Stan­dard & Poor’s up­grades Malta’s credit rat­ing to A- on strong eco­nomic growth

Malta Independent - - FRONT PAGE -

The Stan­dard & Poor’s credit rat­ing agency yes­ter­day raised Malta’s long-term rat­ing for the first time in 20 years - to a rat­ing of A- from its pre­vi­ous BBB+ rat­ing, and fore­cast­ing the Mal­tese econ­omy to con­tinue grow­ing by an av­er­age of per cent per cent per an­num un­til 2019.

The agency raised its long-term sov­er­eign credit rat­ings on Malta to ‘A-’ from ‘BBB+’. The up­grade re­flected what S&P called ‘Malta’s im­proved credit met­rics’, in­clud­ing: strong real GDP growth; deficits be­low 1 per cent for the 2016-19 pe­riod; and durable cur­rent ac­count sur­pluses.

S&P said that Malta’s out­look re­mains sta­ble, re­flect­ing the

credit rat­ing agency’s opin­ion that: “The up­side po­ten­tial of Malta’s eco­nomic and fis­cal per­for­mance is coun­ter­bal­anced by down­side risks re­lated to Brexit, ex­ter­nal flows, and the struc­ture of the fi­nan­cial sec­tor.”

In its as­sess­ment, S&P pro­jected that, “The Mal­tese econ­omy will ex­pand in real terms by three per cent a year on av­er­age be­tween 2016 and 2019, while run­ning con­sis­tent cur­rent ac­count sur­pluses with only mod­est credit growth.”

S&P ex­pects bud­getary con­sol­i­da­tion will con­tinue grad­u­ally, re­duc­ing net gen­eral gov­ern­ment debt to 53% of GDP in 2019 from 58% in 2015.

It adds that, “The out­look is sta­ble, re­flect­ing our view that the up­side po­ten­tial of Malta’s eco­nomic and fis­cal per­for­mance is coun­ter­bal­anced by down­side risks re­lated to Brexit, ex­ter­nal flows, and the struc­ture of the fi­nan­cial sec­tor.”

At the same time, S&P af­firmed its ‘A-2’ short-term for­eign and lo­cal cur­rency sov­er­eign credit rat­ings on Malta.

The up­grade re­flects Malta’s im­proved credit met­rics, in­clud­ing:

• Strong real GDP growth that we ex­pect will av­er­age 3% in 2016-2019, on ris­ing labour sup­ply, ser­vices ex­port growth, and ro­bust in­vest­ment;

• Con­sis­tent im­prove­ment in qual­i­ta­tive and quan­ti­ta­tive fis­cal per­for­mance, with gen­eral gov­ern­ment deficits be­low 1% in 2016-2019 and tighter man­age­ment of con­tin­gent li­a­bil­i­ties; and

• Durable cur­rent ac­count sur­pluses - -at 1.9% of GDP on av­er­age in 2016-2019, re­flect­ing an im­prove­ment in Malta’s fun­da­men­tal ex­ter­nal po­si­tion.

Malta, S&P said, “is in the midst of one of the strong­est medi­umterm eco­nomic ex­pan­sions in the eu­ro­zone, with the sec­ond-high­est av­er­age GDP growth rate in 20102015 (af­ter Ire­land) and the third­high­est ex­pected real GDP growth in 2016-2019.

By the end of this year, we an­tic­i­pate that Malta’s econ­omy will ex­ceed pre-2009 lev­els by more than 25%.

“We also con­sider that most of the rise in Mal­tese in­comes since 2009 re­flects gen­uine ex­pan­sion of the do­mes­tic econ­omy’s cap­i­tal base, par­tic­u­larly in ser­vices, rather than ac­count­ing ef­fects based on tax-mo­ti­vated changes in the res­i­dency of pro­duc­tive as­sets.”

S&P said that one of the key driv­ers of Malta’s solid eco­nomic per­for­mance is the ex­pan­sion of its

labour sup­ply, on the back of net mi­gra­tion (which added 1% to the pop­u­la­tion in 2015 alone) and the ac­com­pa­ny­ing in­crease in em­ploy­ment, es­pe­cially of women.

Over the past 10 years, S&P noted, the em­ploy­ment rate for those aged be­tween 20 and 64 years has in­creased to 68% from 58%, fu­elled by rapid growth in the em­ploy­ment of women to 54% from 36%.

Another ma­jor fac­tor is in­vest­ment growth, S&P said, mainly com­pris­ing large-scale projects in ed­u­ca­tion, health­care, tourism, and trans­port in­dus­tries, as well as en­ergy projects, in­clud­ing the con­ver­sion of power sta­tions to cheaper en­ergy sources and the grad­ual in­te­gra­tion of Malta’s power sys­tem into the Euro­pean grid.

The agency adds, “As a re­sult, elec­tric­ity prices now re­sem­ble EU av­er­ages, and new busi­nesses have eas­ier ac­cess to elec­tric­ity.”

S&P noted that, “Malta has a very open econ­omy, with ex­ports in ex­cess of 140% of GDP, of which more than three-quar­ters are ser­vice ex­ports, such as tourism, e-gam­ing, and lo­gis­tics.”

Brexit ef­fect on Malta will be con­tained

Be­ing open and small, the Mal­tese econ­omy is ex­posed to po­ten­tial ex­ter­nal shocks, S&P said that the largest be­ing the pos­si­ble dis­rup­tion to trade and fi­nan­cial mar­kets from a UK Brexit or de­par­ture from the EU as a re­sult of the 23 June ref­er­en­dum.

“In our base case, we project that the medium-term con­se­quences of Brexit will be con­tained. UK ar­rivals gen­er­ate al­most 30% of Malta’s tourism re­ceipts, and the weaker ster­ling is likely to drag on ser­vices ex­ports to the UK.

“How­ever, given that it is al­ready fac­ing sup­ply con­straints, the tourism sec­tor can, in our view, eas­ily fill the gap from other mar­kets.

“The im­pli­ca­tions of Brexit for Malta’s fi­nan­cial ser­vices are less clear cut and would mostly oc­cur through fi­nan­cial in­sti­tu­tions other than do­mes­tic banks.

“If the as­set man­age­ment in­dus­try in the UK slows, Malta-based in­vest­ment funds may gen­er­ate fewer ser­vices ex­ports, which would cut ex­port growth, but this, in and of it­self, is un­likely to cre­ate bal­ance-of-payments risks.

“Over­all, we con­sider the fi­nan­cial ser­vices in­dus­try to be suf­fi­ciently di­ver­si­fied to con­tain the risks re­lated to Brexit.”

Malta’s tax regime, S&P said, has been an im­por­tant fac­tor in at­tract­ing in­vest­ment in some sec­tors, “but ini­tia­tives such as the Anti-Tax Avoid­ance Direc­tive (ATAD) may chal­lenge some as­pects of the regime.

“In ad­di­tion, de­spite on­go­ing re­forms, the busi­ness en­vi­ron­ment in Malta is still con­strained by Malta’s ju­di­cial frame­work, lead­ing to slow con­tract en­force­ment.

“Nev­er­the­less, we see Malta’s over­all po­lit­i­cal and in­sti­tu­tional frame­work as broadly sup­port­ive of cred­it­wor­thi­ness, demon­strated, for ex­am­ple, by struc­tural re­forms that gen­er­ated the em­ploy­ment in­crease men­tioned above and lifted po­ten­tial eco­nomic growth.”

S&P said it be­lieves that, “Malta’s favourable eco­nomic growth prospects sup­port fur­ther bud­getary con­sol­i­da­tion. We fore­cast that the gen­eral gov­ern­ment deficit will de­cline grad­u­ally through 2019, and we ex­pect net gen­eral gov­ern­ment debt will de­crease to 53% of GDP by the end of 2019, from 56% in 2016.

“This ex­cludes the guar­an­tees re­lated to the Euro­pean Fi­nan­cial Sta­bil­ity Fa­cil­ity. We fore­cast gen­eral gov­ern­ment in­ter­est payments will av­er­age un­der 6% of gen­eral gov­ern­ment rev­enues per year in 2016-2019.”

Malta’s con­tin­gent fis­cal li­a­bil­i­ties, stem­ming from gov­ern­ment­guar­an­teed debt of non­fi­nan­cial pub­lic en­ter­prises (NFPEs), will likely to­tal about 16% of GDP in 2016, the agency said to­day.

“We ex­pect the stock of guar­an­tees will grad­u­ally de­cline as NFPEs are re­or­ga­nized and their fi­nan­cial po­si­tions im­prove. In the long term, un­less there are fur­ther re­forms in the pen­sion and health­care sys­tems, Malta’s progress to­ward con­sol­i­dat­ing its bud­get may come un­der pres­sure.

“That said, the im­prove­ment in labour force par­tic­i­pa­tion, as well as on­go­ing eco­nomic growth, have led to im­prove­ments in the sus­tain­abil­ity of the so­cial se­cu­rity sys­tem.”

Out­look: rat­ings could be raised fur­ther

The sta­ble out­look re­flects S&P’s view that the up­side po­ten­tial of Malta’s eco­nomic and fis­cal per­for­mance is coun­ter­bal­anced by down­side risks re­lated to Brexit, ex­ter­nal flows, and the struc­ture of the fi­nan­cial sec­tor.

“We could raise the rat­ings if eco­nomic growth in Malta con­sid­er­ably out­per­forms our medi­umterm ex­pec­ta­tions, or if we see a con­sid­er­able re­duc­tion in fis­cal risks re­lated to con­tin­gent li­a­bil­i­ties.

“We could lower the rat­ings if we see sub­stan­tial slip­page in Malta’s fis­cal per­for­mance, a re­ver­sal of the cur­rent ac­count into con­sis­tent deficits, or in­creas­ing risks in the fi­nan­cial sec­tor, ow­ing to ei­ther Brexit or an ero­sion in sec­tor seg­men­ta­tion and the spillover of short-term ex­ter­nal fund­ing risks into the do­mes­tic econ­omy.”

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