Labour to preside over surpluses, lower debt, above-Eurozone-average growth says S&P

Credit rating agency Standard & Poor’s has affirmed Malta’s BBB+/A-2 rating with a positive outlook, and said it expects an upgrade over the next year and a half.

S&P said Malta could expect economic growth of 2.8% annually in real terms up until 2018, with debt going down to 54% of GDP in 2018 and consistent surpluses.

“The ratings on Malta are supported by our assessment of the country’s economic growth prospects and gradual budgetary consolidation, which we expect will place the government’s debt-to-GDP trajectory on a steady downward course. At the same time, the ratings are constrained by what we view as moderate contingent liabilities and a relatively low degree of economic diversification compared with eurozone peers,” S&P said in its update.

Malta’s real GDP grew by 4.5% in 2015. S&P said it estimated that it would expand by 2.8% annually on average in 2016-2018.

“We believe Malta’s economic growth will continue to outpace that of the eurozone as a whole, driven by strong investment in the energy sector and growth in consumption, underpinned by wage growth, employment growth, steady net migration, the decline in oil prices, and moderate inflation.

“Lastly, consumption trends are also supported by an increased participation in the labour market by women and older people, which until recent years lagged well behind the large majority of eurozone peers,” S&P said.

The agency said that the prospective LNG plant and the Malta-Siciliy cable, bolstered by lower global energy prices, will reduce Malta’s import bill and improve the business environment as access to electricity eases. Debt was predicted to decrease to 54% of GDP by the end of 2018, from 57% in 2014.

“Malta’s contingent fiscal liabilities stemming from nonfinancial public enterprises (NFPEs) derive mostly from government-guaranteed debt of power utility Enemalta (estimated at about 9.5% of GDP in 2015). Enemalta will likely not generate profits until 2017, but we note that the current drop in international oil prices is helping its expected return on investments.

“Other state-owned enterprises also represent fiscal risks, as exemplified by this year’s government financial support to Air Malta, estimated at 0.5% of GDP. Government guarantees of NFPEs’ debt totaled 14.3% of GDP according to the latest 2015 data.”

S&P warned that the high level of short-term debt in the banking sector as a potential source of volatility of financial flows, which could undermine Malta’s external liquidity.

It once again noted that without further reforms in the pension and health care systems, the progress in budgetary consolidation will become strained in the medium and long term.

It warned of contingent fiscal risks to public finances coming from the banking sector because of the large offshore sector. “Dislocations in the funding of this sector could affect the island’s reputation as a financial center and potentially weaken its growth prospects. Nevertheless, these operations do not significantly affect the rest of the financial sector, as exemplified by the October 2015 decision by Deutsche Bank to close its operations on Malta (and in several other jurisdictions) and related repatriation of €4.2 billion (equivalent to about 50% of Malta’s GDP).”

Assets of the total banking sector in Malta are over six times its GDP, while domestic banks like BOV and HSBC Malta amount to 2.5 times the size of the island’s GDP. The largest domestic systemically important banks are 25% state-owned Bank of Valletta (total assets of €9.9 billion in September 2015) and HSBC Malta Bank (total assets of €5.9 billion in June 2015), as well as fast-growing Mediterranean Bank (total assets of €2.4 billion in September 2015), which in 2015 joined the former two under the European Central Bank’s supervision.