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

Malta’s economy expected to grow more quickly than Eurozone as a whole • rising real wages and broader female participation in the labour market increased household disposable income

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

The outlook is stable and Malta’s economic growth prospects remain strong relative to the Eurozone while Malta’s domestic banks were considered to be well-capitalised. However, the credit rating agency viewed the government's debt burden as a constraint on policy flexibility, considered the loan loss provisioning levels as low while noting that government’s high debt burden and contingent liabilities were declining.

The ratings were supported by S&P’s view of Malta's fairly strong institutions, its resilient economy, and the credit rating agency’s expectation of further fiscal consolidation.

A sizable government debt burden and contingent liabilities constrained the ratings.

On the other hand, S&P’s could raise its ratings if the government's reform program boosts growth and reduces the government debt burden or contingent liabilities more quickly than we currently expect, without a return to significant current account deficits.

“We estimate that the Maltese economy grew by about 3% in 2014, and we project that it will expand by just over 2% annually on average during the next four years.

“We believe Malta will continue to grow more quickly than the Eurozone as a whole, notably thanks to investments in the energy sector.”

These investments include the laying of an interconnector cable to Sicily in 2014 and the building of a new liquefied natural gas plant in 2015-2016.

The government sold a 33% stake in main domestic provider of energy generation and distribution Enemalta Corp. and a majority shareholding in the BWSC power plant to Shanghai Electric for a total of €250 million.

In addition, Shanghai Electric plans to invest €70 million to convert the BWSC power plant to gas from June 2016. These investments alongside government mandated cuts to utility tariffs are boosting domestic demand.

Last year, electricity prices for households were lowered by 25%; electricity charges for companies will be cut by the same percentage in March 2015. “Lastly, rising real wages and broader female participation in the labor market have increased household disposable income,” S&P said.

The credit rating agency estimated 2014 general government debt net of liquid assets at 62% of GDP, with a decline to 60% of GDP by 2018 mainly owing to rising output.

“We estimate general government gross debt at 71% of GDP in 2014. We estimate the 2014 general government deficit at 2.1% of GDP, versus 2.7% in 2013, reflecting higher tax receipts and supportive nominal GDP growth. We forecast that general government accounts will improve slowly through 2018, primarily owing to GDP growth. We project that spending will be at about 43% of GDP on average over our forecast horizon, higher than the 2008 peak at 42.6% of GDP.”