Fitch Ratings
has affirmed Malta's Long-Term Foreign and Local Currency Issuer Default
Ratings (IDR) at 'A' with a Positive Outlook. Furthermore, the issue ratings on
Malta's senior unsecured foreign and local currency bonds have also been
affirmed at 'A' and 'F1', respectively. The Country Ceiling has been affirmed
at 'AAA' and the Short-Term Foreign and Local Currency IDRs at 'F1'.
Fitch - Key Rating Drivers
When
commenting about Malta’s ratings, Fitch noted that these reflect the high
national income per head compared with the ‘A’ median, Malta's robust
economic growth and a large net external creditor position. The ratings are
constrained by ongoing structural bottlenecks as captured by the weak World
Bank Ease of Doing Business indicator
Fitch’s
Positive Outlook for Malta reflects the rating agency’s view that the public debt/GDP
ratio is on a downward trajectory and that economic growth will keep
outperforming similarly-rated peers.
2016 saw
Malta’s economic growth remain strong at 3.9% year-on-year over the first three
quarters which has been boosted by robust public consumption.
The rating
agency forecasted that the “Maltese economy will keep growing at a faster pace
than the 'A' median at an average 3.3% over 2017-2018, supported by strong
employment growth, rising disposable income due to continuous wage appreciation
and the launch of new investment projects in the health, education and
transport sectors.” This projected growth is in line with the forecast in the Malta Budget
2017.
Sectorial Analysis
The pharmaceutical, remote gaming, financial
services and tourism sectors
are expected to experience strong export performance this year. Despite higher
import-intensive investments related to the EU funding cycle, exportations from
the aforementioned sectors will help Malta maintain a solid current account
surplus over 2017-2018. Fitch continued to add that Malta’s external
position compares favourably with ‘A’ rated peers with a net international
investment position estimated at 47% of GDP at end 2016.
Real GDP
growth was revised up by 4.9pp in 2014 and 1.3pp in 2015, following national
accounts revisions published by the National Statistical Office in December
2016. This can be attributed to upward revisions to non-residential
construction and machinery, as well as service exports particularly from the
gaming industry. This result was a substantial improvement in the public
debt/GDP ratio and to an upward revision of potential GDP growth to 5.4% in
2016, reflecting higher estimates of total factor productivity.
Fitch has
also pointed out that high revenues from excise duties, income tax, and the Malta
International Investor Programme (IIP), have helped Malta’s gross
general government debt fall to an estimated 59% of the GDP at end-2016 from
60% in 2015. The rating agency is expecting it to further decrease to 56% in
2018, on the back of an improved primary surplus and strong nominal GDP growth,
still higher than the 'A' median of 52% of GDP.
With respect
to fiscal deficit, Fitch’s estimations fall in line with those of the Malta
Budget 2017. It is expected that fiscal deficit shall decrease to 0.5% of GDP
from an estimated 0.7% in 2016. “Robust economic growth and additional indirect
tax measures will boost tax revenues and offset more moderate revenue from the
IIP, increased expenditure related to the EU presidency and lower tax on
pensions,” adds the agency.
With respect
to the local airline, no further capital transfer has been budget for Air Malta
as the government expects private investors to take a stake in the company this
year.
Fitch
maintains a favourable outlook on the future of Malta’s deficit and believes
that it will remain stable in 2018 as higher absorption of EU funds enables
lower public investment.
Government-guaranteed
liabilities remain amongst the highest in the European Union at 14.8% of GDP at
the end of 3Q16, although they are set to decrease to 11.9% of GDP at end-2017,
when the temporary guarantee granted to ElectroGas for the construction of a
new power station expires. The rating agency also noted that most guarantees
relate to profitable companies, including the utility company Enemalta, Freeport
Group Corporation and Malta Industrial Parks.
Banking
Fitch has
also reviewed the Maltese banking
sector which continues to register substantial growth. “Malta's
banking sector remains profitable, liquid and well capitalised, albeit highly
concentrated, with core banks representing 219.5% of GDP as of end-September
2016. Asset quality has improved with non-performing loans decreasing to 5.6%
of total loans at end-September 2016, and we expect it to improve further,”
states the agency.
The agency
assumes that the government would only be predisposed towards supporting the
core domestic banks that are systematically important, particularly the Bank of
Valletta (109% of the GDP at-end 2016) while on the other hand, HSBC Bank Malta
(81% of GDP) is more likely to be supported from its parent company.
Finch rating
agency propounds that a sharp correction in the housing market constitutes the
main domestic risk to the sector through mortgage lending and real estate
collateral. However, the rise in house prices has moderated and the pace of
mortgage lending decreased to 6.2% as of end-September 2016 from 11% a year
earlier.
The rating
agency has also commented on future developments which could individually or
collectively result in positive rating. These could include:
- A longer track record of
consolidating the public finances that leads to a lower government
debt/GDP ratio.
- A significant decline in
contingent liabilities or a low likelihood that these contingent
liabilities materialise.
- Progress in addressing key
weaknesses in the business environment
