Standard & Poor’s affirms BBB+ rating for Malta, stable outlook

Standard & Poor’s credit rating agency has affirmed its long- and short-term foreign and local currency sovereign credit ratings for Malta at ‘BBB+/A-2’.

The outlook is stable, but S&P said it would raise ratings if government’s reforms boost growth and debts are cut quicker than expected.

“There is a chance that Malta’s economy could grow faster than we currently anticipate. This could occur if tourism exports continued to outperform or if manufacturing, particularly microelectronics, recovered strongly,” the agency said.

But S&P said that sizable government debt and contingent liabilities, as well as external data discrepancies, had constrained ratings.

The agency said the economy would grow to 2.4% this year and just over 2% on average during the next four years. For 2014, growth would be boosted by the construction of the LNG plant and the interconnector cable to Sicily, as well as by private consumption.

“We believe private consumption will benefit both from cuts in energy tariffs and from government policies that have increased female labour participation from relatively low levels. We also project that net exports will subtract from GDP growth during 2014, as capital imports are set to increase,” S&P said.

S&P also said excise duties of about 2% of GDP from Enemalta will be paid in late 2014 following a capital injection by new minority holder Shanghai Electric Power.

But the agency said that guaranteed debts, especially those for Enemalta, were relatively high for the government at 17% of GDP (10% for Enemalta, and 2.8% for the Malta Freeport). “Enemalta is not likely to generate profits until 2017,” S&P said.

The agency also quelled fears that the presence of foreign-owned, internationally-oriented banks threatened the domestic economy. As of March 2014, external currency and deposit liabilities totaled some 237% of GDP (€17.9 billion), predominantly financing the operations of branches of foreign banks.

“Although the domestic banks do attract nonresident deposits, contributing to ample liquidity positions, their core business remains funded by domestic retail deposits. Nevertheless, in light of their size, they could strain the external liquidity of Malta’s broader financial system under a stress scenario.”

Malta’s external accounts remain distorted by the large international financial institutions operating on the island. During 2013, disinvestment by an international bank led to negative net foreign direct investment (-22% of GDP, compared to an average inflow of 5% in the previous three years). “We do not view this disinvestment as relevant to the domestic economy. Excluding global banks without any link to the domestic economy, we consider Malta to be in a net external debtor position,” S&P said.

At a deposit-to-loan ratio of 130%, S&P said Malta’s banks were well-capitalized, accounting for €50 billion, or seven times the size of the GDP.

But the increase in nonperforming loans (NPLs) to 9% at end-2013, from 8% a year earlier, remains a challenge for the economy. “Almost half of the NPLs are concentrated in the construction and commercial real estate sectors; aggregated total provisioning is very low (about 40% of NPLs) although expected to increase slightly with the implementation of new banking legislation governing banks’ provisioning policies.

“While we do not expect a price correction in the real estate market, it does remain a latent risk for Malta’s banks. That said, we note that loan-to-value ratios are conservative at around 63% for commercial properties and 73% for residential properties in the core domestic banks.”