Fitch af­firms Malta at ‘A’; Outlook Sta­ble

The Malta Business Weekly - - FRONT PAGE -

Fitch Rat­ings has af­firmed Malta's Long-term for­eign and lo­cal cur­rency Is­suer De­fault Rat­ing (IDRs) at ' A' with Sta­ble Out­looks.

The is­sue rat­ings on Malta's se­nior un­se­cured for­eign and lo­cal cur­rency bonds have also been af­firmed at 'A'. The Short­term for­eign cur­rency IDR has been af­firmed at 'F1' and the Coun­try Ceil­ing at 'AAA'.

Key rat­ing driv­ers

Malta's IDR and Sta­ble Outlook re­flect the fol­low­ing main fac­tors: Fitch ex­pects the Mal­tese econ­omy will con­tinue to out­per­form eu­ro­zone peers, with pro­jected av­er­age real GDP growth of 3.2% in 2016-2017, broadly in line with the 'A' me­dian.

Ex­ports' con­tri­bu­tion to growth will rise grad­u­ally as ex­ter­nal de­mand re­cov­ers and in­vest­ment slows.

Ter­tiary in­dus­tries will re­main the main en­gine of growth, in par­tic­u­lar IT and pro­fes­sional ser­vices, the gam­ing in­dus­try, and health­care ser­vices and tourism.

Growth will be down from an es­ti­mated 4.7% in 2015 due to the com­ple­tion of large-scale en­ergy in­vest­ment projects and the ex­pi­ra­tion of the EU fund­ing cy­cle.

Malta's ex­ter­nal po­si­tion com­pares favourably with 'A' rated peers, with a net in­ter­na­tional in­vest­ment po­si­tion es­ti­mated at 35% of GDP in 1Q15. The cur­rent ac­count sur­plus is set to im­prove in 2016 as large im­port-in­ten­sive in­vest­ments re­lated to en­ergy projects fall.

Re­cov­er­ing ex­ter­nal de­mand will sup­port a grad­ual in­crease in ser­vices ex­ports, which along with sturdy tourism in­flows, will push up the cur­rent ac­count sur­plus to a pro­jected av­er­age of 3.1% of GDP in 2016-2017.

The on­go­ing im­prove­ment of the ex­ter­nal po­si­tion rests on a steep ac­cel­er­a­tion of ser­vice ex­ports, de­not­ing the struc­tural shift of the econ­omy to­wards more added-value sec­tors.

Malta's head­line fis­cal deficit is lower than the 'A' me­dian and is ex­pected to nar­row fur­ther, due to strong growth and con­sol­i­da­tion. The deficit is fore­cast to nar­row to 1.1% of GDP in 2016 and 1% of GDP in 2017, down from an es­ti­mated 1.6% of GDP in 2015.

Key to the im­prove­ment in 2016 is the as­sump­tion that no ad­di­tional cap­i­tal in­jec­tion will be re­quired for Air Malta as the com­pany re­turns to prof­itabil­ity.

Rev­enues will grow at a slower pace than nom­i­nal GDP, notably due to the re­duc­tion in in­come tax for those on low in­comes. Mean­while, the pen­sion re­forms in­cluded in the 2016 Bud­get and the up­com­ing wage set­tle­ment will push up pub­lic spend­ing.

Gen­eral gov­ern­ment gross debt is on a de­clin­ing trend and is es­ti­mated at 64.3% of GDP at end-2015 from al­most 70% in 2013. It is set to de­crease fur­ther over the medium term to 60.5% in 2017, but re­mained well above the 'A' me­dian of 44.5% of GDP at end-2015.

This is on the back of an im­proved pri­mary sur­plus and strong nom­i­nal GDP growth.

A slow­down in growth or a rapid in­crease in ex­pen­di­ture are the main risks to debt re­duc­tion.

Gov­ern­ment-guar­an­teed li­a­bil­i­ties are high, and stood at 15.7% of GDP as of Septem­ber 2015. How­ever, risks stem­ming from the po­ten­tial crys­talli­sa­tion of con­tin­gent li­a­bil­i­ties, the ma­jor­ity of which re­lated to util­ity com­pany, Ene­malta, are re­duc­ing. Af­ter its par­tial pri­vati­sa­tion in 2015, the com­pany has im­proved its bal­ance sheet and paid off ar­rears to the gov­ern­ment.

The con­struc­tion of an in­ter­con­nec­tor with Italy and com­ple­tion of two gas power plants should fur­ther help by re­duc­ing en­ergy im­port costs. The com­pany is ex­pected to re­turn to prof­itabil­ity this year, lim­it­ing any ad­di­tional sup­port from the gov­ern­ment.

The Mal­tese bank­ing sec­tor is ro­bust, de­spite its sub­stan­tial size (538% of GDP as of Septem­ber 2015). Cap­i­tal­i­sa­tion and liq­uid­ity ra­tios of sys­tem­i­cally im­por­tant core do­mes­tic banks (rep­re­sent­ing 239% of GDP) are well above the min­i­mum reg­u­la­tory re­quire­ments, at 13.9% and 52.1%, re­spec­tively, as of June 2015, and prof­itabil­ity is im­prov­ing.

How­ever, the sec­tor is largely con­cen­trated with the two largest banks - Bank of Valetta and HSBC Bank Malta - hold­ing more than 80% of loans to res­i­dents and more than 82% of de­posits.

Banks are also highly ex­posed to the sovereign through the hold­ing of se­cu­ri­ties and fi­nanc­ing of gov­ern­ment-re­lated en­ti­ties, and to the hous­ing market, as real es­tate and con­struc­tion rep­re­sent more than half of the loan port­fo­lio and two-thirds of bank loans are se­cured by real es­tate col­lat­eral.

Rat­ing sen­si­tiv­i­ties

Fu­ture de­vel­op­ments that could in­di­vid­u­ally or col­lec­tively, re­sult in pos­i­tive rat­ing ac­tion in­clude: • A fur­ther track record in con­sol­i­dat­ing the pub­lic fi­nances that leads to a lower gov­ern­ment debt/GDP ra­tio. • A sig­nif­i­cant de­cline in con­tin­gent li­a­bil­i­ties. Fu­ture de­vel­op­ments that could in­di­vid­u­ally or col­lec­tively, re­sult in neg­a­tive rat­ing ac­tion in­clude: • Sig­nif­i­cant slip­page from fis­cal tar­gets lead­ing to de­te­ri­o­rat­ing pub­lic debt dy­nam­ics. • Crys­talli­sa­tion of ma­te­rial con­tin­gent li­a­bil­i­ties or a shock to the bank­ing sec­tor that re­quires fis­cal sup­port.

Key as­sump­tions

Fitch assumes that in case of need, the gov­ern­ment of Malta would only be pre­dis­posed to­wards sup­port­ing the core do­mes­tic banks, which are sys­tem­i­cally im­por­tant, in par­tic­u­lar Bank of Val­letta (102% of GDP) and Mediter­ranean Bank.

For HSBC Bank Malta (89% of GDP), Fitch be­lieves that any nec­es­sary sup­port would come from its par­ent com­pany.

In Fitch's view, the Mal­tese gov­ern­ment would be very un­likely to sup­port the in­ter­na­tional banks and would prob­a­bly not sup­port non­core banks ei­ther.

Newspapers in English

Newspapers from Malta

© PressReader. All rights reserved.