Standard & Poor’s Ratings Services yesterday confirmed its ‘A/A-1’ sovereign credit ratings for Malta.
According to a statement, Standard & Poor’s transfer and convertibility assessment remains ‘AAA’, the same as for all members of the European Economic and Monetary Union (EMU).
“The outlook is stable and the ratings on Malta reflect our opinion of its strong political and economic profile and intermediate flexibility and performance profile, as defined under our criteria.
“Malta’s political and economic profiles feature stable political institutions, effective policymaking that delivers relatively sustainable public finances and balanced economic growth, and per capita GDP of $20,200 (about 60% of the EU average). Recent policies have helped improve public finances, such as reducing energy-related subsidies and limiting spending on public sector employees. We expect the 40% electricity tariff hike between 2009 and 2010, which will place state-owned and loss-making Enemalta on a better financial footing, to reduce related government expenditures.
“Malta’s historic growth has matched other recent EMU entrants; average annual per capita growth has been 1.2% since its EMU accession in 2008. In our base-case scenario, we expect Malta’s real GDP growth will drop below trend to 1% in 2012, reflecting the deteriorating external environment. We had previously expected Malta to grow by 2.5% in 2012. Now, however, we expect that consumption will decline as consumer confidence weakens, while further planned hikes to utility tariffs reduce disposable income.
“Malta falls in the mid-range of our flexibility and performance profile indicators, comprising external, monetary, and fiscal measures. Although Malta has a broadly balanced external position, short-term external debt is high as a percentage of current account receipts at an estimated 300%. This figure reflects the growth of Malta’s international banking activity. However, Malta’s current account remains in deficit, reflecting consistent net income payments to non-residents. Malta’s banking system has continued to grow strongly and total banking system assets are estimated at over 750% of GDP in June 2011, after attracting foreign institutions, particularly Turkish, that use the jurisdiction as a booking center due to its advantageous tax regime.”
“Malta’s general government deficit has averaged 3.3% of GDP since 2005. We expect that the government will miss its 2011 and 2012 fiscal targets of 2.8% and 2.1% by around 0.5% of GDP due to our lower growth assumptions and some underperformance on expenditure restraint. We also expect important longer term pension and labour reforms to be slow in implementation. Net general government debt, which we forecast will average close to 65% of GDP through to 2014, has grown faster than we expected over 2010 and 2011. This is after the government needed to borrow to help the ailing national airline, Air Malta, and also to fund Malta’s contributions to the Greek rescue package. The government guarantees a stock of debt totaling about 17% of GDP, mostly on behalf on Enemalta, which we expect will continue to be loss making in 2011.”
“We estimate the contingent liabilities to the government from the banking system to be moderate under our criteria, at the lower end of the 30% to 60% of GDP band. Total assets of the domestic banking system are estimated at over twice GDP. The domestic banks, Bank of Valetta and HSBC, are exposed to residential real estate. House prices increased by almost 80% between 2000 and 2007. By late 2010, they had fallen 12%, before increasing slightly in the first half of 2011. Additionally, vacant stock is estimated at 23% of the total, leaving the potential for a further correction. On the other hand, the domestic institutions have limited exposures to Italy, Spain, Greece, Ireland, and Portugal, of 9% of total domestic assets.”
“We see upside and downside rating pressures as balanced. Upside pressure on the ratings could build, for example, if the government over performs on the fiscal side so that net general government debt falls below 60% of GDP and is expected to remain so. On the other hand, given that Malta is a small state of 400,000 people, any adverse developments in particular sectors or with large employers would reverberate through the economy, which in turn could create downward rating pressure.”
Source: Malta Independent