Standard & Poor's Ratings Services today affirmed Malta’s long- and short-term foreign and local currency sovereign credit ratings at 'BBB+/A-2' giving the country a stable outlook.
The government welcomed the appraisal.
The outlook reflected S&P’s view of a less than one-in-three likelihood of a rating change over the next two years. The outlook also balanced Malta's economic prospects against its recurrent, though declining, fiscal imbalances and relatively high debt, as well as its external data inconsistencies.
“We could raise our ratings on Malta if the government's reform program boosts growth and reduces the government debt burden more quickly than we currently expect, without a return to significant current account deficits.
“We could lower our ratings on Malta if fiscal slippages increase the government's net debt burden. Negative pressure could also build if Malta's large financial sector were to experience sizable disinvestment or weakening access to external debt and deposit financing, highlighting hitherto absent linkages between internationally oriented banks and the domestic economy,” S&P said.
In an overview S&P said Malta's economic growth prospects remained strong relative to its EU peers and forecast an average GDP growth of just over two per cent in the next four years.
However, it viewed the government's relatively high debt burden as a constraint on policy flexibility compared to other economies with similar per capita GDP levels.
The agency said it considered the domestic banks to be well-capitalised, though increasingly challenged by rising non-performing loans.
S&P said its ratings 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, constrain the ratings.
“We forecast the Maltese economy to grow by 2.4% this year and just over two per cent on average over the next four years. For 2014, growth will likely be boosted by the construction of a new liquefied natural gas (LNG) power plant and an interconnector cable to Sicily, as well as by private consumption.
“Private consumption has benefitted both from cuts in energy tariffs and from government policies that have increased female labor participation from relatively low levels. We also project that net exports will subtract from GDP growth during 2014, as capital imports are set to increase.
“There is a chance that Malta's economy could grow faster than we currently anticipate. This is light of higher-than-expected tourism receipts in January-May 2014 (compared with the same period in 2013) as well as manufacturing, particularly microelectronics, resuming.”
S& P noted, however, that growth performance would remain highly sensitive to external demand in key trading partners, given its estimation that goods and services exports would be 92 per cent of GDP in 2014.
“We estimate that general government debt net of liquid assets reached 63 per cent at end-2013 and will likely stabilise from this year thanks to fiscal consolidation and rising output. In 2013, the general government deficit improved to 2.8 per cent of GDP (3.3 per cent in 2012), reflecting higher tax receipts and supportive nominal GDP growth.
“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. We understand that VAT arrears of about two per cent of GDP from Enemalta (the main provider of energy generation and distribution in Malta) are to be paid in late 2014 following a capital injection by the new minority holder, Shanghai Electric Power (payable in September).”
At an estimated 17 per cent of GDP, the government's non-financial contingent liabilities were higher than most peers. They 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."
S&P said that the presence of foreign-owned, internationally oriented banks posed little threat to the government by way of contingent liabilities as these institutions had little or no impact on the domestic economy.
As of March 2014, external currency and deposit liabilities totaled some 237 per cent of GDP (€17.9 billion).
It said it expected Malta's current account surplus to decline somewhat over 2014 due to a larger import bill given the rise in imports associated with energy projects.
“We expect a narrower income deficit and a continued significant services balance surplus will offset this.”
S&P noted that Malta's external accounts were distorted by the large international financial institutions operating on the island.
It said that last year, significant negative net foreign direct investment (-22 per cent of GDP, compared to an average inflow of five per cent in the previous three years). This followed an international bank divesting its Maltese assets and operations.
However, while a movement of this size relative to Malta's GDP would ordinarily be notable, the agency did not view the international bank's operation as linked to the domestic economy.
“Indeed, we view Malta as being in a net external debtor position once we exclude global banks that have no link to the domestic economy.
“We view Malta's domestic banking system as well-capitalized 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).
“That said, the increase in nonperforming loans to nine per cent at end 2013, remains a challenge for the domestic banking sector. Part of this increase relates to a regulatory change to the definition of NPLs. Further, almost half of the NPLs are concentrated in the construction and commercial real estate sectors and related provisioning is very low (about 40 per cent). 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.”
As a member of the eurozone (European Economic and Monetary Union), Malta benefitted from the stability of the euro, low inflation, and access to European Central Bank funding. Mostly because of its small size and heavy fiscal burden, however, there could be times when ECB policy is not particularly suited to the Maltese economy.