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