Standard & Poor’s Ratings Services said that the European Commission’s and the European Central Bank’s proposal to the EU Council that the Republic of Cyprus (A/Positive/A-1) and the Republic of Malta (A/Stable/A-1) be allowed to join the Eurozone in 2008 does not have any immediate impact on the sovereign ratings.
“The expectation that both Malta and Cyprus will join the EMU in 2008 is already incorporated into the ratings on these sovereigns,” said Standard & Poor’s credit analyst Eileen Zhang. “As a result, the green light from the European Commission and the ECB has no impact on the ratings.”
The ratings on Cyprus are supported by its prosperous and resilient economy, short but impressive track record of fiscal consolidation, and the prospect of EMU membership. Constraining the ratings are the sovereign’s high, but declining public debt burden, and poor external liquidity. Standard & Poor’s expects Cyprus to join the EMU in 2008.
The positive outlook on the ratings on Cyprus reflects Standard & Poor’s expectation that the government’s commitment to budgetary consolidation will result in a continued reduction in the fiscal deficit and debt burden, even after euro adoption. Sustained improvements in the budgetary process (including a medium-term fiscal framework and elimination of expansionary supplementary budgets), more efficient revenue collection, and a lasting decline in transfer payments and defense expenditures could improve Cyprus’ creditworthiness in the near term. Conversely, any slippage back to the high deficits of the recent past would weaken the government’s credit standing.
The ratings on Malta are supported by strong political institutions that underpin progressive macroeconomic policy. This policy is demonstrated by the government’s willingness to pursue fiscal consolidation and the restructuring of the public sector. The ratings are constrained, however, by Malta’s small and open economy that is vulnerable to external shocks, as well as by the sizable, although declining, public debt burden.
The stable outlook on the ratings on Malta reflects Standard & Poor’s expectation that the government’s commitment to reversing budget imbalances will continue, leading to further fiscal reforms and a reduction in general government debt. In addition, the ongoing restructuring effort and the downsizing of the state’s presence in the economy are expected to improve the prospects for higher economic growth in the long run. As progress unfolds, Malta’s creditworthiness is likely to improve. Conversely, significant setbacks in reaching the Maltese government’s fiscal targets, especially given the imperative for fiscal discipline within EMU, which Malta is expected to join in 2008, or setbacks in implementing the reform agenda, would undermine Malta’s creditworthiness.
