Fitch keeps Malta at A+ rating as consumption and IIP revenues grow

Larger tax revenues and proceeds from the sale of Maltese citizenship, coupled with lower capital spending, will keep Malta’s surplus at 1% of GDP in 2018, the credit rating agency Fitch said.

Malta’s rating was affirmed at A+ by Fitch, with a stable outlook thanks to its robust economic growth.

It said revenues would decline by 1.7 points to 38.7% of GDP as inflows from the IIP moderate while spending will increase by 1.2pp to 37.7% of GDP due to a capital injection into Malta Air Travel Ltd for the purchase of landing slots from Air Malta (0.5% of GDP).

Fitch also said that while World Bank governance indicators exceed the ‘A’ median for Malta and were comparable with the ‘AA’ median, the “rule of law” subcomponent of the governance indicators is on a declining trend. Malta’s Ease of Doing Business was also weaker than the ‘A’ median, ranking 84th out of 190 in 2018.

Fitch said debt dynamics were also strong, with low interest payments and recurrent primary surpluses that was pushing down gross general government debt to 47.2% of GDP in 2018, and further down to 40.9% in 2020.

Contingent liabilities declined to 9.6% of GDP at-end 2017 following the expiration of the Electrogas guarantee in 2017, from 13.7% at-end 2016.

Real growth will be strong at 5.6% in 2018 thanks to an increase in consumption and in investment, as well as strong performances by the remote gaming, tourism and financial services sectors. Fitch estimates Malta’s medium-term potential growth at 3%, but is more conservative than the European Commission’s latest forecast in the 3.5%-5.2% range in 2022, as we expect pressures on the infrastructure and rising labour shortages will constrain the expansion of the economy in the medium term.

Fitch said price pressures are increasing given a tightening labour market, but inflation will remain contained at 1.6% in 2018 as the strong inflow of foreign workers and rising labour participation will prevent a sharp increase in wages.

Property prices rose 5.3% in 2017, and advertised prices rose 11.8%, boosted by strong housing demand, a booming tourism sector and exemption of stamp duty for first-time buyers. Fitch said that increasing housing supply should help curb the rise in property prices.

It also said Malta’s banking sector remains sound, with core domestic bank assets accounting for 206% of GDP, non-core domestic banks’ assets representing 19.7% of GDP and international banks’ assets at 205%

Non-performing loans (NPLs) accounted for 4.1% of total loans (5.3% in 2016), although legacy resident corporate NPLs of core domestic banks remained high at 11%. “Risks stem from the high and rising exposure to the housing market, with mortgage lending accounting for 48.3% of the total lending to residents. Lending standards to households remain prudent, also due to households’ net worth with a loan-to-value ratio for residential properties at 73.5% in 2017 and debt service-to-income ratio at 23%.”