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