Malta primary challenge to maintain economic competitiveness

Malta's A1 government ratings reflect the country's high economic resiliency and its very high financial robustness, Moody's Investors Service said in its new sovereign credit report on Malta. The country's primary challenge is to maintain economic competitiveness over the longer term, building on and securing its success in attracting investment in fields such as remote gaming, financial services, call centres and pharmaceuticals.
"Malta has made substantial progress towards real convergence with the rest of the eurozone," said Dietmar Hornung, senior analyst in Moody's Sovereign Risk Group. "Although competitiveness in some traditional export industries is decreasing as a result of real income convergence, market liberalisation and EU membership are facilitating new export-oriented activities."
Key to addressing the competitiveness issue will be making progress on structural reforms associated with the EU's Lisbon Agenda. "Areas of weakness for Malta include an oversized and inefficient public sector, an over-reliance on public subsidies, insufficient spending on research and development, and a low female participation in the labour force," said Hornung. "These problems will be exacerbated in coming years due to the ageing population."
The analyst notes that Malta's institutional strength benefited from the EU accession process. "Now, the risk of economic disruption from the political cycle is far less than it has been historically, not least because of the heavy constraints on economic policy that are imposed by Malta's membership of the EU and its adoption of the euro," said Hornung.
Moody's also considers that Malta's susceptibility to event risk is very low. For one thing, its adoption of the euro has effectively eliminated the risk of an external financial crisis. Malta's banks also weathered the initial stage of the crisis relatively unscathed, but their concentration risk is considerable, given their high exposure to the real estate sector.
The outlook on Malta's government ratings is stable. Still, Moody's sees a clear need for Malta to address its structural economic problems if it is to continue its real convergence with core eurozone countries and remain competitive over the longer term.