Fitch yesterday confirmed Malta’s long-term foreign currency and local currency ratings at A+, with stable outlooks, citing the island’s economic recovery since the recession and prospects for continued growth.
Last month, another ratings agency, Moody’s, downgraded Malta’s foreign currency and local currency government bond ratings to A2 from A1 and revised the outlook to negative.
In its report yesterday, Fitch said it affirmed Malta’s short-term Issuer Default Ratings IDR at F1 and Country Ceiling at AAA, which is the common Country Ceiling for the euro area.
“Malta’s rating reflects its continuing, if unspectacular economic recovery since the 2009 recession and the expectation that this will proceed with no more than a small deterioration in the growth rate in 2012,” said Chris Pryce, director in Fitch’s Sovereign Group.
“The rating also takes account of the encouraging outlook for Malta’s public finances and the fact that the predominantly offshore financial system has emerged largely unscathed from the international financial crisis.”
Fitch said it conservatively assumes that the present indications of a general European slowdown towards the end of this year will have an effect on Malta, producing a rate of expansion for GDP in 2012 no greater than two per cent.
On past experience, a somewhat higher rate, possibly above three per cent per annum, should be attainable in the following years if European recovery takes hold and the government continues to press forward with industrial restructuring and the reduction in subsidies, it said. However, the low rate of investment in the last two to three years may hold back GDP growth, at least initially.
Fitch said government debt, which never quite met the Maastricht criterion of 60 per cent of GDP or less, and still reflects the heavy borrowing in the decade up to 2005, had fallen short of the agency’s earlier expectations of 70 per cent and looked set to stabilise at 68 per cent this year.
“A continuing if gradual fall is now expected. Unlike the fiscal deficit, which performed a little better than the current ‘A’ rated peer group medium in 2010, Malta’s government debt ratio at 68 per cent remains well above the comparable A peer group median of 40 per cent, a major rating weakness,” it said.
It noted that the domestic banks survived the international banking crisis and recession virtually unscathed and required no direct financial assistance from the government. Capital and non-performing loan ratios deteriorated marginally during the past two years but did not cause immediate alarm.
“The authorities’ conservative approach to banking and its supervision has served Malta well, as has the banks’ own business model which emphasises retail customer deposits as the main source of finance for lending. Credit expansion, which was high up until the recession, is now growing only moderately.
“Malta ranks highly in the traditional international governance indicators and is noted for its stable government, effective civil institutions and lack of corruption. Its GDP per head is above the ‘A’ rated median. Its euro area membership is a source of strength and protects it from currency crises, notwithstanding a large current account deficit which continues to be more than fully funded by foreign direct investment,” Fitch added.
The main drivers of future changes in the rating include resolute fiscal consolidation on the positive side. However, on the negative side, Malta remains a small country with a large banking system leaving it vulnerable to the ongoing financial stress in the euro zone. Over the longer term, reform of the state pension system to maintain affordability in the face of a rapidly rising population “is essential” Fitch added.