Standard & Poor’s raises Malta’s credit rating to A-

Standard & Poor’s has raised its credit ratings of Malta to 'A-' from 'BBB+'. The outlook is stable. At the same time, S&P also affirmed their 'A-2' short-term foreign and local currency sovereign credit ratings on Malta.

The upgrade reflects Malta's improved credit metrics, including: strong real GDP growth that expected to average 3% in 2016-2019, on rising labor supply, services export growth, and robust investment.

This is the first upgrade which Malta has received in 20 years from S&P, Prime Minister Joseph Muscat tweeted.

#Malta lands first @spglobalratings upgrade in 20 years. A- with stable outlook. This is just the beginning -JM

— Joseph Muscat (@JosephMuscat_JM) October 14, 2016

Consistent improvement in qualitative and quantitative fiscal performance, with general government deficits below 1% in 2016-2019 and tighter management of contingent liabilities; and durable current account surpluses--at 1.9% of GDP on average in 2016-2019-- reflecting an improvement in Malta's fundamental external position.

• The Maltese economy will expand in real terms by 3% a year on average in 2016-2019, while running consistent current account surpluses with only modest credit growth.
• Budgetary consolidation expected to continue gradually, reducing net general government debt to 53% of GDP in 2019 from 58% in 2015.
• Long-term sovereign credit ratings on Malta raised to 'A-' from 'BBB+'.
• The outlook is stable, reflecting S&P’s view that the upside potential of Malta's economic and fiscal performance is counterbalanced by downside risks related to Brexit, external flows, and the structure of the financial sector.

S&P described Malta as being in the midst of one of the strongest medium-term economic expansions in the eurozone, with the second-highest average GDP growth rate in 2010-2015 (after Ireland) and the third-highest expected real GDP growth in 2016-2019. By the end of this year, S&P anticipate that Malta's economy will exceed pre-2009 levels by more than 25%.

“We also consider that most of the rise in Maltese incomes since 2009 reflects genuine expansion of the domestic economy's capital base, particularly in services, rather than accounting effects based on tax-motivated changes in the residency of productive assets.”

One of the key drivers of Malta's solid economic performance is the expansion of the labor supply, on the back of net migration (which added 1% to the population in 2015 alone) and the accompanying increase in employment, especially of women.

Over the past 10 years, the employment rate for those aged between 20 and 64 years has increased to 68% from 58%, fueled by rapid growth in the employment of women to 54% from 36%.

Another major factor is investment growth, mainly comprising large-scale projects in education, healthcare, tourism, and transport industries, as well as energy projects, including the conversion of power stations to cheaper energy sources and the gradual integration of Malta's power system into the European grid.

As a result, electricity prices now resemble EU averages, and new businesses have easier access to electricity.

Malta has a very open economy, with exports in excess of 140% of GDP, of which more than three-quarters are service exports, such as tourism, e-gaming, and logistics.

Brexit and its implications

Being open and small, the Maltese economy is exposed to potential external shocks, the largest being the possible disruption to trade and financial markets from a U.K. Brexit or departure from the EU as a result of the June 23 referendum.

“In our base case, we project that the medium-term consequences of Brexit will be contained. U.K. arrivals generate almost 30% of Malta's tourism receipts, and the weaker sterling is likely to drag on services exports to the U.K. “However, given that it is already facing supply constraints, the tourism sector can, in our view, easily fill the gap from other markets. The implications of Brexit for Malta's financial services are less clear cut and would mostly occur through financial institutions other than domestic banks.

“If the asset management industry in the U.K. slows, Malta-based investment funds may generate fewer services exports, which would cut export growth, but this, in and of itself, is unlikely to create balance-of-payments risks.”

Overall, S&P considers the financial services industry to be sufficiently diversified to contain the risks related to Brexit.

Judicial framework constraints business environment

Malta's tax regime has been an important factor in attracting investment in some sectors, but initiatives such as the Anti-Tax Avoidance Directive (ATAD) may challenge some aspects of the regime. In addition, despite ongoing reforms, the business environment in Malta is still constrained by Malta's judicial framework, leading to slow contract enforcement. Nevertheless, we see Malta's overall political and institutional framework as broadly supportive of creditworthiness, demonstrated, for example, by structural reforms that generated the employment increase mentioned above and lifted potential economic growth.

“We believe that Malta's favorable economic growth prospects support further budgetary consolidation.

S&P forecasts that the general government deficit will decline gradually through 2019, and it expects net general government debt will decrease to 53% of GDP by the end of 2019, from 56% in 2016.

This excludes the guarantees related to the European Financial Stability.

“We forecast general government interest payments will average under 6% of general government revenues per year in 2016-2019.”

Malta's contingent fiscal liabilities, stemming from government-guaranteed debt of nonfinancial public enterprises (NFPEs), will likely total about 16% of GDP in 2016.