Ratings Agency Fitch has affirmed Malta's long-term foreign currency and local currency Issuer Default ratings (IDRs) at 'A+', respectively. Both ratings have Stable Outlooks.

Fitch also affirmed Malta's Short-term IDR at 'F1' and Country Ceiling at 'AAA', which is the common Country Ceiling for the euro area.

"Malta's rating affirmation reflects its smooth passage through the recession, with limited fiscal damage, demonstrable financial sector resilience and signs of a strong economic recovery," Chris Pryce, Director in Fitch's Sovereign Group said.

"The domestic banking system required no financial assistance from the government. This is a consequence of the conservative approach to banking and its supervision adopted by the two main political parties, the governing National Party and the Labour Party."

Fitch noted that Malta improved its public finances ahead of euro zone accession in 2008, with the fiscal deficit falling from almost 10% of GDP in 2003 to just over 2% of GDP in 2007.

"Once Malta became a member, fiscal discipline was relaxed through the approval of capital spending, and the onset of the global financial crisis made it difficult to reverse this deterioration."

Nontheless, it said, Malta's fiscal deficit is still low compared to peers (at 3.8% of GDP in 2009), but debt is double that of the 'A' rated cohort (at 69% of GDP in 2009) and stands out as a rating weakness.

Fitch observed that most public debt is held locally, and the financial sector is a large purchaser of government debt. This 'captive market' allows Malta to sustain a high level of debt, which Fitch expects to stabilize at around 70% of GDP in 2011-12.

"However, long term debt sustainability is clouded by Malta's ageing population and projected future pension liabilities. The government has not yet demonstrated sufficient resolve to address this issue," it said.

The agency added that the domestic banks in Malta survived the international banking crisis and recession virtually unscathed. There was some small deterioration in capital and non-performing loan ratios and government assistance was not required, in marked contrast to the position in most other European countries.

"Its conservative approach to banking and its supervision has served Malta well, especially the high proportion of lending financed from retail customer deposits. Credit expansion, which had been high, has begun to tail off since 2008. The international banking sector is much larger than the domestic sector and large in comparison to Malta's GDP, but it is not integrated into the domestic economy and mainly provides services for foreigners. There is little overlap with domestic banks and in a crisis the foreign parent banks and home governments would be expected to provide support. The ramifications of such a crisis within Malta would be contained."

Fitch said that Malta also ranks highly in the traditional international governance indicators reflecting stable government, effective civil institutions and lack of corruption. GDP per head is above the 'A' rated median. Euro area membership is a source of strength that protects the island from currency crises and limits the impact of its poor record in international merchandise trade. Unlike manufacturing, its service sectors, including business and finance, are buoyant, as is foreign direct investment which more than covers Malta's perennial current account deficits.

Fitch said it conservatively assumed that some cooling in the rate of expansion will give an increase for the year of about 2.4%. On past experience, a somewhat higher rate, above 3% pa, should be attainable in the following years if European recovery becomes well established and the government continues to press forward with industrial restructuring and the reduction in subsidies.

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