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Rating agency DBRS confirms Malta's A rating

Maltese economy gets a clean bill of health

Updated 9.35am - Added government reaction

Malta’s economic outlook has received another clean bill of health, with credit rating agency DBRS confirming its long-term rating at A (high) and medium-term rating at R-1 (middle), with a stable outlook.

In a rating report issued late on Friday, the Toronto-based rating agency noted that Malta’s economic growth outpaced the European average and its fiscal surplus was bigger than originally anticipated, with the country enjoying a strong external position, favourable public debt structure and households in a strong position.

It found that domestic banks were in a strong position and that although the housing market was inflating, it posed no immediate risk.

Concerns about the handling of Pilatus Bank did not overly weigh on DBRS credit assessors’ minds: in its report, the agency it as a “small bank with no systemic implications” and noted that the government had plans to introduce stricter anti-money laundering legislation, increase resources and establish national coordinating mechanisms by 2020.

That assessment contrasts with conclusions drawn by Standard & Poors, which upped Malta’s risk profile earlier this month and warned that the country’s reputation for financial services "could be at risk."  

Fitch, another rating agency, has also maintained an A+ rating for Malta and said it sees a stable outlook.

DBRS noted that Malta has been dropping down a World Bank list ranking countries by rule of law for more than 10 years, since 2007, and mentioned the Egrant inquiry in passing, saying that it had concluded there was “no evidence of corrupt practices, money laundering or suspect financial transactions”.

The Maltese government welcomed the DBRS report and highlighted assessors’ observation that Malta placed within the top 25th percentile for all six of the World Bank’s governance indicators.

It also said that the rating agency had noted that Malta’s decline in rule of law standards had started in 2007, and not when the Labour Party had risen to power in 2013.

Economy

The agency said that Malta had managed to avoid the trap of an overheating economy thanks to a highly elastic supply of foreign labour and by growing the economic share of less capital-intensive service sectors.

Surplus

Government’s general fiscal surplus  reached 3.9 per cent in 2017, well surpassing its original 0.8 per cent target.

Its headline fiscal surplus will likely drop to 1.1 per cent this year, DBRS predicted, with a relative decline in expenditure “more than offset by a drop in the revenue ratio, partly explained by base-effects from the citizenship scheme revenues”.

Proceeds from that scheme, the Individual Investor Programme, made up a larger part of GDP growth in 2017 – 2.6 per cent – than in 2016, at 1.7 per cent.

Debt

Malta’s government debt, relative to its GDP, continues to decline. It peaked at 70.1 per cent of the economy in 2011 and stood at 50.7 per cent last year, DBRS said, and is now among the EU’s lowest. The IMF, European Commission and Central Bank of Malta all expect it to continue dropping.

Government outstanding guarantees remain high at 9.6 per cent of GDP in 2017, though that declined from 13.7 per cent in 2016.

Banks and housing

Local banks have healthy Tier 1 capital ratios, high levels of liquidity and good profitability levels, DBRS said. The housing market continued to inflate, though the rating agency said it did not see any immediate risks given Malta’s strong economy and increasing supply of houses. Banks’ conservative lending and households’ high levels of liquid assets also helped lessen risks of a housing market crash.

Exports

Service sector exports are growing strongly and in 2017 the current account surplus hit a three-decade high, at 13.6 per cent of GDP. Malta’s large financial industry inflates Malta’s gross external indebtedness, the agency said.

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