assume that the deficit will more than halve to 6.1% of GDP in 2022, if tourism manages to recover some of its vibrancy.

Malta will receive a significantly lower allocation of grants relative to GDP under the EU’s post-pandemic recovery fund Next Generation EU than most other tourism-dependent sovereigns in Southern Europe.

Requested grant funding totals around 2.5% of 2020 GDP for Malta against 4.8% for Government of Cyprus (Ba1 stable), 6.2% for Government of Spain (Baa1 stable) and 10.7% for Government of Greece (Ba3 stable.) Moody’s views these funds as being a key factor in mitigating the economic impact of the pandemic-induced decline in tourism on these sovereigns’ economic strength.

Moody’s also said it does not expect that negotiations on international corporate tax harmonization will diminish Malta’s tax revenue or its attractiveness to foreign companies. But it said negotiations on the detailed OECD proposals are ongoing and such an outcome cannot be excluded.

In addition, an ongoing infringement procedure launched by the European Commission (EC) against Malta’s citizenship-by-investment scheme could end up being to the European Court of Justice, the agency said.