Fitch ratings agency reaffirms Malta’s rating as ‘Positive Outlook’

Fitch Ratings has affirmed Malta's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A' with a Positive Outlook. Moreover, 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'.

According to the agency, Malta's ratings reflect its high national income per head compared with the 'A' median, robust economic growth and a large net external creditor position. It said however, that the ratings are constrained by ongoing structural bottlenecks as captured by the weak World Bank Ease of Doing Business indicator.

In addition to national income, the Positive Outlook reflects the view that the public debt/GDP ratio is on a downward trajectory and that economic growth will keep outperforming similarly-rated peers, Fitch said.

It also noted that economic growth remained strong in 2016 at 3.9% year-on-year over the first three quarters and that this was boosted by robust private consumption.

“We forecast 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,” said the agency. 

Among the sectors expected to experience a strong export performance are the pharmaceutical, remote gaming, financial services and tourism sectors, which the agency said will help “maintain a solid current account surplus over 2017-2018 despite higher import-intensive investments related to the new EU funding cycle.” It added 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,” read a statement on the agency’s website.

The revision, it said, was mainly due to upward revisions to non-residential construction and machinery and to service exports, notably from the gaming industry. This led to 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.

The agency also said that Malta's gross general government debt fell to an estimated 59% of GDP at end-2016 from 60.8% in 2015 due to high revenues from excise duties, income tax and the International Investor Programme (IIP). It said however that it expected this it to 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 

“We project the fiscal deficit to narrow in 2017 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,” it said.

On Air Malta, it noted that no further capital transfer has been budgeted as “the government expects private investors” to take a stake in the company this year.

“We believe the deficit will remain stable in 2018 as higher absorption of EU funds enables lower public investment, while revenues from the IIP decrease.”

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, said the agency. “Most guarantees relate to profitable companies, including the utility company Enemalta, Freeport Group Corporation and Malta Industrial Parks,” it added.

Malta's banking sector, it said, 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. A sharp correction in the housing market constitutes the main domestic risk to financial stability given the large exposure of the banks 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 agency said that future developments that could individually or collectively, result in positive rating action 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.

The agency also said that it assumed that if needed, the Maltese government would only be predisposed towards supporting the core domestic banks that are systemically important, in particular Bank of Valletta (109% of GDP at-end 2016).

It said that for HSBC Bank Malta (81% of GDP), any necessary support would come from its parent company. In Fitch's view, the Maltese government would be very unlikely to support the international banks and would probably not support non-core banks either.