Fitch Ratings has affirmed Malta's Long-term foreign and local currency Issuer Default Rating (IDRs) at 'A' with Stable Outlooks.
The issue ratings on Malta's senior unsecured foreign and local currency bonds have also been affirmed at 'A'. Fitch has also affirmed the Country Ceiling at 'AAA' and the Short-term foreign currency IDR at 'F1'.
It said the affirmation and stable 0utlook reflected the gradual improvement of
Malta's public finances, helped by strong economic growth and lower nominal interest expenditure.
It said it expects the headline fiscal deficit to fall to 1.8% of GDP this year, with total revenue/GDP reaching a record high of 42.8%. As in previous years, expenditure growth will be driven by a higher public wage bill (reflecting in part a rise in the number of health and education workers) and social transfers.
The authorities, it said, expect fiscal consolidation to gather pace in 2016-18, primarily driven by lower current expenditure. "However, meeting these targets will prove challenging, as the risk of expenditure slippage is high. On the upside, fiscal management is set to improve following the implementation of the Fiscal Responsibility Act and the eurozone fiscal rules. The establishment of a fiscal council could also help guarantee confidence in fiscal targets."
Fitch said general government gross debt (GGGD) is expected to fall modestly in the medium term, but remain well above the 'A' median of 47.2% of GDP.
"In our baseline, nominal GDP growth of 5.3% and a primary surplus of 0.7% of GDP will help bring public debt/GDP to around 65% in 2017, from a high of almost 70% in 2013. There are some downside risks to our debt outlook, primarily related to lower than projected growth and higher budget deficits."
GOVERNMENT GUARANTEES - ENEMALTA PROGRESS
"At 16.9% of GDP at end-2014, government-guaranteed liabilities are among the highest in the EU and continue to weigh on creditworthiness," Fitch said.
"Most are related to state-owned enterprises, in particular the utility company, Enemalta. Nevertheless, after the recent purchase of 33% of its assets by a Chinese firm, Enemalta's financial position has started to improve, thanks in part to lower energy imports and new infrastructure investment. This has reduced the risk that contingent liabilities will crystallise."
ECONOMIC GROWTH OF 3.6% EXPECTED THIS YEAR
The agency said that although gross fixed capital formation contracted in year-on-year terms in 1Q15, investment is expected to pick up in the short term, helped by the construction of the new power plant and the completion of EU-funded projects (the funds have to be spent by end-2015).
In this context, Fitch forecasts the economy to expand by around 3.6% this year, above the 'A' and 'AA' medians.
"The Maltese economy will continue to outperform eurozone peers in the medium term, even as GDP growth is set to moderate slightly from 2016 onwards. The country's services sectors will remain the most dynamic, led by higher tourist arrivals and expansion of the gaming industry. There are some risks from rising unit labour costs, but at present there are few signs of a loss of price competitiveness, highlighting a structural shift in the economy to higher value-added services. However, failure to improve productivity could create growth bottlenecks in the longer term."
INFLATION
The agency noted that inflation has started to pick-up, reaching 1.1% in June (from 0.4% in December 2014). "This reflects both sturdy domestic demand growth and the diminishing effects of the 2014 energy price cut for households. An upcoming reduction in industrial energy prices is unlikely to have significant pass-through effects on consumer prices, with Fitch forecasting inflation to rise to around 2% in 2016-17."
LOAN DEPOSIT RATIO
The agency said Malta's capital markets remains very liquid, with the loan to deposit ratio of domestic banks at 63% in 1Q15. The core banks, which have a balance sheet of around 260% of GDP, are well capitalised and delinquency portfolios have stabilised over the past year, while provisions for NPLs have increased.
"However, financial institutions are likely to face challenges in boosting profitability, partly due to high non-interest expenses."
RATING SENSITIVITIES
Fitch said future developments that could individually or collectively, result in a positive rating action are:
-An improved track record in consolidating the public finances that leads to a lower government debt/GDP ratio.
-A significant decline in contingent liabilities.
The main factors that individually or collectively could trigger negative rating action are:
-Significant slippage from fiscal targets leading to deteriorating public debt dynamics.
-Crystallisation of material contingent liabilities or a shock to the banking sector that requires fiscal support.
FINANCE MINISTRY WELCOMES REPORT
In a reaction, Finance Minister Edward Scicluna said the Fitch rating and report "confirms our confidence in our ability to continue attaining our ambitious budgetary targets."
"We are also pleased that the Government efforts to restructure government owned entities and pro-actively seeking to attract investment into new growth sectors are also being acknowledged.”
The Finance Ministry noted that Fitch had said that Malta’s economic growth would continue to outperform its Eurozone peers while at the same time public finances would continue to improve.
"Fitch expects this economic performance to persist in the coming years underpinned by strong investment, sustained growth in services sectors, and a structural shift in the economy towards higher value-added activities."
The ministry said that while Fitch acknowledged the relatively high ratio of government-guarantee liabilities that were accumulated during the previous administrations, they noted that the recent investment by Shanghai Electric had started to improve Enemalta’s financial position, ‘leading to reduced risk that contingent liabilities will crystallise’.