Updated| Malta retains Fitch ‘A’ rating with 3.2% growth that outperforms eurozone

Minister for Finance Edward Scicluna has welcomed Malta's stable 'A' Fitch Rating , saying the latest report, published last night, “shows that Malta's economy will keep on growing.”

The Fitch report, published late last night, predicts an economic performance that will outperform the rest of the Eurozone with growth of 3.2% in 2016 and 2017.

A new development in Fitch’s ratings is a silver lining on the recovery of external demand that will signal an increase in exports.

“Tertiary industries will remain the main engine of growth, in particular IT and professional services, the gaming industry, and healthcare services and tourism. Growth will be down from an estimated 4.7% in 2015 due to the completion of large-scale energy investment projects and the expiration of the EU funding cycle,” Fitch said of the last lap of funds from the EU budget.

The shift to gas from oil will also see Malta improving its current account surplus, while a pick-up on exports and tourism will push up the trade surplus to an average 3.1% of GDP in 2016-2017.

The deficit is forecast to narrow to 1.1% of GDP in 2016 and 1% of GDP in 2017, down from an estimated 1.6% of GDP in 2015.

“Key to the improvement in 2016 is the assumption that no additional capital injection will be required for Air Malta as the company returns to profitability. Revenues will grow at a slower pace than nominal GDP, notably due to the reduction in income tax for those on low incomes. Meanwhile, the pension reforms included in the 2016 Budget and the upcoming wage settlement will push up public spending,” Fitch said.

Government debt is on a declining trend and is estimated at 64.3% of GDP at end-2015 from almost 70% in 2013. It is set to decrease further over the medium term to 60.5% in 2017.

Government-guaranteed liabilities remain high at 15.7% of GDP as of September 2015. But after Enemalta’s partial privatisation in 2015, the company has paid off arrears to the government and the Italy interconnector and completion of the LNG plant will reduce energy import costs. “The company is expected to return to profitability this year, limiting any additional support from the government,” Fitch said.

Scicluna acknowledged that the report noted the lower income tax rate and higher expenditure as a negative trend, but said that they were necessary measures and were in the interests of the country.

When confronted with the figure of approximately 12,000 persons, allegedly living on the poverty line, the minister said that the collection and compilation process for data on poverty takes such a long time that the figures it reflects are the result of the previous administration.

Asked about the impact of BEPS (Base Erosion and Profit Shifting- tax planning strategies that exploit gaps and mismatches in tax rules to make profits 'disappear' for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax) - the minister said that the government was “in close talks with the opposition to defend the sector.” Financial Services have a significant contribution to the economy, the minister said, “what we want to find out is which measures are most damaging and negotiate about them.”