Standard & Poor’s is forecasting economic growth of more than two per cent for the next four years, leaving Malta’s rating unchanged at BBB+.
In its July analysis released yesterday, the ratings agency retained a stable outlook as it commented positively on economic prospects and the government’s fiscal consolidation programme.
However, it saw the government’s relatively high debt burden as a constraint on “policy flexibility” when compared with economies with similar per capita GDP levels.
The ratings, it noted, were supported by its view of Malta’s fairly strong institutional and governance effectiveness and its resilient economy. A sizable government debt burden and significant contingent liabilities, as well as external data discrepancies, constrained the ratings.
“For 2014, growth will likely be boosted by the construction of a new liquefied natural gas power plant and an interconnector cable to Sicily as well as by private consumption,” Standard & Poor’s said.
It noted that private consumption benefited from cuts in energy tariffs – which came into force in March – and from government policies increasing female labour participation from relatively low levels.
“There is a chance that Malta’s economy could grow faster than we currently anticipate [as a result of] higher-than-expected tourism receipts in January-May 2014 and manufacturing, particularly microelectronics, resuming,” the ratings agency said.
It pointed out that growth performance would remain highly sensitive to external demand in key trading partners, given its estimation that goods and services exports would constitute 92 per cent of GDP in 2014.
It also anticipated Malta would exit the EU’s excessive deficit procedure later this year.
“We forecast that the general government deficit will narrow further to 2.4 per cent of GDP this year, predominantly on higher VAT receipts and social contributions.
“As a consequence, we anticipate that Malta will exit the European Commission excessive deficit procedure this year.”
Such reasoning was also based on the understanding that VAT arrears amounting to some two per cent of GDP from Enemalta were to be paid in late 2014 after a capital injection by Shanghai Electric Power, the new minority shareholder.
At an estimated 17 per cent of GDP, the government’s non-financial contingent liabilities were higher than most peers, the agency noted. These mostly comprised the guaranteed liabilities of Enemalta (10 per cent of GDP) as well as the Freeport (2.8 per cent).
“We do not project that these nonfinancial contingent liabilities will decrease materially over our forecast horizon.
“In particular, in our opinion, Enemalta is not likely to generate profits until 2017.
“Including the contingent liabilities of the domestic financial sector, we assess the government’s total contingent liabilities as moderate,” the agency said.
When referring to the banking sector, it reaffirmed its positive outlook.
It noted that the presence of foreign-owned, internationally oriented banks posed little threat to the government by way of contingent liabilities because such institutions had little or no impact on the domestic economy.
“We view Malta’s domestic banking system as well-capitalised with a deposit-to-loan ratio of about 130 per cent, stemming from historically sticky domestic deposits.
“As of March 2014, the domestic banking sector accounted for €50.3 billion, or seven times the GDP.
“Of the domestically relevant banks – those that intermediate fully in the local economy and would receive government support if needed: Bank of Valletta accounted for €7.7 billion at end-March and HSBC was €5.7 billion (end-2013).”
Standard & Poor’s deemed the increase in nonperforming loans to nine per cent at end 2013 as a challenge for the domestic banking sector.
Part of the increase was related to a regulatory change to the definition of nonperforming loans.
Almost half of nonperforming loans were concentrated in the construction and commercial real estate sectors and related provisioning was very low (about 40 per cent), it pointed out.
“While we do not expect a price correction in the real estate market, it does remain a latent risk for Malta’s banks.
“That said, we note that loan-to-volume ratios are conservative at around 63 per cent for commercial properties and 73 per cent for residential properties in the core domestic banks,” the agency said.
Welcoming the credit agency’s appraisal, the government said it was determined to safeguard and maintain the sustainable finances and economic momentum the country achieved, in the interest of further economic growth and the creation of quality employment.