Fitch downgrade: deficit at 3.6%, pensions ‘biggest threat’ to public finance

Malta's excessive debt and high public debt has dropped the country's rating from top rung 'A+' to 'A', credit rating agency Fitch said today, warning that ratings could worsen unless state-owned enterprises are restructured, reducing the government's guarantees for these public companies' debts.

Significant fiscal slippage saw the deficit rise to 3.3% in 2012, carrying over to 2013 where annual deficit could be as high as 3.6%, compared with 2.7% as original forecasted in the 2013 budget in November.

Malta is now being asked to address its deficit after the European Commission re-opened the excessive deficit procedure (EDP) with a deadline for correcting the excessive deficit set for 2014.

Fitch says the government will aim at a balanced primary budget in 2014.

Maltese government debt, excluding some €800 million that Enemalta alone is accountable for, will also peak at 74% of gross domestic product in 2014-15, and will only decline marginally above 63% by 2020.

Government-guaranteed debt rose to 17.6% of GDP in 2012 from 11% in 2006, and 60% of them relate to Enemalta. This implies that total public debt stands at 90% of GDP in 2012. Additionally, government payment arrears, including the healthcare sector, amount to some 9.8% of GDP (in 2012).

Fitch admonished the Labour government for forging ahead with an expansionary budget, after the former administration failed to respond to the fiscal deterioration of 2012. "As yet there has been no clarity around the fiscal measures underpinning the adjustment," Fitch said, saying Labour is hoping it will increase revenue but that unless spending is cut, it will difficult to reduce the deficit or slow down public debt.

Labour will in fact proceed with income tax cuts in 2013, as first announced last year by the Nationalist administration and taken on board by Labour.

Fitch said pensions were the main long-term threat to public finances, with Labour offering no concrete policy this year, despite several years of consultations on the recommendations of the Pensions Working Group. Labour has said it will not introduce second-pillar pensions as yet.

Despite the downgrade, Malta enjoys a "deep pool" of domestic savings and strong banking liquidity, apart from most of the national debt being held by domestic investors.

Joseph Muscat's nine-seat majority also "bodes well for political stability", Fitch said, saying the government had a strong mandate to reform Enemalta, but no detailed plans yet on healthcare and pensions.

Malta's GDP growth has also outperformed the eurozone average, thanks to resilient labour market, while unemployment stood at 6% in July 2013, the lowest level since 2009.

In a statement, the government said it was addressing the excessive deficit that had resulted in 2012, and said Fitch's rating was being realigned to similar downgrades from Moody's and S&P.

"We are confident we will see the deficit go below 3%," the government said. "We understand Fitch's message, and we are ensuring both economic stability and economic growth to increase jobs, apart from improving the country's competitiveness."