DBRS agency up­grades Malta from sta­ble to pos­i­tive, notes marked im­prove­ment in gov­ern­ment in­ef­fi­ciency

Malta Independent - - NEWS - He­lena Grech

DBRS credit rat­ings agency has up­graded Malta’s outlook from sta­ble to pos­i­tive thanks to sound eco­nomic growth and a sur­plus in the pub­lic fi­nances. It also noted marked im­prove­ment in short­com­ings such as gov­ern­ment in­ef­fi­ciency.

The rat­ings agency wrote: “Malta is now among the few EU coun­tries in full com­pli­ance with EU fis­cal rules. The Pos­i­tive trend re­flects our view that the im­por­tant im­prove­ments in the fis­cal po­si­tion since 2014 are likely to be sus­tained. Pri­mary sur­pluses above 2% of GDP, to­gether with steady eco­nomic growth be­tween 3% and 4%, should al­low Malta to con­tinue re­duc­ing its pub­lic debt. Cur­rent fore­casts point to a gov­ern­ment debt ra­tio be­low 53% of GDP by the end of 2018.

“A con­tin­ued re­duc­tion in pub­lic in­debt­ed­ness in the near- tomedium term could lead to an up­grade in Malta’s rat­ings. Other fac­tors such as the suc­cess­ful im­ple­men­ta­tion of re­forms to im­prove the ef­fi­ciency of the pub­lic sec­tor, a boost in pri­vate sec­tor in­vest­ment, and in­creased labour force par­tic­i­pa­tion, could also have a pos­i­tive ef­fect on the rat­ings.

“How­ever, the emer­gence of ad­di­tional con­tin­gent li­a­bil­i­ties, from state-owned en­ter­prises or the fi­nan­cial sec­tor could lead to a change in the trend back to Sta­ble. Large ex­ter­nal shocks could also pose down­side risks, given the small size of Malta’s econ­omy.”

Asked by The Malta In­de­pen­dent, Adri­ana Alvarado, vice pres­i­dent at Sov­er­eign Rat­ings Global Sov­er­eign Rat­ings ex­plained that “with gov­ern­ment rev­enues now sur­pass­ing ex­pen­di­ture, and with eco­nomic ac­tiv­ity re­main­ing ro­bust – and thus sup­port­ing tax rev­enues – pub­lic debt is on a de­clin­ing path.”

“This is what we mean by a pri­mary sur­plus and GDP growth help­ing to re­duce the pub­lic debt ra­tio. In terms of the over­all ef­fect for the coun­try, a sound fis­cal po­si­tion and the lower risks as­so­ci­ated with this have a pos­i­tive ef­fect on in­vestor sen­ti­ment. This nor­mally trans­lates into lower bor­row­ing costs for the gov­ern­ment and the over­all econ­omy. A sound fis­cal po­si­tion also pro­vides the gov­ern­ment with fis­cal space – that is room for ma­noeu­vre to deal with any po­ten­tial eco­nomic slow­down.

“Some de­gree of in­ef­fi­ciency per­sists in Malta’s pub­lic sec­tor, com­par­ing un­favourably to some other EU coun­tries. Nev­er­the­less, in­ef­fi­ciency is grad­u­ally be­ing ad­dressed with the Spend­ing Re­views and other fis­cal re­forms in­tended to im­prove fis­cal man­age­ment and the qual­ity of pub­lic sec­tor ser­vices.”

Turning to con­tin­gent li­a­bil­i­ties, and what this refers to in prac­tice, she said that “con­tin­gent li­a­bil­i­ties from state-owned en­ter­prises (SOEs) have added to Malta’s debt bur­den in the past, as some large SOEs faced fi­nan­cial dif­fi­cul­ties. To­tal out­stand­ing gov­ern­ment guar­an­tees re­main high, at 14.2% of GDP in Q1 2017. There­fore, con­tin­gent li­a­bil­i­ties from SOEs in gen­eral con­tinue to pose a risk to gov­ern­ment fi­nances. Nev­er­the­less, gov­ern­ment guar­an­tees are set to fall to 9.7% by end-2017, as the guar­an­tee to Elec­tro­gas ex­pires. The re­struc­tur­ing of SOEs, in­clud­ing Ene­malta, has also re­duced risks to the pub­lic sec­tor bal­ance sheet.”

The Malta In­de­pen­dent asked Alvarado to place a bet on any ex­ter­nal shocks she feels are com­ing our way. To this, she said that they are “dif­fi­cult to pre­dict and do not form part of the base­line forecast. Ex­ter­nal shocks could range from an un­ex­pect­edly se­vere down­turn in the UK to­gether with a sharp de­pre­ci­a­tion in Ster­ling, also af­fect­ing growth in the EU, to a tur­moil in global fi­nan­cial mar­kets lead­ing to sig­nif­i­cantly higher-thanex­pected in­ter­est rates, af­fect­ing eco­nomic sen­ti­ment.”

Over the past few years, many have ex­pressed con­cern that the hous­ing mar­ket in Malta is set to crash. This news­room took the op­por­tu­nity to ask the ex­perts how they feel about this prophecy based on the stats and fig­ures avail­able today.

“The over­all fi­nan­cial con­di­tion of Mal­tese core do­mes­tic banks looks strong, de­spite some chal­lenges. Non-per­form­ing loans (NPLs), con­cen­trated in the real es­tate de­vel­op­ment sec­tor, have con­tin­ued to de­cline. The NPL ra­tio was 5.3% for to­tal loans and 13.9% for the res­i­dent cor­po­rate sec­tor in Q4 2016. The au­thor­i­ties adopted mea­sures to in­cen­tivise credit in­sti­tu­tions to re­solve NPLs in 2016. We see this as a favourable de­vel­op­ment.

“Re­gard­ing the hous­ing mar­ket, both the Cen­tral Bank of Malta (CBM) and the IMF have es­ti­mated that res­i­den­tial prop­erty prices are in line with eco­nomic fun­da­men­tals (re­flect­ing dy­nam­ics of de­mand and sup­ply), and we con­tinue to mon­i­tor devel­op­ments. The CBM also has the ca­pac­ity to ap­ply macro­pru­den­tial mea­sures to try to limit risks in the real es­tate sec­tor. At the mo­ment, we view risks to fi­nan­cial sta­bil­ity as con­tained, given the ab­sence of large fi­nan­cial im­bal­ances in the pri­vate sec­tor and the con­ser­va­tive busi­ness mod­els of Mal­tese core do­mes­tic banks.”

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