The Malta Independent 25 June 2019, Tuesday

Fitch affirms Malta at 'A+' rating - outlook stable

Saturday, 2 February 2019, 09:36 Last update: about 6 months ago

 International ratings agency Fitch Ratings has affirmed Malta's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A+' with a stable outlook.

Fitch states that Malta's budget performance has been stronger than 'A' rated peers, and is on an improving trend. "Malta's general government balance turned a surplus in 2016, peaking in 2017 at 3.5% of GDP. The sharp increase in 2017 fiscal surplus was partly due to significant individual investor programme (IIP) revenues and tax revenues from strong economic activity. Fitch estimates the surplus to have narrowed to 1.1% of GDP in 2018 and that it will narrow further to 0.8% of GDP by 2020. Malta's fiscal policy outlook is anchored by the government's commitment to a structural fiscal balance net of IIP revenues, with IIP revenues ring fenced for investment purposes."

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Fitch states that tax revenues are expected to fall as a share of GDP due to a one-off impact of a new EU directive on eVAT revenues, measures to support first- and second-time home buyers, and support for pensions, graduates and low income earners, while IIP revenues are forecast to fall to 0.9% of GDP in 2019 from the 2.2% peak in 2017. "Lower capital transfers in 2019 (a 0.5pp of GDP one-off transfer was made to Malta Air Travel) and expenditure restraints should more than offset a 0.3pp of GDP rise in capital expenditure, resulting in total government expenditure falling. Higher capital expenditure reflects an increase in the utilisation of EU funds and will be focussed on roads, environment, healthcare and education projects."

Public debt has fallen rapidly to 47.3% of GDP in 2018, from a peak of 70.2% in 2011, Fitch state. "Debt dynamics remain very favourable, driven by low interest payments, strong nominal GDP growth and recurrent primary surpluses. Fitch forecasts the gross general government debt/GDP ratio to fall to 41.7% by 2020, and further to 26.7% by 2028 according to our baseline projections. Government guarantees remain sizeable, but fell to 9.0% of GDP at end-3Q18 (2016: 13.8%). This excludes other contingent liabilities, such as potential government support for core domestic banks should an unforeseen need arise."

"We forecast Malta's real GDP growth to have slowed to 5.9% in 2018 (2017: 6.6%), albeit slightly higher than our forecast of 5.6% at the time of our August 2018 rating review. Strong private and public consumption is driving growth, with private consumption supported by low interest rates and strong employment and wages. Growth has continued to surprise on the upside due to Malta's ability to attract foreign labour and a strong supply-side response in the property market that mitigate capacity constraints. However, Fitch forecasts growth to taper to 5.1% in 2019 and further to its medium-term potential growth of 3.0% by 2024 as infrastructure, real estate and labour market constraints lead to higher rents and wages. Risks are tilted to the downside due to prospects of disruptions to the tourism sector from slower eurozone growth and a possible disorderly Brexit. UK tourists accounted for 24% of total tourist arrivals in November 2018, down from 32% four years ago."

Malta's current account has been in surplus since 2012, driven by its growing services trade sectors. "The 2017 surplus rose to 10.5% of GDP due to a significant fall in capital goods imports on the completion of significant infrastructure projects, and the rise in overseas gaming and travel services exports. We forecast the surplus to narrow slightly to 10.1% of GDP in 2018 and to 7.1% by 2020 as the goods trade deficit widens with stronger private consumption, and as net services exports from the gaming sector normalise. The small and very open nature of the economy leaves Malta vulnerable to external shocks. Malta's net external creditor position (198% of GDP) is strong relative to the 'A' and 'AA' medians owing to the categorisation of special-purpose entities with large balance sheets as Maltese residents. "

Fitch also state that GDP per capita is significantly higher than the 'A' median and has averaged 5.8% growth per year in 2010-2018. "Malta outperforms the 'A' median on the World Bank human development and governance indicators, although its score on the 'voice and accountability' subcomponent has been slipping in recent years. Ease of doing business significantly underperforms the 'A' median, ranking only at the 56th percentile of sovereigns on the World Bank index, although greater infrastructure investment is alleviating some bottlenecks."


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