Ratings agency Standard and Poor's has revised its outlook on Malta to Positive from Stable. The 'BBB+/A-2' ratings were affirmed.
In a report on Malta it said it expects the economy to expand by close to 3% annually on average in 2015-2018.
"We believe Malta’s economy will continue to outpace the eurozone as a whole, notably because of investments in the energy sector. Investments include the laying of an interconnector cable to Sicily (currently in a testing phase), as well as the building of a liquefied natural gas terminal, a natural gas plant, and the conversion of an oil-fired plant to gas, all expected to be finalized in 2016.
"Beyond 2016, further diversification of the economy--particularly into information and communication technology and medical tourism--could boost investment. Moreover, we expect domestic demand to be backed by stronger private consumption, resulting from government-mandated cuts to utility tariffs that have reduced electricity prices by 25%.
"Lastly, consumption trends are being supported by rising real wages and, more importantly, broader female participation in the labour market," the agency said.
It said it expected tourism to continue to perform well on the back of a favourable euro/pounds sterling exchange rate, the increased perception of terrorism-related risks in some other Southern Mediterranean countries, and the current turmoil in Greece.
The low corporate tax rate was seen as attracted significant foreign investment into Malta's banking, insurance, and gaming industries, implying, S&P added, that the economy would be sensitive to potential pressure for a eurozone-wide standardization of corporate tax regimes.
The agency said it expected that Malta would run a small current account surplus over the 2015-2018 forecast horizon.
DEBT FORECAST TO DECREASE
The net general government debt is forecast to decrease to 55% of GDP by 2018, from 59% in 2014.
The agency said Malta's contingent fiscal liabilities stemming from NFPEs derive mostly from Enemalta's government guaranteed debt (9.7% of GDP as of end-March 2015). Enemalta will likely not generate profits until 2017.
"We note that the current drop in international oil prices is helping Enemalta's expected return on investments. Nevertheless, other state-owned enterprises also represent fiscal risks, as exemplified by this year’s government financial support to Air Malta, estimated at 0.5% of GDP. Government guarantees of NFPE debt totalled 16% of GDP at year-end 2014.
"Moreover, we note that without further reforms in the pension and health care
systems, public finances will become strained in the medium term," the agency warned.
"Under our criteria, we see contingent fiscal risks to public finances coming from
the banking sector. Malta's domestic banking sector operates alongside a large
offshore sector which, we believe, the government would not support in case of
financial distress. However, dislocations in their funding could affect the island’s
reputation as a financial center."
The agency observed that the assets of the total banking sector are nearly seven times GDP while assets of core domestic banks amounted to about twice GDP.
NON-PERFORMING LOANS
"Among core domestic banks, the increase in non-performing loans (NPLs) to 9.1% of total loans as of March 2015 remains a challenge for the economy, with almost half of NPLs in the construction and commercial real estate sectors."
Banks' aggregate loan loss provisioning rose to 42% as of September 2014, which, S&P said, it still considered low.
RISKS TO COMPETITIVENESS
The agency also warned that nominal unit labour costs have been increasing at one of the fastest rates in the euro area, posing risks for competitiveness when many euro area neighbours are undertaking structural reforms and internal devaluations.
On Greece, the agency said it did not believe events in Greece will have a material bearing on Malta’s credit profile. Like all eurozone members, Malta is exposed through common monetary, fiscal, and development institutions such as the European Central Bank, the European Financial Stability Facility, and the European Investment Bank. Apart from contingent liabilities associated with those institutions, Malta’s exposure to Greece is limited. Malta’s trade with Greece is small and direct financial links are few.
See report on pdf below.
FINANCE MINISTER WELCOMES REPORT
Finance Minister Edward Scicluna welcomed the report.
“Standard & Poor’s’ decision to upgrade the outlook to positive re-affirms the solid performance of our economy and prospects for the upcoming years. Of particular satisfaction is their remark about the Government’s success in reforming key sectors, mainly the energy sector, and the concrete efforts to diversify the economy," Prof Scicluna said.
"We are also pleased to note the favourable comments in relation to Malta’s low exposure to Greece, with the agency stating that events in Greece will not have material bearing on Malta’s credit profile.”