Fitch Ratings has downgraded Malta's long-term foreign and local currency issuer default ratings from A+ to A.

In a statement, it said the downgrade reflects significant fiscal slippage.

"Malta's general Government deficit was 3.3 per cent of GDP in 2012, well above both the Government's target (2.2 per cent) and Fitch's September 2012 forecast (2.6 per cent of GDP).

"This slippage has carried over to 2013, when Fitch forecasts a deficit of 3.6 per cent of GDP, compared with 2.7 per cent in the original 2013 budget.

"The European Commission has re-opened the excessive deficit procedure against Malta, with the deadline for correcting the excessive deficit set for 2014."

"Fitch now forecasts that general Government gross debt will peak at 74 per cent of GDP in 2014-15 (two years later than previously expected) and decline only marginally in the medium term, remaining above 73 per cent of GDP by 2020.

"A debt ratio that is higher for longer reduces the fiscal space to absorb future adverse shocks."

"The 2013 budget is moderately expansionary, rather than starting consolidation.

"Although the newly-elected government has committed to fiscal consolidation and pledged to exit EDP by 2014, as yet there has been no clarity around the fiscal measures underpinning the adjustment.

"The April 2013 Stability Programme Update suggests the fiscal adjustment will be based solely on revenue growth. Despite Fitch's forecast for positive GDP growth in 2014-15, the agency believes it will be difficult for the Government to reduce the general Government deficit and put public debt on a downward trajectory without some adjustment on the expenditure side."

"Government-guaranteed liabilities had risen to 17.6 per cent of GDP in 2012 from 11 per cent in 2006, and 60 per cent of them relate to Enemalta, the public energy utility company.

"This implies that total public debt (including guarantees) stood at 90 per cent of GDP in 2012. Furthermore, Government payment arrears, including the healthcare sector, amount to some 9.8 per cent of GDP (in 2012)."

"Since the March 2013 elections, there has been no concrete policy announcement in this area, despite several years of consultations on the review and recommendations of the Pensions Working Group.

"Demographic projections by the EU Commission suggest that the system is not sustainable without reform. Long-term fiscal policy will be heavily influenced by spending pressures on pensions and healthcare related to an ageing population."

Government statement

In a statement, the government said that the credit rating downgrade was a result of problems it had inherited and is now addressing. It follows similar decisions taken by other agencies.

The government is confidence that it will reach its pre-established targets and the country’s deficit will go down to below three per cent.

The Maltese economy is creating employment, the government said, but there is a need for more discipline in government finances. The government is working on two complementary strategies – that of retaining economic stability and improve competitiveness.