Rating the ratings: a review of Malta’s credit rating through time

Around eight times a year we read about the latest sovereign credit rating that has been assigned to Malta by international credit rating agencies. As is usual in Malta, their reports tend to be interpreted within the context of the local partisan commentary, with selected parts repeatedly quoted and others left unreported, depending on the slant the commentator wants to give.

But at their core, what matters is the rating itself and the outlook assigned by these international experts. Credit ratings are quite simple. They are tools to help guide investors where to place their money. They in fact arose in the early 1900s in the US when investors needed a way to select among large number of investment opportunities and did not have time to go through the financial details of all these opportunities.

Of course, whenever there is a financial crisis and investors get burnt, trust in these rating agencies tends to fall. However, as pointed out several times by institutions such as the IMF, while there is always room for improvement, there exists little alternative to credit ratings. Like Churchill said about democracy “this is the worst form of Government except for all those other forms that have been tried”. 

At present all credit rating agencies rate Malta’s sovereign as being within the upper medium investment grade. This means that the Maltese government has a strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in the highest-rated category.

The worst rating given to Malta is by Standard & Poor’s (S&P), which is about 2 notches below that assigned by Fitch Ratings. S&P and Moody’s, the two largest agencies, have been rating Malta since 1994 while DBRS Morningstar is a relative newcomer as it has been rating us since 2015. We have also started being rated by some German credit rating agencies, but these ratings are unsolicited (i.e. they are not requested by the Maltese Government).

Malta started with relatively good ratings in the mid-1990s, but soon things turned for the worse. By July 1997, we had the first worsened outlook for a rating, with Moody’s issuing a negative outlook for its initial A2 rating. This resulted in the first rating downgrade ever received, in March 1998. A year after, it was the turn of S&P to cut its rating. Things then remained stable till 2007 when both Fitch and Moody’s decided to upgrade the rating of the Maltese Government. Moody’s even went as far as giving another upgrade in 2008, the only case where Malta’s credit rating was given two upgrades in one year.

S&P was not that convinced and left everything unchanged. A stance that was proven right by subsequent developments. The 2008 financial crisis, and the political instability of the Gonzi administration, soon wreaked havoc on Maltese public finances. By the end of 2013, all three major rating agencies had downgraded Malta’s rating. The worst slap on the wrist was from S&P which removed Malta’s A rating and chucked us in a lower medium investment grade category, BBB+.

The new Labour administration had to work hard to regain the trust of the international credit rating agencies. The latter acknowledged this good work but limited themselves to just changing the outlook for the rating and left the rating unchanged. The first to make a move was S&P in October 2016 when it upgraded us back into the upper medium investment grade category. This was followed by an upgrade by Fitch in August 2017, by DBRS in February 2018 and by Moody’s in July 2019.

The onset of the pandemic and its impact on tourism could have really ruffled the feathers of the rating agencies. In fact, in the first two months of the pandemic both Fitch and S&P removed the positive outlook for Malta’s sovereign rating and assigned a stable one. However, there was great trust in the Maltese government’s fiscal and economic management abilities. The ratings were kept, and the commentary of the expert reports was consistently optimistic that the shock to economic growth and public finances would be sharp but temporary. Despite all the doom and gloom of the Opposition about the FATF decision, both DBRS and Fitch recently reaffirmed their ratings for Malta.

Across the rest of Europe, the picture was quite different. Since the pandemic started, Fitch has downgraded Italy, a G7 economy, to BBB-, and Slovakia from A+ to A. This agency has also issued 4 negative rating outlooks, including one to another G7 giant, France. S&P assigned two negative rating outlooks, including to Spain (the fourth largest EU economy). Moody’s has been more sparing, issuing only one negative outlook. On its part, DBRS assigned two new negative outlooks, while also downgrading the French sovereign.

Malta’s sovereign rating is thus faring much better than it did in the aftermath of the 2008 financial crisis, when credit rating agencies were not too much impressed with the way Government handled economic and fiscal policy. Besides having a much stronger track record and therefore a larger pool of trust to draw upon, the current Labour administration has another key strength over the Gonzi administration. It is seen as politically stable and geared towards another strong electoral showing. Rating agencies are happy about recent institutional reforms and have faith in the progressive agenda of the current administration. As a result, it is highly likely that our country can look forward to further positive certificates from these international institutions.

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