Agency lowers Malta's local credit ratings

The international credit ratings agency, Standard & Poor's has lowered Malta's local currency sovereign credit ratings, citing as reason the government's failure to control its deficit.

The ratings have been lowered to A+/A-1 from AA-/A-1+. At the same time, S&P affirmed its A/A-1 foreign currency sovereign credit rating on Malta. The outlook is stable.

The lowering of the local currency ratings reflects a deterioration in Malta's medium-term fiscal prospects, according to S&P's credit analyst Mary Nnachi.

"As a result of upward revisions to general government deficit estimates since 2002, the government's target of reducing the deficit to 3.1 per cent of GDP in 2005 is unlikely to be met unless significant corrective measures are taken."

Deficits have remained high, the agency said, averaging about eight per cent of GDP between 1998-2002, despite robust GDP growth averaging three per cent over the same period.

The 2002 general government deficit, at 6.1 per cent of GDP, exceeded an original budget estimate of 5.2 per cent of GDP. The deficit was now expected to remain broadly stable in 2003, instead of diminishing to its pre-accession economic programme target of 4.6 per cent.

The slow pace of progress in 2003 reflected lower-than-anticipated growth in revenues and rising expenditure pressures from health, pensions, and costs related to the new hospital.

Moreover, large structural expenditure items, such as subsidies to state-owned enterprises and social transfers continued to weigh heavily on the budget.

The general government debt burden (including Malta Freeport debt) was forecast to increase to 73 per cent of GDP by 2004, from an already high 69 per cent in 2001, S&P said.

S&P said that the government, which aimed to secure early membership of EMU, was likely to announce measures to consolidate the deficit in the coming weeks.

A sustained period of fiscal consolidation was "essential" if Malta was to be among the first of the accession countries to join EMU.

Membership of the eurozone would effectively shield Malta from balance of payments-related financial stress.

"Failure to decisively address current trends in the fiscal deficit would undermine prospects of an early participation in EMU and weaken the government's credit standing," Ms Nnachi warned.

"Policy-makers are expected to move to address the fiscal imbalance and stabilise the general government debt burden."

The only positive aspect of the ratings' report is the prospect of EU accession in May, 2004 which S&P said, continued to provide a policy anchor for structural reforms, including fiscal consolidation.

In March, S&P had said that the outcome of the referendum in favour of EU membership reflected expectations that fiscal consolidation and progress with structural reforms would continue.

The referendum result not only gave increased legitimacy to the government's structural reform agenda but also created an opportunity to quicken the pace of reform, S&P had said.

When contacted, Finance Minister John Dalli said that the S&P ratings underlined the need for structural changes to put less demand on government finances.

"We need a change of mentality and to convince people that the government does not provide money like manna from heaven."

It was clear, he said, that Malta was being monitored by reputed international agencies, and this put even more pressure on the government to put its finances in order for the short and long term.

The minister augured that all the political forces, together with the constituted bodies, would realise the need to deal with the issue in an objective and national manner, rather than "play out for the gallery".

Labour's spokesman for finance, parliamentary affairs deputy leader Charles Mangion threw the ball back into Mr Dalli's court and accused the government of trying to divest itself of the responsibility. It was giving the impression that it was the country in general which triggered the problem, he said.

The S&P ratings confirmed the Labour Party's statements that the government's projections had not been realistic, Dr Mangion said.

The government had a duty to explain what led to this breakdown in finances and to carry out a serious exercise to curb expenditure.

Dr Mangion said the government was forging ahead with projects without carrying out a proper analysis and was in the process of fuelling its expenditure further, as was the case with the Tal-Qroqq hospital, which was costing far more than projected.

Asked what he made of the government's promise to deal with the problem, Dr Mangion replied:

"Five years ago, the government had also promised reforms but it's perfectly clear that it has failed in its targets. Whatever this government says I take with a pinch of salt."