Fitch Ratings has affirmed Malta's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A' with a Positive Outlook. The issue ratings on Malta's senior unsecured foreign and local currency bonds have also been affirmed at 'A' and 'F1', respectively. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign and Local Currency IDRs at 'F1'.

KEY RATING DRIVERS

Malta's ratings reflect its high national income per head compared with the 'A' median, robust economic growth and a large net external creditor position. The ratings are constrained by ongoing structural bottlenecks as captured by the weak World Bank Ease of Doing Business indicator. The Positive Outlook reflects our view that the public debt/GDP ratio is on a downward trajectory and that economic growth will keep outperforming similarly-rated peers.

Economic growth remained strong in 2016 at 3.9% year-on-year over the first three quarters, boosted by robust private consumption. We forecast the Maltese economy will keep growing at a faster pace than the 'A' median at an average 3.3% over 2017-2018, supported by strong employment growth, rising disposable income due to continuous wage appreciation and the launch of new investment projects in the health, education and transport sectors.

Strong export performance in the pharmaceutical, remote gaming, financial services and tourism sectors will help maintain a solid current account surplus over 2017-2018 despite higher import-intensive investments related to the new EU funding cycle. Malta's external position compares favourably with 'A' rated peers, with a net international investment position estimated at 47% of GDP at end-2016.

Real GDP growth was revised up by 4.9pp in 2014 and 1.3pp in 2015, following national accounts revisions published by the National Statistical Office in December 2016. This was mainly due to upward revisions to non-residential construction and machinery and to service exports, notably from the gaming industry. This led to a substantial improvement in the public debt/GDP ratio and to an upward revision of potential GDP growth to 5.4% in 2016, reflecting higher estimates of total factor productivity.

Malta's gross general government debt fell to an estimated 59% of GDP at end-2016 from 60.8% in 2015 due to high revenues from excise duties, income tax and the International Investor Programme (IIP). We expect it to decrease to 56% in 2018, on the back of an improved primary surplus and strong nominal GDP growth, still higher than the 'A' median of 52% of GDP.

We project the fiscal deficit to narrow in 2017 to 0.5% of GDP from an estimated 0.7% in 2016. Robust economic growth and additional indirect tax measures will boost tax revenues and offset more moderate revenue from the IIP, increased expenditure related to the EU presidency and lower tax on pensions. No further capital transfer has been budgeted for Air Malta as the government expects private investors to take a stake in the company this year. We believe the deficit will remain stable in 2018 as higher absorption of EU funds enables lower public investment, while revenues from the IIP decrease.

Government-guaranteed liabilities remain amongst the highest in the European Union at 14.8% of GDP at the end of 3Q16, although they are set to decrease to 11.9% of GDP at end-2017, when the temporary guarantee granted to ElectroGas for the construction of a new power station expires. Most guarantees relate to profitable companies, including the utility company Enemalta, Freeport Group Corporation and Malta Industrial Parks.

Malta's banking sector remains profitable, liquid and well capitalised, albeit highly concentrated, with core banks representing 219.5% of GDP as of end-September 2016. Asset quality has improved with non-performing loans decreasing to 5.6% of total loans at end-September 2016, and we expect it to improve further. A sharp correction in the housing market constitutes the main domestic risk to financial stability given the large exposure of the banks to the sector through mortgage lending and real estate collateral. However, the rise in house prices has moderated and the pace of mortgage lending decreased to 6.2% as of end-September 2016 from 11% a year earlier.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)

Fitch's proprietary SRM assigns Malta a score equivalent to a rating of 'AA-' on the Long-Term FC IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:

  • Public Finances: -1 notch, to reflect contingent liability risks.
  • External Finances: -1 notch, to reflect that the euro's reserve currency status, for which the SRM provides 2 notches, would likely offer Malta only limited protection in case of a global or domestic financial crisis.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES

Future developments that could individually or collectively, result in positive rating action include:

  • A longer track record of consolidating the public finances that leads to a lower government debt/GDP ratio.
  • A significant decline in contingent liabilities or a low likelihood that these contingent liabilities materialise.
  • Progress in addressing key weaknesses in the business environment.

Future developments that could individually or collectively, result in negative rating action include:

  • Significant slippage from fiscal targets leading to deteriorating public debt dynamics.
  • Crystallisation of material contingent liabilities or a shock to the banking sector that requires fiscal support.

KEY ASSUMPTIONS

Fitch assumes that in case of need, the Maltese government would only be predisposed towards supporting the core domestic banks that are systemically important, in particular Bank of Valletta (109% of GDP at-end 2016). For HSBC Bank Malta (81% of GDP), Fitch believes that any necessary support would come from its parent company. In Fitch's view, the Maltese government would be very unlikely to support the international banks and would probably not support non-core banks either.

Source: Fitch Ratings

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