FATF greylisting has little impact on Malta ratings

The greylisting of Malta by the the Financial Action Task Force (FATF) has had no immediate impact on the island’s ratings or those of its domestic rated banks, according to Fitch Ratings.

However, the firm did acknowledge that the greylisting demonstrates structural weaknesses in Malta’s anti-money laundering infrastructure, and the Mediterranean territory will be required to demonstrate progress on a set of recommendations should it free itself from the greylist, as it faces increased financial monitoring in the near future.

Maltese authorities have confirmed their intentions to act sharply as they intensify their anti-money laundering efforts to achieve this as quickly as possible, with the country having initially been placed on the FATF’s greylist last week.

“We believe that contingency planning, combined with the banking sector’s sound credit metrics and its generally reduced risk appetite, will contain the overall impact of greylisting,” Fitch Ratings explained.

“However, this is difficult to assess at this stage. Malta’s net FDI and portfolio flows are exceptionally large but highly distorted by special-purpose entities and their tax-planning activities. 

The country’s recent weaknesses were captured in the ‘A+’/Stable sovereign rating and in Fitch Ratings’ negative assessment of the operating environment for Maltese banks at ‘bbb’.

Nonetheless, the FATF’s decision also highlights the risk of reputational damage, which could reduce investment. The effectiveness of the authorities’ response will be important in assessing any potential credit impact.

Reputational damage from greylisting could eventually adversely affect the country and its financial system by reducing its attractiveness for investors and corporates, ultimately leading to capital outflows and weaker-than-projected economic performance. 

As Malta is a major centre for the European gambling industry – the online sector accounts for 12% of the island’s GDP, generating €700 million and employing 9,000 people – the continued greylisting of the country as a potentially financially unsafe could affect this important section of the economy.

Despite this threat, Fitch Ratings continued: “Malta’s international banking sector has inflated the country’s banking assets-to-GDP ratio.

“Given that international banks almost exclusively conduct business with non-residents, their substantial downsizing over the past decade had no impact on the financing of Malta’s real economy. Malta reported strong GDP growth pre-pandemic, averaging 6.5% in 2015–2019.”

Furthermore, empirical research studies have found mixed evidence on how greylisting can affect capital flows and growth, whilst repeated greylisting of Panama and of Iceland in 2019 and 2020 had limited economic effects.