Ratings agency deems vote good for reform prospects

Standard & Poor's Ratings Services yesterday affirmed its A/A-1 foreign currency and AA-/A-1+ local currency ratings on Malta, saying the outcome of the referendum in favour of EU membership "reflects expectations that fiscal consolidation and progress with structural reforms will continue". The outlook is stable.

"The first true test of popular support for EU membership, the referendum result not only gives increased legitimacy to the government's structural reform agenda but also creates an opportunity to quicken the pace of reform," Standard & Poor's credit analyst Mary Nnachi said.

"Further measures to deregulate, liberalise and privatise key sectors of the Maltese economy are central to safeguarding external competitiveness and strengthening the economy's capacity to adjust to economic shocks."

The agency observed that the government and the opposition, however, remained polarised over the issue of EU membership.

"Although the referendum result has lent additional political weight to the government's pro-EU stance, the next general election- scheduled for April 12 - will give the MLP and the rest of the no lobby an opportunity to reverse the result, which is non-binding: the vote in favour of membership was only achieved with a 54 per cent majority on a 91 per cent turnout.

"EU aspirations have provided an important anchor to the government's increasingly prudent macroeconomic policy approach, which has allowed for continued progress with structural and institutional reforms. Should an MLP government be elected and withdraw Malta from the EU accession process, the pace of reform could slow."

S&P said high levels of inward investment, a well-educated population, a stable business environment and a productive sector that had reoriented itself toward high value-added activities had all helped to strengthen the resilience of the Maltese economy. Despite a downturn in key international markets (such as tourism, information and telecommunications technology and manufacturing) since 2001, the economy had shown its resilience by returning to positive GDP growth of about three per cent in real terms by 2002, after a one per cent fall in 2001.

"The near-term growth outlook will hinge on a recovery in the semiconductor exports and tourism sectors, both of which are heavily influenced by global economic conditions.

"Despite challenging economic circumstances, the general government deficit has fallen steadily over the past five years, from a peak of 13 per cent of GDP in 1998. Fiscal consolidation is expected to continue in 2003, with the deficit budgeted to narrow to 4.6 per cent of GDP, from 5.2 per cent in 2002. Nevertheless, Malta's significant debt burden, at an estimated 69 per cent of GDP in 2003 (including Malta Freeport Corp. Ltd's government-guaranteed debt), is the highest among EU accession countries and nearly 30 per cent of GDP higher than the A median.

"Continued progress in narrowing the deficit, in particular by tackling the high structural expenditure component of the budget, is central to reducing the debt burden and improving Malta's fiscal flexibility.

"Malta's external solvency remains strong. Net external assets (debt, equity, and foreign direct investment) are equivalent to a forecast 55 per cent of current account receipts at year-end 2003. In addition, both the public and financial sectors remain net external creditors.

"Ongoing preparations for EU accession - including the implementation of structural reforms, stabilisation of the debt burden and continued fiscal restraint - underpin the stable outlook.

"Over the medium term, a continued commitment to achieving progress in these key areas, through the electoral cycle, remains 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," Ms Nnachi said.