Fitch affirms A+ rating, warns of risk of Debono scuttling budget

Fitch Ratings is the second international rating agency to express confidence in Malta's economic and financial management in 2012, affirming the country's A-plus rating.

Fitch however referred to government's problems with instability, without specifically mentioning ongoing problems with backbencher Franco Debono, saying that government risks not passing the budget for 2013. Government has also lost its one-seat majority after MP Jeffrey Pullicino Orlando broke off from the party and became an independent MP.

Malta's rating was in fact based on the assumption that government will pass the budget with no early elections taking place.

"However, its parliamentary majority is fragile and there is a risk that the budget will not pass," Fitch said, adding that in the event of early elections the fiscal slippage is likely to be wider than Fitch's baseline.

"A fiscal slippage within 3% of GDP would be within the tolerance of the rating. A higher fiscal deficit could cause public debt to reach 76% of GDP in 2012."

Fitch added that it expected public debt to peak at 74% of GDP in 2013 and to decline gradually thereafter.

The A-plus rating however reflects Fitch's view that Malta will maintain a general government primary budget surplus in 2012-14.

"This would put public debt on a declining path from 2013. This implies that the incumbent government will take necessary action to ensure that the budget deficit remains below 3% of GDP this year and that any new government emerging from the elections will set out a credible multi-year fiscal consolidation programme that incorporates the impact of ageing," Fitch said.

While in its statement the Maltese government completely ignored Fitch's reference to the government instability, it highlighted the 'positive outlook' it pronounced.

"This confirmation of Malta's achievements in reaching its financial targets is an important message of stability for investors and for those looking at investing here," the government said.

On a more positive note, Fitch remarked that Malta had engineered a structural shift towards a higher-value added export base, particularly in the services sector.

"Exports of services have held up well and this has underpinned a sharp current account adjustment. This has helped the economy weathering the 2009 crisis," it said while confirming that Malta's economic growth surpassed the eurozone average.

Government said that the positive assessment "vindicates government's efforts, in line with its Vision for 2015 and beyond, to support and incentivize the development of new economic sectors such as financial services, ICT, gaming and digital gaming".

Government added that these new sectors however have not deterred its attention from the need to continue putting focus on restructuring Malta's manufacturing base from a low-cost labour-intensive jurisdiction to opportunities based on research and innovation. 

"This has resulted in the expansion of the pharmaceutical sector, aviation services and the manufacturing of higher-end electrical components. Indeed, exports have continued to increase in the first eight months of the year," government said.

But while government has hailed the positive results it brought about in the new developing economic sectors, Fitch has warned about a threat to the public finances.

"The main long-term threat to the public finances is the unreformed pension system. Pension expenditure is projected to increase from 10.4% of GDP in 2010 to 15.9% of GDP in 2060," it said.

"Failure to implement reform and secure the long-term sustainability of the public finances could lead to a downgrade in the medium-term."

Fitch also said that any outcome of general elections would "not disrupt the medium-term objective of fiscal policy, which is to realise a balanced central government budget and stabilise the public debt ratio".

"Should post-election fiscal policy significantly fail in achieving this, it could have negative rating implications. A new intensification of financial stress, particularly if it led to a deeper and more prolonged recession than currently expected by Fitch, would also hurt the creditworthiness of Malta," it added.