Updated | Finance minister welcomes reaffirmation of A3 rating

Credit rating agency Moody’s has reaffirmed Malta’s A3 rating, supported by the healthy and robust growth outlook on its economy and the government’s access to a large and reliable domestic funding pool.

In its analysis of Malta’s economy, Moody’s reiterates that despite being small and open, the Maltese economy has weathered the global financial crisis well, in part thanks to the good performance of its growing services sector, such as the tourism industry.

“Going forward, we forecast real growth of around 2.8% in 2015, increasingly led by final consumption and capital formation. Policy initiatives target the energy sector and the labour market in particular, as both suffer from inefficiencies,” it says, however noting that it was too early to conclude whether these policies have reached the intended objectives.

Moody’s expect the economy’s growth sources to rebalance, with private consumption and capital formation being the main growth drivers, boosted by investment in the energy sector. The forecasted real growth would be supported “by the health of the households’ balance sheets, which features low indebtedness and low debt service.”

The government’s main challenge is to strengthen its fiscal account and balance sheet: at 70% of GDP, the government’s debt relative to rating peers is high while the country’s reliance on domestic funding makes the government vulnerable to the health of the banking system beyond typical contingent liability risk; contingent liability risk stemming from utilities is material.

“The island’s loss-making energy service provider, Enemalta, is the most prominent source of contingent liability risk, as its debt guaranteed by the government is equivalent to around 10% of GDP. Despite the company’s ongoing restructuring and the progress achieved under the energy reform, it is too early to asses whether the new framework will allow the company to become financially viable,” Moody’s report.

Moody’s concede that in spite of these challenges, the government’s draft budgetary plan for 2015 should put fiscal consolidation on a good footing. It forecasts that Malta’s fiscal deficit will drop to 1.7% of GDP in 2015, the same year Moody’s expect debt to begin falling after having peaked at 70% of GDP in 2013-14.

Moody’s state that the government’s ratings could be upgraded in the event of “a significant improvement” in contingent liability risk and in public finances, with debt metrics converging with that of rating peers.

“Conversely, downward pressure on the ratings could develop if fiscal slippage jeopardises the anticipated stabilization of the debt burden. The rating could also be downgraded in case of sustained and significant disruptions in Malta’s large financial system.”

Moody’s describes Malta’s economy as being based on two key pillars: a large and growing tourism sector and an important and long-established financial industry.

Benefitting from its geographical position, the accession to the EU and membership into the euro area, the Maltese economy has become increasingly service-based.

The tourism industry, the largest contributor to the economy, has the potential to continue growing in the medium term: “[It can] benefit from Malta’s central position and good connectivity, but also from competing tourism destinations having become less attractive.”

Moody’s notes that the banking sector’s outlook is “less positive” and that the manufacturing sector’s contribution to the overall economy has declined somewhat.

“It is undergoing a restructuring process, shifting away from labour-intensive industries to more capital-intensive activities.”

In its 26-page report, Moody’s report that the International Investor Programme, implemented in 2014, is expected to generate revenues worth 0.57% of GDP in 2015 through the expansion of the tax base and creation of new revenue sources with administrative fees paid by applicants.

“Increased indirect taxes on consumer goods and services and a revision in fees on market output are expected to result in revenues amounting to 0.3% and 0.06% of GDP respectively.

“The raising of the retirement age, following the 2006 pension reform, is expected to result in additional national insurance contributions worth 0.14% of GDP.”

In their report, Moody’s also include government’s initiatives to reduce excessive bureaucracy. Some measures, it reports, have already been taken to meet these objectives, such as the deduction of energy vouchers directly from issued bills and the streamlining of classification at the Planning Authority.

“The new government also recently adopted an ‘open government’ concept, which opens up all proposed laws to questions and comments from citizens that may result in amendments of the draft regulation. While this could enhance transparency and accountability of government policies, it could also slow policy decision making.”

Finance minister Edward Scicluna welcomed the news, saying that the report confirms the progress made by the Maltese economy.

"The overall sentiment in the country is one of optimism. Our policies are trickling down and being felt at every level of society. This is confirmed by Moody's highlighting of higher domestic consumption, which confirms we are making a positive difference in people’s lives," he said.

"This also confirms that budget measures introduced last year resulted in Malta ranking among the UE’s top-performers on economic growth, employment, and unemployment. We shall be looking towards the coming budget to build further on these results." 

The minister also welcomed Moody’s positive endorsement of Malta 2015 draft budget plan recently submitted to the European Commission.

In this regard, Moody’s remarks that “the Government’s draft budgetary plan for 2015 should put fiscal consolidation on a good footing” and that “budget targets appear to be realistic, as they are built on reasonable macroeconomic assumptions and measures that appear socially acceptable for key stakeholders.”

Scicluna also notes Moody’s recognition of the Government’s efforts to address the factors that are impinging on Malta’s growth, namely inefficiencies in the labour market and the energy sector, by means of measures that facilitate access to work, especially for women and youth, and the much-needed reform and investment in the energy sector.