S&P confirms Malta's A ratings

Standard & Poor's Ratings Services said yesterday it had affirmed Malta's A long-term foreign currency and A+ long-term local currency sovereign credit ratings.

The A-1 short-term foreign and local currency ratings on Malta were also affirmed.

The outlook is stable.

Standard & Poor's said it had also affirmed its A senior unsecured debt rating on the outstanding $250 million bond maturing in 2028 and $205 million bond maturing in 2009, originally issued by Freeport Terminal (Malta) plc, a wholly owned subsidiary of Malta Freeport Corp. Ltd, and subsequently transferred to the corporation. The bonds are guaranteed by the Maltese government.

"With the successful EU entry in May 2004, the political focus has shifted back to fiscal consolidation and further structural reform," Standard & Poor's credit analyst Eileen Zhang said.

"The government is continuing its public sector efficiency drive by extensively modernising the state-owned entities and putting forward reform proposals for the pension and health care systems."

The agency said that despite sluggish GDP growth, the general government deficit has started a turnaround since 2004 and was expected to decline to 3.8 per cent of GDP this year. General government debt (including the state-guaranteed debt of Malta Freeport Corp. Ltd) was estimated to embark on a declining trend from this year with the help of further privatisation proceeds and was projected at 78 per cent of GDP this year.

"The current target of reducing the deficit to less than three per cent of GDP by next year, however, remains challenging unless tax collection is improved, although the government is expected to implement additional corrective measures if the target is under threat.

"Standard & Poor's forecasts that the gradual reduction in the general government deficit would allow for EMU membership as early as 2008.

"We expect that the government's commitment to reversing budget imbalances will continue, leading to further fiscal reforms and the reduction of the general government deficit and debt levels," Ms Zhang said.

"In addition, the ongoing restructuring effort and the downsizing of the state's presence in the economy are expected to improve the prospects for higher potential growth while alleviating the burden imposed by state-owned companies on the public finances."

In these circumstances, Malta's credit standing would improve, leading to positive rating actions, Standard & Poor's said. Failure to reach the fiscal targets, however, or significant setbacks to the reform agenda, would undermine the medium-term prospects for participation in EMU and weaken the government's credit standing.