Standard & Poor’s affirms Malta’s A1 rating, outlook stable

S&P’s overview explains that Malta has stable political institutions that have “delivered effective policies for achieving relatively sustainable public finances and balanced economic growth.”

In its analysis of the current economic situation, S&P warned however that as Malta's general government deficit has averaged 3.3% of GDP since 2005, it expects that government will miss its 2011 and 2012 fiscal targets of 2.8% and 2.1% by around 0.5% of GDP.

S&P forecasts government debt to average close to 65% of GDP through to 2014, adding that it has grown faster than expected over 2010 and 2011.

The credit rating agency adds that this increase in deficit was the effect of government borrowing  to help the ailing national airline, Air Malta, and also to fund Malta's contributions to the Greek rescue package. Government also guarantees a stock of debt totalling about 17% of GDP, mostly on behalf on Enemalta, which S&P expects will continue to be loss making in 2011.

S&P estimates the contingent liabilities to the government from the banking system to be moderate under its criteria, at the lower end of the 30% to 60% of GDP band. Total assets of the domestic banking system are estimated at over twice GDP.

The domestic banks (principally Bank of Valetta and HSBC) are exposed to residential real estate. House prices increased by almost 80% between 2000 and 2007. By late 2010, they had fallen 12%, before increasing slightly in the first half of 2011. Additionally, vacant stock is estimated at 23% of the total, leaving the potential for a further correction. On the other hand, the domestic institutions have limited exposures to Italy, Spain, Greece, Ireland, and Portugal, of 9% of total domestic assets.

Outlook

S&P says that it sees upside and downside rating pressures as balanced. “Upside pressure on the ratings could build, for example, if the government over-performs on the fiscal side so that net general government debt falls below 60% of GDP and is expected to remain so. On the other hand, given that Malta is a small state of 400,000 people, any adverse developments in particular sectors or with large employers would reverberate through the economy, which in turn could create downward rating pressure.”

Rationale

The ratings on Malta reflect S&P’s opinion of its strong political and economic profile and intermediate flexibility and performance profile, while the political and economic profiles feature stable political institutions, effective policymaking that delivers relatively sustainable public finances and balanced economic growth, and per capita GDP of us$20,200 (about 60% of the EU average).

Recent policies have helped improve public finances, such as reducing energy-related subsidies and limiting spending on public-sector employees. We expect the 40% electricity tariff hike between 2009 and 2010--which will place state-owned and loss-making Enemalta (BB/Negative/--) on a better financial footing--to reduce related government expenditures. Malta's historic growth has matched other recent EMU entrants; average annual per capita growth has been 1.2% since its EMU accession in 2008.

In its base-case scenario, S&P expects Malta's real GDP growth will drop below trend to 1.0% in 2012, reflecting the deteriorating external environment. S&P previously expected Malta to grow by 2.5% in 2012. Now, however, it now expects that consumption will decline as consumer confidence weakens, while further planned hikes to utility tariffs reduce disposable income.

Malta falls in the mid-range of S&P’s flexibility- and performance-profile indicators, comprising external, monetary, and fiscal measures. Although Malta has a broadly balanced external position (including direct and portfolio equity holdings), short-term external debt is high as a percentage of current account receipts at an estimated 300%. This figure reflects the growth of Malta's international banking activity. However, Malta's current account remains in deficit, reflecting consistent net income payments to non-residents.

Malta's banking system has continued to grow strongly and total banking system assets are estimated at over 750% of GDP in June 2011, after attracting foreign institutions, particularly Turkish, that use the jurisdiction as a booking center due to its advantageous tax regime.