Moody’s, DBRS both upgrade Malta’s sovereign economic rating

Two international credit agencies, Moody’s and DBRS, have given Malta’s sovereign economic rating an upgrade on Friday.

In a statement yesterday, the government said that after DBRS had improved Malta’s rating last August, the agency has now given Malta an upgrade from ‘A’ to ‘A high’, which is the highest ever rating given to the country.

Moody’s revised its rating from ‘A3 stable’ to ‘A3 positive’, which is the first upgrade given by the agency to Malta since October 2013.

In its report, Moody’s said it chose to upgrade Malta’s rating because of the country’s “improving fiscal strength, due to a sustained pace of public sector debt reduction supported by prudent fiscal policy and containment of contingent liabilities”.

Moody’s sustains that a surplus of 1.5 per cent was achieved in 2017, as against the 3.5 per cent deficit in 2012. It noted that part of the improvement was a result of the Individual Investor Programme and “fiscal consolidation efforts and sustainably strong economic performance”, which “if sustained, the improvement in fiscal strength will support the assignment of an A2 rating”.

Moody’s also remarked about a “robust medium-term growth prospects supportive of further improvements in fiscal metrics in future.” It added that “measures implemented in recent years targeting the labour market”, as well as “substantial progress has been made in diversifying Malta’s energy sources and increasing energy efficiency”.

The DBRS rating upgrade, meanwhile, resulted of improvement in public finances: “Since DBRS’s latest review, the projection of the general government debt ratio has been materially revised downwards due to more favourable growth prospects and stronger primary balances in coming years,” the report says.

DBRS is projecting that Malta’s debt will drop to 41 per cent of GDP by 2022, or seven per cent lower than the previous estimates. DBRS sustain that “the general government is expected to have over-achieved its fiscal targets in 2017”.

“The Maltese economy continues to power ahead,” DBRS said, while Malta’s economy “remains one of the top performers in the euro area”.

DBRS added that “Malta’s political environment is broadly stable” and “the government is making additional efforts to improve governance and strengthen its institutional framework”.

Malta, DBRS said, nonetheless faces some challenges. “Malta’s contingent liabilities, stemming from its large state-owned enterprises and concentrated financial sector, remain a source of vulnerability. Malta’s small and open economy with some sectors highly dependent on foreign demand, such as tourism, exposes the country to external developments.

“Pressures from rising age-related costs, if unaddressed, could pose a concern for the pension and healthcare system.”

Malta’s small and open economy, the smallest in the Euro area, is vulnerable to external oscillations. However, a more diversified economic base and Malta’s low reliance on external financing help mitigate these risks. In DBRS’s view, downside risks to the outlook largely stem from a downturn in Malta’s main export markets and policy uncertainties related to the post-Brexit arrangement and US policymaking. In the longer term, corporate tax reforms at EU level and in the US could diminish to some degree the attractiveness of several jurisdictions, including Malta, for multinational companies. Also, the gaming industry in Malta could be impacted by regulatory changes at EU level. On the domestic side, higher wage increases could put upside pressure on GDP growth, while delays in construction projects or increasing physical bottlenecks could constrain growth.

DBRS recommended that, “Efforts to continue building fiscal buffers will be important to mitigate Malta’s medium-term fiscal risks. Firstly, the central government’s outstanding guarantees remain high at an estimated 9.7 per cent of GDP in 2017, albeit declining from 14.1 per cent of GDP in 2016. Secondly, age-related costs are expected to increase rapidly and may require additional measures to improve long-term sustainability of the healthcare and pension system. Thirdly, possible changes to international taxation could impact disproportionally Malta, given its higher reliance on corporate taxation (close to 17 per cent of total revenues). Broadening the tax base and reducing tax evasion could mitigate this risk.”

It remarked that Malta’s government debt ratio is on a downward trend, driven by primary surpluses and a favourable interest- growth differential. After peaking at 70.1 per cent of GDP in 2011, the debt ratio is estimated to have declined to 53.6 per cent of GDP in 2017. Malta’s debt ratio is one of the lowest in the EU and is projected to fall to 41.2 per cent of GDP by 2022, according to the IMF.

Moreover, the government relies heavily on a domestic investor base and while DBRS considers that the favourable debt profile significantly reduces refinancing and exchange rate risks, Malta’s debt stock remains vulnerable to growth and contingent liability shocks.

Increased political noise in institutional framework

DBRS remarked that Malta’s political environment is broadly stable: “The main parties, the ruling Labour Party and the Nationalist Party, are centrist and supportive of Malta’s Eurozone membership, which was adopted in 2008 after joining the EU in 2004. This has resulted in stable macroeconomic, fiscal and monetary policy institutions, more transparency, and in a high degree of policy continuity.

“The Labour Party won an additional term in power in early elections held in June 2017, and DBRS expects no major policy changes. The government is making additional efforts to improve governance and strengthen its institutional framework.

“Various ongoing investigations and court proceedings are indicative of the need for further governance improvements, but also of the government’s commitment to address past shortcomings.”