Fitch affirms Malta ‘A’ rating, stable outlook

Shanghai Power Electric 33% acquisition can lead to successful restructuring of Enemalta and repayment of pending debts

Fitch has maintained Malta's 'A' rating, after it was downgraded from A+ last September
Fitch has maintained Malta's 'A' rating, after it was downgraded from A+ last September

Fitch Ratings has affirmed Malta’s long-term foreign and local currency Issuer Default Rating (IDRs) at ‘A’, after the country was downgraded from its A+ rating back in September 2013. The outlook is stable.

Fitch said the rating and stable outlook reflected its view that the Maltese economy was “on the road to recovery” after growing by 2.4% in 2013, better than the 0.9% registered in 2012.

Fitch expects Malta’s GDP growth to continue outperforming the eurozone average in 2014-15.

At 6.5% the unemployment rate remains well below the eurozone average, and employment has risen due to the increasing female labour market participation rate.

In a comment, finance minister Edward Scicluna said that Fitch was "very conservative" in its views as a rating agency. "That means their latest report is very good news for Malta. With the other two reports from Standard & Poors and the European Commission's winter forecast, this report follows up on their positive outcome. We're going in the right direction."
Scicluna added that the public could put its mind at rest on government's decisions. "The fact that Fitch estimates a 2.5% increase in economic growth means that the economy will create more jobs for the benefit of all."

But Fitch also said that public finances remain a sovereign rating weakness, even though the deficit is being pulled down to 2.6%.

Fitch estimates the deficit declined to 3% of GDP in 2013, from 3.3% of GDP a year earlier. Recent data points to significant growth in both indirect and direct tax receipts in the 11 months to November 2013.

But it also said it estimates government spending increased to 44.2% of GDP in 2013 from 43.4% of GDP in 2012: mainly in salaries, social benefits, and capital spending, which has only been “partially offset” by spending cuts inside ministries.

Fitch expects government spending to increase, but the deficit to decline to 2.8% of GDP through increased revenue.

As usual, Enemalta poses the main risk to 2014 fiscal outturns – Fitch noted Shanghai Electric Power’s 33% acquisition and that the deal “reportedly has the potential to enhance the utility’s profitability over the medium term and reduce its debt. A successful restructuring of the company would allay concerns around crystallisation of contingent liabilities. The agreement should be presented to the Maltese parliament in September 2014.”

“Fitch notes the authorities’ decision to reduce energy tariffs from March 2014, while simultaneously cutting energy production costs at Enemalta. However, the latter is subject to execution risk and the plan could negatively impact Enemalta’s profitability, should cost savings fail to materialise. This in turn would have an impact on the budget and be rating negative,” Fitch said.

Fitch again said pensions, healthcare costs and public debt servicing, were recurrent pressures on spending obligations. “On healthcare and pensions, two critical areas, progress has been slow.”

It forecasts debt to peak at 73% of GDP in 2014, and then start declining to 70% by 2020. And with another 17.6% of government-guaranteed debts – of which two-thirds is Enemalta’s alone – total public debt stands at 90%.

Additionally, debt arrears amount to 10% of GDP (201 2 figures), the second highest level within the eurozone.

Fitch also said that government’s strong parliamentary majority “bodes well for political stability. It also has a strong mandate to reform the energy sector and Enemalta.”