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Fitch Revises Malta’s Outlook from Stable to Positive; Affirms at ‘A+’

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Credit Agency Fitch expects high economic growth in Malta to be sustained in the medium term, and estimates potential growth at around 4%.

In its statement, Fitch said that with a GDP growth of 6.7% in 2018, Malta was the fastest growing economy in the EU. Fitch forecasted GDP growth was expected to remain robust at 5.5% in 2019 and 4.8% in 2020. Malta has raised its GDP per capita from 57% of the EU average in 2008 (at market prices) to 83% in 2018.

In its report, Fitch said that Malta ran a general government surplus of 2.0% of GDP in 2018 (current ‘A’ median of -0.8%). This was above the government and Fitch’s previous estimate of 1.1% of GDP, albeit lower than 2017 (3.4%). Fitch expects a surplus of 0.9% of GDP in 2019, slightly increasing to 1.0% in 2020 and 1.1% in 2021. This factors in revenue from the Individual Investor Program (IIP) declining from 1.5% in 2018 to 0.5% in 2020-21.

Fitch expects the recent track record of falling public debt/GDP will be maintained.

Commenting about these ratings, the credit rating agency said that Malta’s ratings are supported by euro area membership and institutional strengths stronger than the majority of ‘A’ rated peers. Malta outperforms the ‘A’ median on the World Bank human development and governance indicators, although its scores on the ‘voice and accountability’ and ‘control of corruption’ subcomponents have been slipping in recent years. Ease of doing business significantly underperforms the ‘A’ median, ranking only at the 56th percentile of sovereigns on the World Bank index, although greater infrastructure investment is alleviating some bottlenecks.

The external sector is stronger than the majority of ‘A’ peers, but Malta’s highly open and small economy leaves it vulnerable to external shocks. Despite the slowdown in the eurozone, Malta’s current account remains strong at 9.8% of GDP. Fitch expects a slight narrowing of the current account surplus to 9.5% and 8.9% of GDP in 2019 and 2020, respectively.

The large number of special purpose entities (SPEs) and multinationals in the financial and insurance activities contributes to the highly distorted net FDI flows, which were reported as 79.3% of GDP in 2018. Malta has one of the largest net international investment positions in the EU at 60.3% at end-2018, and is expected to continue increasing in the coming years.

Malta’s domestic banking sector is large, with assets of 194% of GDP in March 2019. The cleaning of banks’ balance sheets is continuing with the share of non-performing loans down to 3.3% of total loans in 1Q19 from a peak of 7.3% in 1Q15. Credit growth to resident households (9.2% yoy in May 2019) remains broadly in line with its historical average. Real estate prices are aligned with fundamentals according to the European Commission, showing no signs of potential overheating.

The report refers to the fact that Pilatus Bank, had its banking license revoked by the ECB and the MFSA in November 2018 following investigations by US authorities into sanctions breaches by the bank’s chairman. Another small bank, Satabank, has recently been fined EUR3 million, after the regulators froze all its funds and appointed EY to administer its assets.

Domestic demand will drive real GDP growth, fuelled by strong labour market dynamics. Modest wage growth will bolster disposable incomes and support resilience in household consumption growth, with few signs of overheating in the economy. Investment activity is forecast to remain high, supported by the absorption of EU structural funds.

Existing labour and skills shortages could hamper potential growth. Relatively high school dropout rates contribute to Malta’s large proportion of low-skilled population. The gender employment gap (22.3pp in 2018) remains almost double the EU average (11.5pp), despite having diminished considerably since 2001. If not addressed, these could contribute to a future slowdown in labour productivity and to a loss of competitiveness.

Future developments that could individually or collectively result in positive rating action include:
Continued decline in government debt/GDP.

Sustained high GDP growth supporting a convergence of GDP per capita with that of higher rated sovereigns.

Progress in addressing key weaknesses in the business environment and banking supervision.

Future developments that could individually or collectively result in negative rating action include: Crystallisation of material contingent liabilities or a shock to the banking sector that requires fiscal support and serious external shock that could affect growth and government debt dynamics.

Long-Term Foreign-Currency IDR affirmed at ‘A+’; Outlook revised to Positive from Stable
Long-Term Local-Currency IDR affirmed at ‘A+’; Outlook revised to Positive from Stable
Short-Term Foreign-Currency IDR affirmed at ‘F1+’
Short-Term Local-Currency IDR affirmed at ‘F1+’
Country Ceiling affirmed at ‘AAA’
Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at ‘A+’
Issue ratings on long-term senior unsecured local-currency bonds affirmed at ‘A+’

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