Rating is affirmed but Malta warned

Election may lead to growth in deficit

International credit rating agency Fitch has confirmed Malta’s standing but warned that the unreformed pensions system was a threat to public finances.

The election outcome will not disrupt the medium term objective of fiscal policy

In a statement yesterday, Fitch confirmed Malta’s A+ long-term currency ratings and its triple A country ceiling. It follows on a similar decision by Moody’s last month.

It said the rating affirmation reflected the agency’s view that Malta would maintain what is known as a primary budget surplus in 2012-14, a surplus between the Government’s revenue and expenditure before factoring in interests.

“This implies that the incumbent Government will take necessary action to ensure the deficit remains below three per cent of GDP this year and that any new government emerging from the elections will set out a credible fiscal consolidation programme that incorporates the impact of ageing,” it said.

Echoing recurring comments by international bodies, Fitch expressed concern over Malta’s growing pension cost.

“The main long-term threat to the public finances is the unreformed pension system,” the agency warned, pointing out that pension expenditure was projected to increase from 10.4 per cent of GDP in 2010 to 15.9 per cent in 2060.

“Failure to implement reform and secure the long-term sustainability of the public finances could lead to a downgrade in the medium-term,” the agency said.

The agency assumed the upcoming Budget will be sanctioned through Parliament and there will not be an early election, while recognising that the Administration’s parliamentary majority “is fragile”.

In the event of an early election, the agency expects a deficit growth but said any slippage that remained within three per cent of GDP would be within the rating’s tolerance.

However, it warned that a higher fiscal deficit could cause public debt to reach 76 per cent of GDP in 2012.

The agency is expecting public debt to peak at 74 per cent of GDP in 2013 then decline gradually to 69 per cent by 2020, though this depends on an assumption that moderate fiscal adjustment would be pursued from 2013 onwards.

Fitch is not anticipating any surprise change of policies after an election.

“Fitch’s baseline envisages that the election outcome will not disrupt the medium-term objective of fiscal policy, which is to realise a balanced central government budget and stabilise the public debt ratio,” the agency said.

On the other hand, if financial turmoil intensified, particularly if it led to a deeper and more prolonged recession than expected, Malta’s creditworthiness would be hurt, the agency noted.

It commented positively on the resilience of Maltese banks to the eurozone crisis so far and remarked the housing market appeared to have stabilised.

“Malta has engineered a structural shift towards a higher-value added export base, particularly in the services sector. Exports of services have held up well and this has underpinned a sharp current account adjustment,” it said.

“This has helped the economy to weather the 2009 crisis and has supported real GDP growth of 2.1 per cent in 2011, above the eurozone average,” Fitch noted.

Fitch’s decision comes after Moody’s affirmed Malta’s A3 government bond rating in September while praising the Government for reducing the national deficit.


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