Standard & Poor’s rating explained: what are Fenech and Muscat talking about?

Finance Minister Tonio Fenech has blamed the Opposition for Malta's downgrade by credit rating agency Standard & Poor's, for not having approved the 2013 budget ahead of the elections.

Labour leader Joseph Muscat disagrees: S&P's downgrade is down to government debt and the loss-making and "ailing utility provider" Enemalta.

2013 Standard Poors Rating January MALTA [draft] by maltatoday

Who is saying the truth?

Standard & Poor's is one of three rating agencies (the others are Moody's and Fitch) that are paid by the Maltese government to carry out regular ratings of the country's sovereign credit rating.

In its overview of its rating document, S&P start off by saying that the the dissolution of the Maltese parliament on 7 January would "prevent the 2013 budget from being adopted" until after the 9 March elections, "raising questions about the government's ability to restore the fiscal flexibility it has gradually lost, and resolving the recurrent budgetary risks caused by loss-making state-owned enterprises."

It also includes three other bullets: that debt has risen to over 75% of GDP, that it is lowering the long-term rating but keeping the short-term rating at A-2, and that the outlook is stable because of Malta's resilience to the trouble inside the eurozone.

Rationale

The clues to what motivated the S&P downgrade lie in the rationale by the credit rating agency.

Firstly, S&P says that the ratings are supported by its view that Malta's political institutions are "strong".

It then goes on to say that the ratings are constrained due to the "sizable government debt burden" and the effect of "permanently loss-making state enterprises", as well as "external vulnerabilities of the narrowly based economy, and structural issues such as high private-sector indebtedness and very low female labour force participation."

Secondly, S&P says Malta's high debt - €4.9 billion - gives the island limited fiscal ability to "counter prolonged periods of lower growth".

Thirdly, Malta has to contend with debt from "ailing energy utility" Enemalta, estimated at 600% of GDP, and because its losses will continue over the foreseeable future. Debt at Enemalta is almost 20% of GDP issued by state-owned enterprises, on top of an estimated gross debt burden of 75% of GDP in 2013.

Fourthly, S&P notes that the dissolution of the House was triggered after the rejection of the budget bill - however it says that although government expenditure is limited during this two-month period, Malta's deficit will exceed its target of 2.2% of GDP for 2012.

In fact, S&P says economic growth projections "appear to us to be quite optimistic."

However, S&P said that the Maltese economy displayed resilience against a poor external environment, despite its openness and significant financial services activity. Net exports of goods and services turned positive in 2010 and contributed to growth throughout the crisis.

Stable outlook

S&P says outlook for Malta remains stable, because while Malta has a "relatively wealthy and diversified economy", it also faces risks from its "narrow economic base", its public finances, and "an uncertain growth outlook".

Will these ratings improve? They won't if Malta's borrowing requirements (which help pay national debt) go beyond 2.5% of GDP in 2013; or if interest and debt servicing increases to 10% of government revenues.

The rating can improve if liabilities from corporations like Enemalta decline, government debt falls, and economic growth increases without any pre-2011 deficits.