MBR_ISSUE 46_NOV_DEC_18_LowRes

Malta Business Review
CREDIT RATING
PUBLIC FINANCE
Scope assigns Malta first-time credit rating of A+ with Stable Outlook
Euro area membership, high economic growth, prudent fiscal management and strong external position are
credit strengths. Elevated contingent liabilities, unfavourable demographics, external vulnerabilities and
regulatory shortcomings remain challenges.
Scope Ratings GmbH has today assigned
the Republic of Malta a first-time A+ longterm
issuer and senior unsecured local- and
foreign-currency rating, along with a shortterm
issuer rating of S-1+ in both local and
foreign currency. All Outlooks are Stable.
Rating drivers
Scope’s first-time assignment of Malta’s
A+ rating reflects the country’s euro area
membership, high economic growth,
prudent fiscal management and strong
external position. The rating is challenged
by contingent liabilities, unfavourable
demographics, external vulnerabilities, and
regulatory shortcomings of the financial
sector.
Malta has shown buoyant growth rates
during the recent decade with an Malta
has shown buoyant growth rates during the
recent decade with an average expansion
of 4.3% since 2007, outperforming the
EU average behind only Ireland. The main
drivers of Malta’s growing economy are
high service exports (tourism, transport and
gaming), and robust private consumption.
For 2018 and 2019, Scope anticipates annual
growth to reach 5.4% and 5% respectively
on the back of record-low unemployment
of 4%, strong employment growth due
to migration and recovering investment,
especially on the housing market. Growth
is expected to continue to be driven by
private consumption and higher investment,
whereas the external sector provides less
support compared to previous years.
"Growth is expected to
continue to be driven
by private consumption
and higher investment,
whereas the external
sector provides less
support compared to
previous years.
The A+ rating is further underpinned by
Malta’s strengthened fiscal framework,
together with a combination of faster fiscal
consolidation, low interest payments and
stronger GDP growth. The government
has achieved consistent fiscal surpluses,
supported by a broadening tax base,
reflecting better monitoring compliance
and increasing female labour participation.
Expenditures are below the euro area
average but have picked up recently. Capital
expenditures have increased strongly due
to the acquisition of landing rights from
Air Malta. Going forward, the Maltese
government targets a general fiscal surplus
of 1.3% of GDP for 2019, net of revenues
from the Individual Investment Program (IIP)
and including gross fixed capital formation of
3.5% of GDP. Fiscal expenditures in 2019 are
expected to decline slightly from 38.4% to
37.8% of GDP, based on the one-time capital
transfer to Air Malta in 2018 (EUR 57mn).
Malta’s strong fiscal performance has led
to a steady decline in its debt to GDP ratio
from 2012 onwards, falling below the 60%
Maastricht threshold in 2015. The last two
years brought a further decline by almost 8
percentage points, thanks to exceptionally
strong growth and a slightly positive fiscal
balance. For 2018, government projections
foresee a decline of the debt to GDP ratio to
46.9%, equal to 4 percentage points. Going
forward, the government expects another
3 percentage points decline towards 2019
by assuming that the primary surplus of
2.7% exceeds interest rate expenditure
(1.5%) and stock-flow adjustment (1.6% of
GDP). Our baseline scenario, in line with the
IMF forecast, foresees a continued, albeit
less pronounced decline in debt over the
projection horizon to around 30% of GDP,
supported by positive primary balances and
high growth.
Malta’s A+ rating is further supported by
the economy’s robust external sector.
Continuous current account surpluses led
to a net international investment position of
62.6% at year-end 2017. This development
is dominated by a boost in services exports,
comprising transport, tourism and gaming.
Although the country shows a negative
balance on goods exports, the quality of
exported manufacturing goods is above the
EU average with 40% of the export value
related to top quality. Going forward, we
expect Malta to retain its current account
surplus, albeit with lower surpluses towards
2019 but supported by rising import shares
and its role as a financial centre.
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