Fitch Ratings has outlined its belief that the decision of The Financial Action Task Force’s (FATF) to greylist Malta confirms structural weaknesses in the country’s anti-money laundering framework, but has no immediate impact on Malta’s ratings or those of its domestic rated banks.
Should Malta free itself from the greylist, it is required to demonstrate progress on a set of recommendations, as it faces increased monitoring in the near future.
Furthermore, the Maltese authorities have confirmed their intentions to act sharply as they intensify their anti-money laundering efforts to achieve this as quickly as possible.
Mapping out how the region has taken steps, Fitch Ratings emphasised: “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.
“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.
“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.”
The country’s recent weaknesses are captured in the ‘A+’/Stable sovereign rating and in Fitch Ratings’ assessment of the operating environment for Maltese banks at ‘bbb’ with a negative outlook. Yet, 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.
Empirical research studies provide mixed evidence on how greylisting can affect capital flows and growth, and repeated greylisting of Panama and greylisting of Iceland in 2019 and 2020 had limited economic effects.