Malta's long-term foreign and local currency Issuer Default Ratings (IDRs) were affirmed 'A' by credit ratings agency Fitch as Malta's outlooks were deemed to be stable. The 'A' rating was awarded primarily based on the following key factors;
- Gradual improvement of the situation of Malta's public finances
- Strong economic growth
- Lower minimal interest expenditure
- Maltese economy is predicted to continue outperforming the rest of the euro zone
Malta's senior unsecured foreign and local currency bonds were updated to 'A' while the country ceiling was affirmed as 'AAA'. The short term foreign currency rating was graded 'F1'. With respect to the positive rating, finance minister Edward Scicluna stated that this reflects the present government's determination of achieving its budgetary targets.
In addition, the government is also undergoing the process of restructuring its departments and entities with the aim of developing new growth sectors and further improving Malta's economic situation as a result. The expectations are for fiscal deficit to decrease to 1.8% of GDP in 2015, with total Revenue/GDP reaching an all-time high of 42.8%. Public expenditure is foreseen to increase due to increased employment with the public sector within education and health as well as due to social transfers.
Malta's service sectors are foreseen to remain the most dynamic, particularly due to increased tourist arrivals and the ever-growing gaming industry present on the island. Due to this, Malta needs to watch out against the failure to improve its productivity. Investment is set to pick up momentum in the short-term, creating the expectation for the Maltese economy to expand by 3.6%, also due to the investment in a new power plant and the completion of EU-funded projects.
A lowered unemployment rate, lower energy costs and steady credit growth contributed to private consumption growth as this remained high in the first quarter of 2015. On a similar note, inflation also increased to 1.1% in June 2015 from 0.4% in December 2014 and this is predicted to rise to around 2% in 2016-2017.
Fitch also analysed Malta's capital markets and concluded that Malta has highly liquid capital markets with a loan to deposit ratio of domestic banks standing at 63% in the first quarter of 2015. Although financial institutions are likely to experience certain challenges in increasing their profitability, the establishment of a single-supervisory framework and a resolution fund should secure financial stability. Simultaneously, Malta's financial sector has experienced considerable growth and the island has also maintained a strong international investment position.
On another positive note, Malta is expecting fiscal consolidation to gather further momentum between 2016 and 2018, mainly due to reduced expenditure in the present. Fiscal management is set to improve, particularly after the implantation of the Fiscal Responsibility Act and the Eurozone fiscal rules. However, Fitch stated that lower than projected growth and higher budget deficits should also be factored in. Slippage from fiscal targets is a factor that could negatively affect Malta's rating and the risk of this happening appears quite high.
In addition, a scenario featuring the crystallisation of material contingent liabilities or a shock to the banking sector where fiscal support would be required will also negatively affect Malta's situation. On the other hand, future developments that can further consolidate Malta's positive rating are an improved track record in public finance administration, leading to a lower government debt/GDP ratio and a considerable decline in contingent liabilities.
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