DBRS con­firms Repub­lic of Malta at A, Trend changed to pos­i­tive

The Malta Business Weekly - - FRONT PAGE -

DBRS Rat­ings Lim­ited con­firmed the Repub­lic of Malta’s LongTerm For­eign and Lo­cal Cur­rency – Is­suer Rat­ings at A and its Short-Term For­eign and Lo­cal Cur­rency – Is­suer Rat­ings at R-1 (low). The trend on the rat­ings has been changed to Pos­i­tive.

The rat­ing is sup­ported by Malta’s Eu­ro­zone mem­ber­ship, its solid ex­ter­nal po­si­tion, a favourable public debt struc­ture and the ro­bust fi­nan­cial po­si­tion of house­holds. How­ever, Malta’s con­tin­gent li­a­bil­i­ties re­main a source of vul­ner­a­bil­ity, its econ­omy is ex­posed to ex­ter­nal shocks and pres­sures from the ris­ing age-re­lated costs, if un­ad­dressed, could pose a con­cern for the pen­sions sys­tem.

Nev­er­the­less, the Pos­i­tive trend re­flects DBRS’s view that the im­por­tant im­prove­ment in the fis­cal po­si­tion over the past three years is likely to be sus­tained. A sound bud­get po­si­tion, to­gether with solid growth, is ex­pected to lead to the fur­ther re­duc­tion in the public debt ra­tio.

Im­prove­ments in the Fis­cal Man­age­ment and Pol­icy, Debt and Liq­uid­ity and Eco­nomic Struc­ture and Per­for­mance sec­tions of our anal­y­sis were the key fac­tors for the trend change.

Fol­low­ing a fis­cal con­sol­i­da­tion process since 2013, Malta’s fis­cal out­turns came in bet­ter than ex­pected in 2016. Both the head- line and the struc­tural deficits turned into sur­pluses and the gov­ern­ment debt ra­tio, al­ready 12 per­cent­age points lower than its 2011 peak, fell be­low 60% of GDP. The im­prove­ment in public fi­nances has been driven by strong rev­enues as well as moderation in ex­pen­di­ture and sup­ported by a strength­ened fis­cal frame­work. The fis­cal over-per­for­mance also meant that Malta com­plied with the bud­get bal­ance rule, the debt rule and the ex­pen­di­ture bench­mark of the EU Sta­bil­ity and Growth Pact in 2016.

Malta’s Eu­ro­zone mem­ber­ship en­sures re­li­able ac­cess to Euro­pean mar­kets, fos­ters strong and cred­i­ble macroe­co­nomic poli­cies and makes avail­able fi­nan­cial fa­cil­i­ties from Euro­pean in­sti­tu­tions. The ex­pan­sion of trade and travel links with Europe has also pro­vided a boost to the coun­try’s econ­omy. Malta’s econ­omy is among the fastest grow­ing in the Euro area and its growth prospects look favourable.

Malta’s solid ex­ter­nal po­si­tion is an­other credit strength. The cur­rent ac­count sur­plus has av­er­aged 4.4% of GDP in 2011-2016 and the coun­try is also a net ex­ter­nal cred­i­tor with a net ex­ter­nal as­set po­si­tion of 31.2% of GDP on av­er­age over the same pe­riod. Although the im­port con­tent of pro­duc­tion re­mains high, this has de­clined as the econ­omy be­comes more ser­vice ori­ented. The cur­rent ac­count sur­plus is sup­ported by siz­able ser­vices ex­ports. Malta’s low re­liance on ex­ter­nal fi­nanc­ing has sup­ported its re­silience in re­cent years as the core do­mes­tic bank­ing sec­tor is funded by do­mes­tic re­tail de­posits and the gov­ern­ment meets its fi­nanc­ing re­quire­ments do­mes­ti­cally.

Malta’s public debt com­po­si­tion and ma­tu­rity struc­ture also pro­vide sup­port to its rat­ing. The Maltese Trea­sury has fol­lowed a strat­egy of length­en­ing the ma­tu­rity of gov­ern­ment debt in re­cent years. The av­er­age ma­tu­rity of gov­ern­ment bonds was nine years in July 2017, which com­pares favourably to other Euro­pean economies.

Gov­ern­ment debt is also largely fixed-rate, re­sult­ing in a pre­dictable and man­age­able debt re­demp­tion sched­ule.

On the pri­vate sec­tor, Maltese house­holds en­joy high lev­els of sav­ings and mod­er­ate in­debt­ed­ness. House­hold net fi­nan­cial as­sets are large at 182% of GDP. House­hold debt, mainly in the form of mort­gages, has in­creased but re­mains mod­er­ate. Pri­vate con­sump­tion growth is con­se­quently quite re­silient.

Some of Malta’s credit chal­lenges are as­so­ci­ated with the ex­po­sure of its public sec­tor and the still mod­er­ately high, al­beit de­clin­ing, level of public debt. Con­tin­gent li­a­bil­i­ties from large state-owned en­ter­prises, though re­duced, con­tinue to pose a risk to gov­ern­ment fi­nances.

The de­gree of con­cen­tra­tion in the do­mes­tic fi­nan­cial sec­tor could also be a source of con­tin­gent li­a­bil­i­ties. Although the re­struc­tur­ing of some of the SOEs has re­duced risks to the public sec­tor bal­ance sheet and the over­all fi­nan­cial con­di­tion of the core do­mes­tic banks looks strong, the public sec­tor re­mains vul­ner­a­ble to debt shocks. Af­ter re­main­ing above 60% of GDP for decades, public debt has been de­clin­ing since 2014 and fore­cast to fall be­low 53% in 2018.

Malta’s tourism sec­tor and other in­dus­tries that rely on for­eign de­mand also ex­pose the econ­omy to un­favourable ex­ter­nal de­vel­op­ments. Tourism ben­e­fits from a market of wealthy Euro­pean economies, but it could be ad­versely af­fected by an eco­nomic down­turn in the re­gion.

Malta is ex­posed to a slow­down in the UK econ­omy, as Bri­tish tourists ac­count for 25% of Malta’s to­tal tourists. Shocks to ex­ter­nal de­mand could also have an im­pact on do­mes­tic real es­tate prices, with po­ten­tial ad­verse im­pli­ca­tions for house­hold fi­nances. The in­creas­ing di­ver­si­fi­ca­tion of the econ­omy, nev­er­the­less, helps mit­i­gate some of the ex­ter­nal risks.

Fi­nally, pres­sures from agere­lated costs present an­other chal­lenge for Malta. Health­care costs and pen­sion li­a­bil­i­ties, while still be­low EU av­er­ages, have in­creased rapidly in re­cent years.

Labour-market par­tic­i­pa­tion is ris­ing, as a re­sult of re­cent re­form ef­forts, but re­mains among the low­est in the EU, par­tic­u­larly among women and older work­ers. Pen­sion re­form mea­sures are be­ing im­ple­mented and this should help se­cure the long-term sus­tain­abil­ity of the sys­tem. How­ever, the over­all im­pact of the mea­sures is still to be as­sessed.

Rat­ing driv­ers

A re­duc­tion in public in­debt­ed­ness in the near to medium term, in line with DBRS’s ex­pec­ta­tions, could lead to an up­grade in the rat­ings. Suc­cess­ful im­ple­men­ta­tion of re­forms to im­prove the ef­fi­ciency of the public sec­tor, boost pri­vate sec­tor in­vest­ment and in­crease fur­ther labour force par­tic­i­pa­tion could also have a pos­i­tive ef­fect.

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.

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