Standard & Poor's sees "stable outlook" for Malta

International credit ratings agency Standard & Poor's yesterday confirmed its "stable outlook" for Malta, a conclusion which the agency said had been underpinned by preparations for EU accession, a stabilising general government debt burden, and continued fiscal restraint.

The international credit rating agency affirmed its single 'A' foreign currency and double 'A' minus local currency long-term issuer credit ratings.

The affirmation reflects ongoing structural reforms and medium-term prospects for further reform, the government's commitment to fiscal consolidation, and strong external solvency, the agency said.

"Much-needed structural and institutional reforms continue to gain momentum, underpinned by the government's EU aspirations," S&P credit analyst David Cooling said.

"EU membership looks increasingly likely, with public opinion increasingly in favour of membership."

Deregulation, liberalisation, and privatisation are central to safeguarding external competitiveness and strengthening flexibility to adjust to economic shocks.

Inward investment, a well-educated population, and a stable business environment underpin structural economic change, strengthening the resilience of the Maltese economy and hastening real and nominal convergence with EU member states.

Despite a contraction of the real economy in 2001, the general government deficit was contained at seven per cent of GDP, S&P said.

Fiscal consolidation is expected to resume in 2002, with the budget deficit forecast to narrow to 5.3 per cent.

Although the general government deficit is forecast to decrease to 3.5 per cent of GDP in 2004, further reductions will be central to lowering the general government debt burden, which, at an estimated 68 per cent of GDP at year-end 2002 (including the government-guaranteed debt of Malta Freeport Corporation Plc), has almost doubled since the early 1990s.

Malta's external solvency remains strong, although weakening, the agency said.

Net external assets (debt, equity, and foreign direct investment) are equivalent to a forecast 50 per cent of current account receipts at year-end 2002.

In addition, both the public and financial sectors remain net creditors. Net public sector assets are equivalent to 25 per cent of current account receipts, more than twice the 'A' median, while net external assets of the financial sector are equivalent to 24 per cent of current account receipts, compared with 1.4 per cent among similarly rated sovereigns.

Credit ratings show the government's willingness and ability to meet its financial obligations.

For example, an obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obliger's capacity to meet its financial commitment on the obligation is still strong.

Of the EU applicant countries, only Malta, Slovenia and Cyprus have an A stable rating.

When contacted, Mr Cooling said that S&P had lowered the credit rating for Malta in 1999, and once again increased it the following year. Since then, the rating has remained stable.

He said that over the medium term, structural reductions in government expenditure remain critical to maintaining Malta's creditworthiness at its present level.

"A hiatus in fiscal consolidation persisting beyond the current economic slowdown would undermine the government's credit standing."

Asked to expand on his comment that EU membership appeared likely, Mr Cooling said that the conclusions were made after the analysts spoke to several opinion makers and took into consideration the opinion polls conducted.

"Furthermore, if you look at the options available, it looks increasingly likely that Malta will opt for membership," Mr Cooling said.

He said that nevertheless, the structural and institutional reforms were needed irrespective of EU membership.

S&P's ratings were released just days after another reputable rating agency, Moody's, retained its negative outlook on Malta's A3 rating.

Standard and Poor's foreign currency ratings for the 'first 10' EU candidate countries:
Cyprus (A/Stable/A-1)
Czech Republic (A-/Stable/A-2)
Estonia (A-/Stable/A-2)
Hungary (A-/Stable/A-2)
Latvia (BBB/Positive/A-3)
Lithuania (BBB-/Stable/A-3)
Malta (A/Stable/A-1)
Poland (BBB+/Stable/A-2)
Slovakia (BBB-/Positive/A-3)
Slovenia (A/Stable/A-1)