A Stable Output for Malta as Fitch Affirms it at ‘A+’

26th October 2010 – Malta’s long-term foreign currency and local currency Issuer Default Ratings (IDRs) has been affirmed by Fitch Ratings at ‘A+’ with a Stable Outlook for both ratings. Fitch has affirmed Malta’s Short-term IDR at ‘F1’ and Country Ceiling at ‘AAA’, which is the common Country Ceiling for the euro area.

“Malta’s rating affirmation reflects its smooth passage through the recession, with limited fiscal damage, demonstrable financial sector resilience and signs of a strong economic recovery in H110,” says Chris Pryce, Director in Fitch’s Sovereign Group. “The domestic banking system required no financial assistance from the government. This is a consequence of the conservative approach to banking and its supervision adopted by the two main political parties, the governing National Party and the Labour Party.”

Malta improved its public finances in 2008, prior to its accession to the Euro zone, with the fiscal deficit falling from almost 10% of GDP in 2003 to just over 2% of GDP in 2007. Once a member, fiscal discipline was relaxed through the approval of capital spending, and the onset of the global financial crisis made it difficult to reverse this deterioration. Fitch says that although Malta’s fiscal deficit is still low compared to peers (3.8% of GDP in 2009), its debt is double that of the ‘A’ rated cohort (at 69% of GDP in 2009) hence standing out as a rating weakness.

Most public debt is local, and the financial sector is a large purchaser of government debt. This ‘captive market’ allows Malta to sustain a high level of debt, which Fitch expects to stabilize at around 70% of GDP in 2011/12. Nonetheless, long term debt sustainability is clouded by Malta’s projected future pension liabilities and ageing population. The government has yet to demonstrate sufficient resolve to address this issue.

Importantly, Malta’s domestic banks survived the international banking crisis and recession virtually unscathed. With just some small deterioration in capital and non-performing loan ratios, government assistance was not required, unlike most other European countries. Its supervision and conservative approach to banking has served Malta well, particularly the high proportion of lending financed from retail customer deposits. Credit expansion, which had been on the high end, has begun to drop since 2008. In comparison to Malta’s GDP, the international banking sector is much larger than the domestic sector and large, yet it is not integrated into the domestic economy and primarily provides services for foreigners. There is little overlap with domestic banks and in a crisis the home governments and foreign parent banks would be expected to provide support. The effects of such a crisis within Malta would therefore be contained.

Malta ranks highly in the traditional international governance indicators reflecting effective civil institutions, a stable government and lack of corruption. GDP per head is above the ‘A’ rated median. Its Euro area membership has brought a source of strength and protects it from currency crises and limits the impact of its poor record in international merchandise trade. Contrary to manufacturing, its service sectors, including business and finance, are buoyant, as is foreign direct investment which easily covers Malta’s perennial current account deficits.

Fitch notes that Malta’s recession ended in Q409, following three successive quarterly falls, when GDP rose marginally containing the decline in output to a relatively mild 2.1% for the year as a whole. In 2010, the first two quarters showed quite substantial quarterly increases at an annual rate of 4.2% and 3.9% respectively. Fitch assumes that some cooling in the rate of expansion will give an increase for the year of about 2.4%. Based on past experience, a fairly higher rate, above 3% pa, should be attainable in the following years if European recovery becomes well established and the government continues to press forward with industrial restructuring and the reduction in subsidies.

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