S&P confirms Malta's credit ratings

Standard & Poor's ratings services yesterday affirmed their A long-term and A-1 short-term sovereign credit ratings on Malta, saying the outlook is stable.

Standard & Poor's 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 and subsequently transferred to the Freeport Corporation. The government guarantees timely debt service on these bonds.

"The ratings on Malta are supported by strong political institutions that underpin appropriate macroeconomic policies, including a commitment to continue to curb the currently substantial fiscal imbalances," said Standard & Poor's credit analyst Eileen Zhang.

"Malta's narrowly based and open economy is vulnerable to external shocks, although equity inflows offset a substantial portion of the persistent current account deficits."

After successful EU entry in May 2004, the political focus has shifted back to fiscal consolidation and further structural reform, such as extensively modernising the state owned entities (SOEs) and implementing reforms in the pension system, S&P observed.

Despite sluggish GDP growth, the general government deficit had fallen as a percentage of GDP since 2004, and was expected to decline to 2.9 per cent of GDP this year, from an average of about 6.2 per cent in the past five years.

General government debt (including the state guaranteed debt of Malta Freeport Corp. Ltd) was expected to begin to decline this year with the help of further privatisation proceeds and was projected at 76 per cent of GDP this year, after peaking at 81 per cent in 2004.

"The current target of reducing the fiscal deficit to 1.2 per cent of GDP by 2008 remains challenging, although Standard & Poor's expects the gradual reduction in the general government deficit may allow EMU membership in either 2008 or 2009," the agency said.

"We expect that the government's commitment to reversing budget imbalances will continue, leading to further fiscal reforms and the reduction of general government debt," 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 economic growth in the long run, while alleviating the burden imposed by SOEs on public finances.

"As progress unfolds, Malta's credit standing is likely to improve. Conversely, significant setbacks in reaching the fiscal targets or implementing the reform agenda would undermine the medium-term prospects for participation in EMU and weaken the government's credit standing."