Ratings agency DBRS has assigned long-term foreign and local currency issuer ratings of A to Malta. DBRS has also assigned short-term foreign and local currency issuer ratings of R-1 (low). The trend on all ratings is Stable.
"The A rating reflects Malta’s strong growth performance and Eurozone membership," the agency said.
"Membership in the Eurozone plays an integral role in Malta’s economy, ensuring reliable access to European markets. Eurozone membership also fosters strong macroeconomic policies and makes available financial support from European institutions. With prudent lending practices and stable household finances, Malta did not generate the financial imbalances that have plagued other Eurozone periphery countries.
"However, Malta’s weak productivity growth combined with high and rising costs pose a challenge for competitiveness, while low participation in the formal labour force limits fiscal flexibility and raises additional social challenges. Furthermore, the economy and public finances are exposed to external shocks, particularly those emanating from within the EU."
The agency said continued progress on fiscal consolidation and a gradual reduction in public indebtedness could put upward pressure on the ratings. In addition, successful implementation of reforms to improve the efficiency of the public sector, boost private sector investment and increase formal labor force participation could have a positive effect.
On the other hand, the emergence of additional contingent liabilities, particularly from the energy or financial sector, could have adverse implications for Malta’s ratings. Large or prolonged external shocks could also present downside risks to the ratings.
The agency said that despite its strengths, Malta exhibited relatively weak productivity growth that could undermine its competitiveness as labour costs continue to rise. Since 2007 in particular, growth in Malta’s output per worker has underperformed most other southern EU countries, while labour costs have risen in excess of 25% (compared to roughly 10% in France, Italy and Spain).
Structural characteristics, including the small size of firms, lack of innovation, high degree of informality and limited access to credit appeared to be primary factors in Malta’s low rate of productivity growth. Infrastructure bottlenecks may also be playing a role.
Malta, the agency said, also had a low rate of labour force participation. Rising real wages and government policies to encourage employment, particularly among women and older workers, have had positive but largely transitory effects on growth. An apparently high degree of informality may limit further progress and ultimately make long-term pension commitments less affordable.
Although Malta’s level of indebtedness compared favourably to many other European economies, it remained elevated compared to historical levels. The average interest cost of public debt was relatively high, though declining, and the government has extended guarantees to several large state owned enterprises (particularly Enemalta).
The restructuring of these companies had reduced risks to the public sector balance sheet, and the new fiscal framework may help to achieve a durable reduction in debt over coming years. Nonetheless, the public sector remains exposed to debt and financing shocks, particularly given the high degree of concentration in the domestic financial sector.
The Finance Ministry welcomed the report, saying the credit agency had noted the economic boost which the present government had brought about, not least through a series of incentives and initiatives such as lower utility charges, free childcare and aid to industry. The government had also narrowed the deficit and was reining in the national debt.
PN REACTION
In a reaction, Mario de Marco, PN deputy leader and spokesman on finance said the Opposition welcomed DBRS's rating and noted the agency's stress on EU and eurozone membership.
"It is ironic that the Labour Party, which opposed both European Union membership and the adoption of the Euro, is now seeking to take credit for the positive effects of Malta's accession to the European Union and the Eurozone. DBRS also praises Malta's financial stability during the financial crisis which crippled other countries, a clear reference to the sound financial management of PN led-administrations," he said.
He said it was important that the government addressed the weaknesses noted in the rating report. The increase in government's recurrent expenditure, driven by an unbridled public sector recruitment, is putting strain on Malta's debt which between 2013 and 2015 is set to increase by €700 million, he said.
Government should also concentrate on ensuring that Malta's productivity improves.
"Our industrial production has been in decline since October 2013. This has started to impact negatively on the average wage of people who work in the manufacturing sector, as evidenced by the findings of the latest Labour survey."