Malta 'relatively successful' in managing recession - Fitch

Malta has weathered the recession quite well, according to credit rating agency Fitch, which has confirmed Malta's rating at the high level of A+.

Chris Pryce, one of Fitch's directors, said Malta's rating affirmation reflected modest success in its first year in the eurozone and the considerable progress in preparing the Malta Dockyards for privatisation.

"The rating further reflects Malta's relative success in managing the present recession, as output has not fallen by more than two per cent and there has only been a limited deterioration in the government's accounts, which marks a better performance than higher rated peers," he said.

However, Fitch, one of the most important international credit rating agencies, said more had to be done to bolster Malta's economy including restraining the growing deficit and putting an end to the automatic increase in wages.

According to Fitch, automatic wage increases were harming the island's competitiveness, a stand employers have been harping on.

The Cost of Living adjustments (Cola) has been a burning issue as the government prepares to formulate its 2010 Budget. While trade unions are insisting the current agreement has to remain, employers lamented this did not make sense since increases had to be tied to productivity.

So far, the government has taken the unions' side saying the automatic mechanism should remain. According to Finance Minister Tonio Fenech, next year's increase should be within the range of €5-6 a week.

The agency gave a thumbs up to the conservative approach adopt-ed by the banking sector, which proved to be an important ingredient in the financial crisis.

Malta's banks had limited exposure to "so-called toxic assets and bank regulation is conservative", while lending policies were also conservative and most funding was derived from retail deposits.

Domestic banks continued to extend credit and the government did not need to intervene through recapitalisation and liquidity injections.

Nonetheless, Fitch said profitability was likely to be affected by lower volumes and interest margins, while non-performing loans were expected to increase, particularly in the highly concentrated real estate sector.

Generally, Malta's economic performance since it joined the EU was assessed positively by the New York based credit agency.

After a sluggish performance in the first half of the decade, partly due to a decline in the textiles industry, GDP growth picked up in the past four years and averaged an "acceptable" 3.2 per cent per year until the global economic downturn derailed Malta's growth in late 2008, Fitch said.

Though consistent with the 'A' rating median, Malta's income per head still remained below EU levels.

It said a determined effort was likely necessary to reduce over-manning, evident in many parts of the economy, as well as to attract and develop new industries and services.

Malta had demonstrated it could attract new industries such as pharmaceuticals, aircraft maintenance, online gaming, and a variety of business services.

The agency said the government's successful fiscal consolidation programme, between 2003 and 2007 when the deficit dropped from 10 to 2.2 per cent, was interrupted last year when it slipped to 4.6 per cent, partly as a result of redundancy payments to Dockyard employees.

However, according to Fitch, the deficit situation was not alarming. The deficit was not expected to deteriorate much this year and could well improve in 2010, it said. The widening of the fiscal deficit between 2007 and 2009 was expected to be relatively moderate compared to other eurozone countries.

Public debt rose as a proportion of GDP to 63 per cent in 2008 and is expected to rise to about 68 per cent by the end of 2010.

Fitch said this was not high compared to many other European countries. Malta's government, like its domestic banks, obtained most of its finance from domestic investors.

"This framework has been not altered by eurozone membership and helped the island navigate a period of significant volatility in euro sovereign debt markets," Fitch said.