Fitch Ratings has affirmed Malta's Long-Term Foreign-Currency Issuer Default Rating at A+ with a Stable outlook.

 

Key rating drivers

Malta's A+ IDRs reflect the following key rating drivers: Malta's ratings reflect its high income per head compared with the 'A' median, robust economic growth and a large net external creditor position, together with eurozone membership. Malta's ratings are constrained by the small and highly open nature of its economy, which makes it vulnerable to external shocks and its high, albeit declining level of contingent liabilities and outsized banking sector relative to GDP.

Domestic banks' assets accounted for 225.7% of GDP in December 2017. Malta's large international banking sector is not exposed to the domestic economy.

Fitch forecasts Malta will maintain a fiscal surplus of 1% of GDP in 2018, after outperforming its fiscal target by 3.1pp in 2017 with a surplus of 3.9% of GDP due to large tax revenues and proceeds from the Individual Investor Programme and lower than expected capital expenditure.

Revenues will decline by 1.7pp to 38.7% of GDP as inflows from the IIP moderate while expenditure will increase by 1.2pp to 37.7% of GDP due in part to net lending: a capital injection into Malta Air Travel Ltd for the purchase of landing slots from Air Malta (accounting for 0.5% of GDP).

The launching of the new EU-funding cycle and investments by the National Development and Social Fund financed by IIP revenues will also support an increase in capital expenditure.

We expect fiscal policy to remain prudent. Government revised its fiscal surplus targets upwards in the April Stability Programme Update, given the strong 2017 fiscal outturn and aims at achieving fiscal savings net of IIP proceeds over the forecast horizon.

Malta's structural balance improved by an additional 3pp in 2017 to an estimated 3.5% of GDP, according to the European Commission. Government expects to keep meeting its medium-term objective in 2018 of a balanced structural budget.

Public debt dynamics are very favourable, with low interest payments, strong nominal growth and recurrent primary surpluses leading to a sustained downward trend in the gross general government debt (GGGD)/GDP ratio. Fitch forecasts GGGD/GDP to decline to 47.2% in 2018 and 40.9% in 2020, compared with a historical 'A' median of 41%.

Contingent liabilities declined to 9.6% of GDP at-end 2017 following the expiration of the Electrogas guarantee in 4Q17, from 13.7% at-end 2016.

Real GDP growth is set to remain robust at 5.6% in 2018, supported by a strong growth in public and private consumption and recovery in investment.

Unemployment declined further to 3.9% in June, from 4.6% in December 2017 and compensation per employee rose 1.8% in 2017, supporting private demand. Net trade contribution to growth will likely decrease after a surge in 2017 as investments-related imports contracted but strong performances by the remote gaming, tourism and financial services sectors will support robust services exports.

Fitch estimates Malta's medium-term potential growth at 3%, but is more conservative than the European Commission's latest forecast in the 3.5%-5.2% range in 2022, as we expect pressures on the infrastructure and rising labour shortages will constrain the expansion of the economy in the medium-term.

Price pressures are increasing given tightening labour market, but we expect inflation to remain contained at 1.6% in 2018 and 1.8% in 2019 as the strong inflow of foreign workers and rising labour participation will prevent a sharp increase in wages.

Property prices (based on transactions) rose 5.3% y-o-y in 2017, and advertised prices rose 11.8%, boosted by strong housing demand, low interest rates leading to portfolio re-allocation to real estate investments, a booming tourism sector and exemption of stamp duty for first-time buyers. However, increasing housing supply should help curb the rise in property prices, while the Fitch Macro Prudential Indicator score of 1 for Malta indicates that only moderate risks are arising from private sector credit to GDP and real property prices.

We forecast the current account surplus to decline in the forecast horizon to 10.9% of GDP in 2018, from 13.7% in 2017 as investments in housing, health and education ramp-up and good imports pick-up.

Malta's net external creditor position is strong relative to peers at a forecast 199.5% of GDP compared with a historical 'A' median of 8.3%, but benefits from the categorisation of special-purpose entities, which are large net external creditors, as Maltese residents.

The banking sector remains sound, although highly concentrated with core domestic banks' assets accounting for 206% of GDP at-end 2017, non-core domestic banks' assets representing 19.7% of GDP and international banks' assets 205%.

Capitalisation remained strong with a common equity Tier 1 ratio of 15.1% in 2017 (for core banks) and asset quality is improving, with non-performing loans accounting for 4.1% of total loans (5.3% in 2016), although legacy resident corporate NPLs of core domestic banks remained high at 11%.

Risks to the sector stem from the high and rising exposure to the housing market, with mortgage lending accounting for 48.3% of the total lending to residents. Lending standards to households remain prudent, also due to households' net worth with a loan-to-value ratio for residential properties at 73.5% in 2017 and debt service-to-income ratio at 23%.

Malta's GDP per capita has increased gradually since 2010 and accounts for an estimated 145% of the 'A' median in 2018. World Bank governance indicators exceed the 'A' median and are comparable with the 'AA' median, although the "rule of law" subcomponent of the governance indicators is on a declining trend.

Malta's Ease of Doing Business is also weaker than the 'A' median, ranking 84th out of 190 in 2018.

 

Sovereign rating model and qualitative overlay

Fitch's proprietary SRM assigns Malta a score equivalent to a rating of 'AA' on the Long-Term Foreign-Currency IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:

External Finances:

-1 notch, to reflect the small and highly open nature of the Maltese economy, which makes it vulnerable to external shocks and the large size of recorded FDI inflows together with a high ratio of debt to equity, which flatter external financing metrics.

- Macro:

-1 notch, to reflect that Malta's future growth is weaker than what is currently captured in the SRM.

 

Rating sensitivities

Future developments that could individually or collectively, result in positive rating action include:

-Further fiscal consolidation leading to a sustained and significant decline in government debt/GDP.

-Convergence of GDP per capita with that of higher rated sovereigns and progress in addressing key weaknesses in the business environment.

Future developments that could individually or collectively, result in negative rating action include:

-Significant fiscal slippages leading to deteriorating public debt dynamics.

-Crystallisation of material contingent liabilities or a shock to the banking sector that requires fiscal support.

-Serious external shock that could affect growth and debt dynamics.

 

Key assumptions

Fitch assumes that in case of need, the Maltese government would only be predisposed towards supporting the core domestic banks that are systemically important, in particular Bank of Valletta (108.6% of GDP at-end 2017). For HSBC Bank Malta (50.7% 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 non-core banks either.

The full list of rating actions is as follows:

Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook stable

Long-Term Local-Currency IDR affirmed at 'A+'; Outlook stable

Short-Term Foreign-Currency IDR affirmed at 'F1+'

Short-Term Local-Currency IDR affirmed at 'F1+'

Country Ceiling affirmed at 'AAA'

Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'A+'

Issue ratings on short-term senior unsecured local-currency bonds affirmed at 'F1+'.