A week ago, exceptionally on a Saturday, possibly aiming at the Sunday papers, the government announced with glowing pride the latest rating report by Fitch about Malta.

This is what the Ministry of Finance had to say: “In its latest assessment report, Fitch Ratings has reaffirmed Malta’s ‘A’ Rating with a stable outlook. Fitch also expressed its view that Malta’s economic growth will continue to outperform its eurozone peers while at the same time public finances will continue to improve.

“Fitch expects the fiscal deficit to continue in its downward trajectory mainly thanks to growth friendly consolidation. In this context, Fitch welcomes the government’s commitment to ensure fiscal sustainability through the adoption of the Fiscal Responsibility Act, remarking how this ‘will help guarantee confidence in the fiscal targets’.

“Fitch also acknowledged Malta’s strong economic growth on the back of falling unemployment, lower energy costs and steady credit growth. Fitch expects this economic performance to persist in the coming years underpinned by strong investment, sustained growth in services sectors, and a structural shift in the economy towards higher value-added activities.

“While Fitch acknowledges the relatively high ratio of government-guarantee liabilities that were accumulated during the previous administrations, they note that the recent investment by Shanghai Electric Power Company started to improve Enemalta’s financial position, ‘leading to reduced risk that contingent liabilities will crystallise’.

“The solid foundations and high liquidity in Malta capital markets were also noted by Fitch. The Rating Agency also remarked the positive institutional development during the last six month, with a single-supervisory framework now in place and the establishment of a resolution fund.”

Note that there is not a single negative comment or any shade of doubt in the statement. So today I will go to the original document, which was published by Fitch not on Saturday but earlier in the week, and highlight the less optimistic, the questions, the doubts, the warnings contained in the report. The full Fitch report can be found in this paper’s issue of last Sunday and in The Malta Business Weekly.

 

Public finances

“As in previous years, expenditure growth will be driven by a higher public wage bill (reflecting in part a rise in the number of health and education workers) and social transfers.”

 

Fiscal consolidation

“The authorities expect fiscal consolidation to gather pace in 2016-18, primarily driven by lower current expenditure. However, meeting these targets will prove challenging, as the risk of expenditure slippage is high.”

 

General government gross debt

“General government gross debt is expected to fall modestly in the medium term, but remain well above the ‘A’ median of 47.2% of GDP. In our baseline, nominal GDP growth of 5.3% and a primary surplus of 0.7% of GDP will help bring public debt/GDP to around 65% in 2017, from a high of almost 70% in 2013. There are some downside risks to our debt outlook, primarily related to lower than projected growth and higher budget deficits.”

 

Government-guaranteed liabilities

“At 16.9% of GDP at end-2014, government-guaranteed liabilities are among the highest in the EU and continue to weigh on creditworthiness...”

 

Gross fixed capital formation

“Gross fixed capital formation contracted in year-on-year terms in 1Q15, [but]  investment is expected to pick up in the short term, helped by the construction of a new power plant and the completion of EU-funded projects (the funds have to be spent by end-2015).

 

Labour productivity

“There are some risks from rising unit labour costs, but at present there are few signs of a loss of price competitiveness, highlighting a structural shift in the economy to higher value-added services. However, failure to improve productivity could create growth bottlenecks in the longer term.”

 

Inflation

“Inflation has started to pick-up since our last rating review, reaching 1.1% in June (from 0.4% in December 2014). This reflects both sturdy domestic demand growth and the diminishing effects of the 2014 energy price cut for households. An upcoming reduction in industrial energy prices is unlikely to have significant pass-through effects on consumer prices, with Fitch forecasting inflation to rise to around 2% in 2016-17.”

 

Financial institutions

“Financial institutions are likely to face challenges in boosting profitability, partly due to high non-interest expenses.”

In conclusion: the outlook is stable, but …

“Future developments that could individually or collectively, result in a positive rating action are:

• An improved track record in consolidating the public finances that leads to a lower government debt/GDP ratio.

• A significant decline in contingent liabilities. 

The main factors that individually or collectively could trigger negative rating action are:
• 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 within the framework of the EU’s Bank Recovery and Resolution Directive.

“In Fitch’s view, the Maltese government would be very unlikely to support international banks (415% of GDP at 1Q15) and would probably not support non-core banks (28% of GDP at 1Q15) either.”

To conclude: the government is right to boast that the economy is doing well and the conclusion of this rating agency is that the outlook for Malta is stable and that it will be doing even better than many other EU and eurozone member states, but when proclaiming this overall positive assessment, the government is not really informing its citizens of the warnings and/or doubts expressed at the same time by the rating agency.

This optimism-at-all-costs mindset can prevent people from being aware of the risks and dangers ahead.

 

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