The Malta Independent 14 April 2024, Sunday
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Standard & Poor's upgrades Malta’s credit rating to A-, outlook stable

Friday, 14 October 2016, 18:48 Last update: about 9 years ago


The Standard & Poor's credit rating agency today raised Malta's long-term rating to A- from its previous BBB+ rating, forecasting the Maltese economy to continue growing by an average of per cent per cent per annum until 2019. 

In a Twitter statement, Prime Minister Joseph Muscat said: #Malta lands first @spglobalratings upgrade in 20 years. A- with stable outlook. This is just the beginning -JM."


The agency raised its long-term sovereign credit ratings on Malta to 'A-' from 'BBB+'. The upgrade reflected what S&P called 'Malta's improved credit metrics', including: strong real GDP growth; deficits below 1 per cent for the 2016-19 period; and durable current account surpluses.

S&P said that Malta's outlook remains stable, reflecting the credit rating agency's opinion that: "The upside potential of Malta's economic and fiscal performance is counterbalanced by downside risks related to Brexit, external flows, and the structure of the financial sector."

In its assessment, S&P projected that, "The Maltese economy will expand in real terms by three per cent a year on average between 2016 and 2019, while running consistent current account surpluses with only modest credit growth."

S&P expects budgetary consolidation will continue gradually, reducing net general government debt to 53% of GDP in 2019 from 58% in 2015.

It adds that, "The outlook is stable, reflecting our view that the upside potential of Malta's economic and fiscal performance is counterbalanced by downside risks related to Brexit, external flows, and the structure of the financial sector."

At the same time, S&P affirmed its 'A-2' short-term foreign and local currency sovereign credit ratings on Malta.

The upgrade reflects Malta's improved credit metrics, including:

  • Strong real GDP growth that we expect will average 3% in 2016-2019, on rising labour supply, services export growth, and robust investment;
  • Consistent improvement in qualitative and quantitative fiscal performance, with general government deficits below 1% in 2016-2019 and tighter management of contingent liabilities; and
  • Durable current account surpluses--at 1.9% of GDP on average in 2016-2019, reflecting an improvement in Malta's fundamental external position.

Malta, S&P said, "is in the midst of one of the strongest medium-term economic expansions in the eurozone, with the second-highest average GDP growth rate in 2010-2015 (after Ireland) and the third-highest expected real GDP growth in 2016-2019. By the end of this year, we anticipate that Malta's economy will exceed pre-2009 levels by more than 25%.

"We also consider that most of the rise in Maltese incomes since 2009 reflects genuine expansion of the domestic economy's capital base, particularly in services, rather than accounting effects based on tax-motivated changes in the residency of productive assets."

S&P said that one of the key drivers of Malta's solid economic performance is the expansion of its

labour supply, on the back of net migration (which added 1% to the population in 2015 alone) and the accompanying increase in employment, especially of women.

Over the past 10 years, S&P noted, the employment rate for those aged between 20 and 64 years has increased to 68% from 58%, fuelled by rapid growth in the employment of women to 54%

from 36%.

Another major factor is investment growth, S&P said, mainly comprising large-scale projects in education, healthcare, tourism, and transport industries, as well as energy projects, including the conversion of power stations to cheaper energy sources and the gradual integration of Malta's power system into the European grid.

The agency adds, "As a result, electricity prices now resemble EU averages, and new businesses have easier access to electricity."

S&P noted that, "Malta has a very open economy, with exports in excess of 140% of GDP, of which more than three-quarters are service exports, such as tourism, e-gaming, and logistics.


Brexit effect on Malta will be contained

Being open and small, the Maltese economy is exposed to potential external shocks, S&P said that the largest being the possible disruption to trade and financial markets from a UK Brexit or departure from the EU as a result of the 23 June referendum.

"In our base case, we project that the medium-term consequences of Brexit will be contained. UK

arrivals generate almost 30% of Malta's tourism receipts, and the weaker sterling is likely to drag on services exports to the U.K. However, given that it is already facing supply constraints, the tourism sector can, in our view, easily fill the gap from other markets.

"The implications of Brexit for Malta's financial services are less clear cut and would mostly occur through financial institutions other than domestic banks. If the asset management industry in the UK slows, Malta-based investment funds may generate fewer services exports, which would cut export growth, but this, in and of itself, is unlikely to create balance-of-payments risks.

"Overall, we consider the financial services industry to be sufficiently diversified to contain the risks related to Brexit."

Malta's tax regime, S&P said, has been an important factor in attracting investment in some sectors, "but initiatives such as the Anti-Tax Avoidance Directive (ATAD) may challenge some aspects of the regime. In addition, despite ongoing reforms, the business environment in Malta is still constrained by Malta's judicial framework, leading to slow contract enforcement.

"Nevertheless, we see Malta's overall political and institutional framework as broadly supportive of creditworthiness, demonstrated, for example, by structural reforms that generated the employment increase mentioned above and lifted potential economic growth."

S&P said it believes that, "Malta's favourable economic growth prospects support further budgetary consolidation. We forecast that the general government deficit will decline gradually through 2019, and we expect net general government debt will decrease to 53% of GDP by the end of 2019, from 56% in 2016.

"This excludes the guarantees related to the European Financial Stability Facility. We forecast general government interest payments will average under 6% of general government revenues per year in 2016-2019."

Malta's contingent fiscal liabilities, stemming from government-guaranteed debt of nonfinancial public enterprises (NFPEs), will likely total about 16% of GDP in 2016, the agency said today.

"We expect the stock of guarantees will gradually decline as NFPEs are reorganized and their financial positions improve. In the long term, unless there are further reforms in the pension and healthcare systems, Malta's progress toward consolidating its budget may come under pressure.

"That said, the improvement in labour force participation, as well as ongoing economic growth, have led to improvements in the sustainability of the social security system."


External position improves over last decade

Malta's external position has improved over the past decade on the back of doubling of services exports since 2007 (such as financial and business services, tourism, and e-gaming). The downward revision of our current account forecast in 2016-2019 to 1.9% of GDP reflects our expectations of strong foreign direct investment inflows, which will drive up goods imports and widen the trade balance.

S&P adds, "We also note that Malta's external statistics are subject to frequent revisions, constraining external analysis.  Large external assets and liabilities (both representing more than 24x Malta's GDP) reflect the use of Malta as a domicile for special-purpose vehicles, as well as the cross-border activities of nondomestic banks and the investment fund sector.

"As regards our preferred measure of external debt net of liquid external nonequity assets, we forecast Malta will report a net liability position averaging about 56% of current account receipts (CARs) in 2016-2019. In our view, the activity generating most external risks is the use of short-term wholesale funding (mostly by international banks) to upstream funds to non-resident borrowers.

"We expect such short-term external debt will stand at an average of 180% of CARs in 2016-2019.


Banking sector assets 5x GDP

S&P noted that assets of the total banking sector exceed 5.0x GDP, while assets of core domestic banks amounted to about 2.3x GDP in March 2016. Core domestic banks have predominantly local assets and liabilities, while international banks' links to the domestic economy are limited. For example, the October 2015 decision by Deutsche Bank to close its operations in Malta, which led to the repatriation of assets worth almost 50% of Malta's GDP, did not have any significant adverse consequences for Malta's economic and external performance or its financial stability.

"However, dislocations in the funding of this sector could affect the island's reputation as a financial centre and potentially weaken its growth prospects. Among core domestic banks, nonperforming loans represented 7.2% of total loans at year-end 2015, with almost one-half in the construction and real estate sectors."

Core domestic banks' aggregate loan-loss provisioning rose to 43.5% as of year-end 2015, which we still consider low.

S&P explains, "As a result of our view of the banking sector's importance, we see contingent fiscal

risks to public finances coming from the sector's large size. Notwithstanding the limits put on government support through the EU banking framework, financial stress in the sector could put pressure on the deposit insurance system and impose broader economic costs on the government.

Membership in the eurozone, S&P noted, anchors Malta's monetary policy and provides its banks with access to funding at low nominal interest rates. Loose monetary policy limits the government's interest burden as well, with over 10% of Malta's central government debt held by the Eurosystem. Nevertheless, we consider that membership in a monetary union increases the onus on member governments to support competitiveness through fluid labour, product, and services markets, and to build up fiscal buffers against future shocks.

"This is more pertinent now than previously, given that the European Central Bank is undershooting  its medium-term price stability target of close to, but lower than, 2% for the eurozone as a whole.

Outlook: ratings could be raised further

The stable outlook reflects S&P's view that the upside potential of Malta's economic and fiscal performance is counterbalanced by downside risks related to Brexit, external flows, and the structure of the financial sector.

"We could raise the ratings if economic growth in Malta considerably outperforms our medium-term expectations, or if we see a considerable reduction in fiscal risks related to contingent liabilities.

"We could lower the ratings if we see substantial slippage in Malta's fiscal performance, a reversal of the current account into consistent deficits, or increasing risks in the financial sector, owing to either Brexit or an erosion in sector segmentation and the spill-over of short-term external funding risks into the domestic economy."


Finance Minister's reaction 

“The budgetary measures and reforms carried out by government in the last three years have been vindicated to the full by the latest credit rating report by Standard and Poor’s which raised Malta’s rating from ‘BBB+’ to ‘A-’, the first time it raised Malta’s credit rating in 20 years,” Finance Minister Edward Scicluna said in a statement on Saturday.

“Standard and Poor’s, in its latest report, is giving due recognition to the results achieved by measures such as those encouraging people to back to work, such as the tapering of benefits, in-work benefits and the introduction of free child-care helped women to re-enter the labour market. Moreover, the exceptional economic growth achieved consistently in the past three years, together with a marked increase in foreign investment and projects aimed at bolstering the education, health and energy sectors improved the quality of life of the Maltese. This report will strengthen government’s resolve to carry on creating wealth for the country and seeing that it reaches those that are most in need.”

"Standard and Poor’s said it was upgrading Malta’s credit rating due to its strong real GDP growth, which it expects to average 3% in 2016-2019, the rise in supply of labour, growth in the export of services and robust investment driven by large-scale projects in education, healthcare, tourism, transport industries and energy projects. It also anticipates that “Malta’s economy will exceed pre-2009 levels by more than 25%.”

It described Malta as being “in the midst of one of the strongest medium-term economic expansions in the eurozone” with the second-highest average GDP growth rate in 2010-2015 and the third-highest average expected real GDP growth in 2016-2019. Malta’s outlook was described as stable, attributable to the fact that “the upside potential of Malta's economic and fiscal performance is counterbalanced by downside risks related to Brexit, external flows and the structure of the financial sector. Furthermore, Standard and Poor’s affirmed that it is expecting a continued gradual budgetary consolidation with net general government debt to stand at 53% of GDP in 2019 after it decrease from 58% in 2015 to 56% in 2016.

Malta’s expanding labour supply was singled out as one the key drivers of its solid economic performance, thanks to net migration calculated as 1% of its 2015 population, and an increase in employment, especially of women. This, coupled with the ongoing economic growth, led to improvements in the sustainability of the social security system, said Standard and Poor’s.

Standard and Poor’s upgrade was further substantiated by Malta’s consistent improvement in qualitative and quantitative fiscal performance, with general government deficits below 1% in 2016-2019, tighter management of contingent liabilities, and durable current account surpluses, standing at 1.9% of GDP on average in 2016-2019. The latter, stated the report, reflects “an improvement in Malta’s fundamental external position.”

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