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Fitch Downgrades Malta to 'A' from 'A+'; Outlook Stable
September 20, 2013 / 3:55 PM / 4 years ago

Fitch Downgrades Malta to 'A' from 'A+'; Outlook Stable

Link to Fitch Ratings' Report: Malta - Rating Action ReportLONDON, September 20 (Fitch) Fitch Ratings has downgraded Malta's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'A' from A+. The Outlook is Stable. Fitch has simultaneously affirmed Malta's Country Ceiling at 'AAA' and Short-term foreign currency rating at 'F1'. KEY RATING DRIVERS The downgrade reflects the following key rating drivers and their relative weights: High - There has been significant fiscal slippage. Malta's general government deficit was 3.3% of GDP in 2012, well above both the government's target (2.2%) and Fitch's September 2012 forecast (2.6% of GDP). This slippage has carried over to 2013, when Fitch forecasts a deficit of 3.6% of GDP, compared with 2.7% in the original 2013 budget. The European Commission has re-opened the excessive deficit procedure (EDP) against Malta, with the deadline for correcting the excessive deficit set for 2014. In its previous rating review (September 2012), Fitch identified material fiscal slippage in 2012 as a negative rating trigger. - Public debt dynamics are worsening. Fitch now forecasts that general government gross debt (GGGD) will peak at 74% of GDP in 2014-15 (two years later than we previously expected) and decline only marginally in the medium term, remaining above 73pp of GDP by 2020. A debt ratio that is higher for longer reduces the fiscal space to absorb future adverse shocks. Medium - In Fitch's view, the authorities' response to the 2012 fiscal deterioration has been slow. The 2013 budget is moderately expansionary, rather than starting consolidation. Although the newly-elected government has committed to fiscal consolidation and pledged to exit EDP by 2014, as yet there has been no clarity around the fiscal measures underpinning the adjustment. The April 2013 Stability Programme Update suggests the fiscal adjustment will be based solely on revenue growth. Despite Fitch's forecast for positive GDP growth in 2014-15, the agency believes it will be difficult for the government to reduce the general government deficit and put public debt on a downward trajectory without some adjustment on the expenditure side. - Contingent liabilities are rising and this poses additional risks to creditworthiness. Government-guaranteed liabilities had risen to 17.6% of GDP in 2012 from 11% in 2006, and 60% of them relate to Enemalta, the public energy utility company. This implies that total public debt (including guarantees) stood at 90% of GDP in 2012. Furthermore, government payment arrears, including the healthcare sector, amount to some 9.8% of GDP (in 2012). - The main long-term threat to the public finances is the pension system, which relies on a pay-as-you-go-system. Since the March 2013 elections, there has been no concrete policy announcement in this area, despite several years of consultations on the review and recommendations of the Pensions Working Group. Demographic projections by the EU Commission suggest that the system is not sustainable without reform. Long-term fiscal policy will be heavily influenced by spending pressures on pensions and healthcare related to an ageing population. Despite the downgrade, Malta's 'A' IDRs reflect the following key rating drivers: - The Maltese sovereign credit profile benefits from a deep pool of domestic savings. Public debt is predominantly held by domestic investors and financing capacity is underpinned by a liquid banking sector. - The newly-elected government has a strong parliamentary majority, which bodes well for political stability. The government has a strong mandate to reform the energy sector and Enemalta. On healthcare and pensions (two critical areas for the long-term sustainability of public finances) the government has not yet articulated a detailed plan. - GDP growth has outperformed the eurozone average in recent years. The labour market has proved resilient since the 2009 crisis. The unemployment rate was 6% in July 2013, the lowest level since Q409. Moreover the employment rate has risen, underpinned by increasing female labour market participation rate. - The current account has experienced a significant turnaround from 2009, moving into a surplus of 1.6% of GDP in 2012, from a deficit of 9% of GDP in the mid-2000s. Diversification of exports has played a significant role in the trade balance turnaround. - Malta's external position is underpinned by a net external creditor position and positive net international investment position. The banking sector provides most of Malta's net creditor position. - Despite its size, at 800% of GDP, the banking sector is strong and has proved resilient to the eurozone crisis. Exposure to troubled eurozone economies is limited, the housing market appears to have stabilised and asset quality remains good. The core domestic banks have a loan/deposit ratio of only around 70% and have not been drawing on any significant amount of ECB liquidity facilities. The government has not needed to provide capital or liquidity to its banks. RATING SENSITIVITIES The main factors that could lead to a negative rating action, individually or collectively, are: - A further significant rise in the public debt, particularly if it was in the context of a lack of momentum for fiscal consolidation. If the 2014 budget fails to deliver a credible medium-term consolidation plan consistent with the objective to stabilise the debt ratio, it could be a trigger for negative rating action. - Crystallisation of material amounts of contingent liabilities on Malta's balance sheets, arising from a range of potential sources, including domestic government liabilities, a shock to the banking sector or eurozone bail-out packages. The main factors that could lead to positive rating action are: - An improved track record in consolidating the public finances that delivers stabilisation of the public debt ratio and places it on a downward path in the medium term. - Successfully controlling contingent liabilities, such as through concrete progress with restructuring of state-owned enterprises. KEY ASSUMPTIONS In its debt sensitivity analysis, Fitch assumes significant fiscal adjustment in 2014 with the general government deficit improving to 3% from 3.6% of GDP in 2013. This implies the government will reach a balanced primary budget in 2014. The agency assumes the government will maintain a primary surplus from 2015 onwards. Under this baseline, the debt/GDP ratio could fall to 73% by 2020, assuming an average primary surplus of 0.6% potential growth of 1.7% and GDP deflator of 2% over 2016-22. An additional risk relates to government-guaranteed debt. Fitch does not assume any crystallisation of material amounts of contingent liabilities. Fitch assumes that the banking sector's performance remains resilient. Moreover the agency assumes that, in case of need, the government of Malta would only be predisposed towards supporting the core domestic banks, which are systemically important. The largest bank is Bank of Valletta, which accounts for 107% of GDP.Country CeilingsAdditional Disclosure Solicitation StatusALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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