Fitch affirms Malta's rating, gives positive outlook

Times of Malta

22 February 2017

Fitch affirms Malta's rating, gives positive outlook-Malta's ratings reflect its high national income per head, robust economic growth and a large net external creditor position

Fitch Ratings has affirmed Malta's long-term foreign and local currency issuer default ratings (IDR) at 'A' with a positive outlook.

The issue ratings on Malta's senior unsecured foreign and local currency bonds have also been affirmed at 'A' and 'F1', respectively.

The country ceiling has been affirmed at 'AAA' and the short-term foreign and local currency IDRs at 'F1'.

The agency said Malta's ratings reflected its high national income per head compared with the 'A' median, robust economic growth and a large net external creditor position.

The ratings, it said, were constrained by ongoing structural bottlenecks as captured by the weak World Bank ease of doing business indicator.

The positive outlook reflected the agency’s view that the public debt/GDP ratio was on a downward trajectory and that economic growth would keep outperforming similarly-rated peers.

Economic growth remained strong in 2016 at 3.9% year-on-year over the first three quarters, boosted by robust private consumption.

 “We forecast the Maltese economy will keep growing at a faster pace than the 'A' median at an average 3.3% over 2017-2018, supported by strong employment growth, rising disposable income due to continuous wage appreciation and the launch of new investment projects in the health, education and transport sectors.

“Strong export performance in the pharmaceutical, remote gaming, financial services and tourism sectors will help maintain a solid current account surplus over 2017-2018 despite higher import-intensive investments related to the new EU funding cycle.”

Malta's external position compared favourably with 'A' rated peers, with a net international investment position estimated at 47% of GDP at end-2016.

Real GDP growth was revised up by 4.9pp in 2014 and 1.3pp in 2015, following national accounts revisions published by the National Statistical Office in December 2016.

This was mainly due to upward revisions to non-residential construction and machinery and to service exports, notably from the gaming industry.

This led to a substantial improvement in the public debt/GDP ratio and to an upward revision of potential GDP growth to 5.4% in 2016, reflecting higher estimates of total factor productivity.

Malta's gross general government debt fell to an estimated 59% of GDP at the end of 2016 from 60.8% in 2015 due to high revenues from excise duties, income tax and the International Investor Programme (IIP).

 “We expect it to decrease to 56% in 2018, on the back of an improved primary surplus and strong nominal GDP growth, still higher than the 'A' median of 52% of GDP.

“We project the fiscal deficit to narrow in 2017 to 0.5% of GDP from an estimated 0.7% in 2016.”

The agency said robust economic growth and additional indirect tax measures would boost tax revenues and offset more moderate revenue from the IIP, increased expenditure related to the EU presidency and lower tax on pensions.

The agency noted that no further capital transfer had been budgeted for Air Malta as the government expected private investors to take a stake in the company this year.

“We believe the deficit will remain stable in 2018 as higher absorption of EU funds enables lower public investment, while revenues from the IIP decrease.

Government-guaranteed liabilities, it said, remained among the highest in the European Union at 14.8% of GDP at the end of 3Q16, although they were set to decrease to 11.9% of GDP at end-2017, when the temporary guarantee granted to ElectroGas for the construction of a new power station expired.

Most guarantees related to profitable companies, including the utility company Enemalta, Freeport Group Corporation and Malta Industrial Parks.

Malta's banking sector remained profitable, liquid and well capitalised, albeit highly concentrated, with core banks representing 219.5% of GDP as at the end of September 2016.

Asset quality improved with non-performing loans decreasing to 5.6% of total loans at end-September 2016, and the agency expected it to improve further.

A sharp correction in the housing market constituted the main domestic risk to financial stability given the large exposure of the banks to the sector through mortgage lending and real estate collateral.

However, the rise in house prices had moderated and the pace of mortgage lending decreased to 6.2% as at the end of September 2016 from 11% a year earlier.

The agency noted that future developments that could individually or collectively, result in positive rating action include:

  • A longer track record of consolidating the public finances that led to a lower government debt/GDP ratio.
  • A significant decline in contingent liabilities or a low likelihood that these contingent liabilities materialised.
  • Progress in addressing key weaknesses in the business environment.