‘2013 economic growth exceeded our expectations’ – S&P

Credit ratings agency Standard & Poor's has maintained Malta's long and short-term sovereign credits ratings at BBBplus/A-2 after noting that the government started its legislative session with progress on a longstanding reform agenda, particularly in the energy sector.

"Indications are that 2013 economic growth has exceeded our expectations," S&P said.

The agency however sees the government's relatively high debt burden as constraining policy flexibility, particularly as it forecasts growth to remain below pre-crisis rates.

"We are therefore affirming our long- and short-term sovereign credit ratings on Malta at 'BBBplus/A-2'. The stable outlook balances our view of Malta's improving prospects for economic reform against its recurrent, albeit declining, fiscal imbalances and external data inconsistencies."

S+P's rating and statement that #Malta economic growth 2013 has been larger than they projected boosts confidence in the future -JM #moveon — Joseph Muscat (@JosephMuscat_JM) January 17, 2014

Welcoming S&P's outlook, the Ministry for Finance said the energy plan was key to strengthening the country's financial position.

"S&P's analysis is a clear recognition of the government's efforts. This administration will keep working to pave the way to further economic growth which exceeds expectations," the ministry said.

S&P reaffirmed Malta's ratings based on its view of Malta's fairly strong institutional and governance effectiveness and its prosperous economy. A sizable government debt burden and external data discrepancies constrain the ratings.

S&P said Malta's government made progress on energy sector reform: "If progress can be maintained, it will support already-improving economic growth, which appears to have exceeded our previous expectations for 2013. Growth should help the government to stabilize its finances through rising tax revenues."

S&P warned it still forecasted growth to remain lower than before the onset of the 2008 financial crisis, and fiscal space remains strained by general government gross debt (73% of GDP in 2013).

Under the European Commission's excessive deficit procedure, which Malta again entered in June 2013, it is required to reduce its debt burden to 60% of GDP, which will likely require additional efforts.

Referring to government's plan to sell Enemalta stakes to a Chinese state-owned corporation, S&P said the potential sale was now nearing completion.

"Although the company continues to record losses, new production facilities should help to reduce government subsidies," S&P said.

The government also guarantees a proportion of Enemalta's debt, the majority of a guaranteed debt stock of 17% of GDP. The completion of a liquefied natural gas plant (by 2015) and an electricity interconnector with Sicily should help to reduce the cost of electricity production by up to 50%.

"If this benefit is passed through to consumers, government subsidies could be further reduced; Malta's electricity prices are currently among the highest in the EU."

S&P said such a progress was a positive signal that the government would tackle other longstanding structural issues, such as pension reform, the low female labor force participation rate (47%), and supply gaps in more highly skilled positions.

But to address these issues, economic growth is crucial. S&P said growth growth would remain below pre-crisis levels, with real GDP per capita growth averaging 1.8% from 2013 to 2016, versus 3% between 2005 and 2007.

Import-heavy domestic demand is expected to reduce the contribution of net exports to growth, but that consumption growth will be cautious over the next few years.

However, a delay to the recovery in domestic demand meant that net exports continued to contribute positively in 2013, alongside employment growth in services, which we estimate at above 2% in 2013.

The government is expected to record a deficit slightly higher than its 2.7% of GDP fiscal target for 2013.

"S&P continue to expect that the government's deficit will remain marginally behind its targets in 2014-2016. We forecast the increase in gross debt to be higher than in 2012, at 4.3% of GDP, but that the debt burden will stabilize over 2014 at 73% of GDP in gross terms."

The agency said the presence of foreign-owned, internationally oriented banks pose little threat to the government by way of contingent liabilities, as these institutions have little or no impact on the domestic economy.

Malta's external data are skewed by the presence of foreign-owned financial institutions doing little or no business with the domestic economy.

For this reason, the country's reported net external asset position of about 7% of current account receipts (10% of GDP) may be overstated.

S&P said the stable outlook, which indicated its opinion that there is a less than one-in-three likelihood of a rating change over the next two years, balances the view of Malta's improving prospects for economic reform against its recurrent fiscal imbalances, although these are declining, and external data inconsistencies.

"We could raise our ratings on Malta if the government's reform program boosts growth and reduces the government debt burden more quickly than we currently expect, without a return to current account deficits. Conversely, we could lower our ratings on Malta if fiscal slippages raise the government's debt burden and the country's net external liabilities."