Ratings agency Standard and Poor's has affirmed Malta's ratings at BBB+/A-2' with a stable outlook.

In a report today, it said the new government has started its legislative session with progress on a longstanding reform agenda, particularly in the energy sector.

Indications were that 2013 economic growth had exceeded expectations. However the agency continued to view the government's relatively high debt burden as constraining policy flexibility, particularly as it expected growth to remain below pre-crisis rates.

"The stable outlook balances our view of Malta's improving prospects for economic reform against its recurrent, albeit declining, fiscal imbalances and external data inconsistencies."

In its report, S&P said the ratings were supported by its view of Malta's fairly strong institutional and governance effectiveness and its prosperous economy.

"A sizable government debt burden and external data discrepancies constrain the ratings. Malta's government has made progress on energy sector reform, a key part of the ruling party's election promises. If progress can be maintained, it will support already-improving economic growth, which appears to have exceeded our previous expectations for 2013.

Malta's government has made progress on energy sector reform, a key part of the ruling party's election promises. If progress can be maintained, it will support already-improving economic growth

"Growth should help the government to stabilize its finances through rising tax revenues. However, we still forecast growth to remain lower than before the onset of the 2008 financial crisis, and fiscal space remains strained by general government gross debt (73% of GDP in 2013)."

The agency noted that in terms of the EU's excessive deficit procedure,  Malta is required to reduce its debt burden to 60% of GDP, which will likely require additional efforts.

It noted that the energy sector reform ultimately aims to reduce the high costs of electricity production.

"We understand that the government's potential sale of a stake in national electricity provider Enemalta--an important step in its multiyear restructuring--is now nearing completion. Although the company continues to record losses, new production facilities should help to reduce government subsidies.

"The government also guarantees a proportion of Enemalta's debt, the majority of a guaranteed debt stock of 17% of GDP. The completion of a liquefied natural gas plant (by 2015) and an electricity interconnector with Sicily should help to reduce the cost of electricity production by up to 50%. If this benefit is passed through to consumers, government subsidies could be further reduced;

"Malta's electricity prices are currently among the highest in the EU. We view this progress as a positive signal that the government will tackle other longstanding structural issues, such as pension reform, the low female labour force participation rate (47%), and supply gaps in more highly skilled positions. Economic growth is crucial for Malta to address these issues."

S&P said it expected growth would remain below pre-crisis levels, with real GDP per capita growth averaging 1.8% from 2013 to 2016, versus 3% between 2005 and 2007.

It expected import-heavy domestic demand to reduce the contribution of net exports to growth, but that consumption growth would be cautious over the next few years.

However, a delay to the recovery in domestic demand meant that net exports continued to contribute positively in 2013, alongside employment growth in services, which were estimated at above 2% in 2013.

Tax receipts were above budget through November 2013, helping overall revenues to increase by 8.4% over the same period.

We expect the government to record a deficit slightly higher than its 2.7% of GDP fiscal target for 2013. We continue to expect that the government's deficit will remain marginally behind its targets in 2014-2016.

"Tempered by expenditure growth of 6%, we expect the government to record a deficit slightly higher than its 2.7% of GDP fiscal target for 2013. We continue to expect that the government's deficit will remain marginally behind its targets in 2014-2016. We forecast the increase in gross debt to be higher than in 2012, at 4.3% of GDP, but that the debt burden will stabilize over 2014 at 73% of GDP in gross terms."

The agency said the domestically owned financial system appeared to be stable while the presence of foreign-owned, internationally oriented banks posed little threat to the government by way of contingent liabilities, as these institutions have little or no impact on the domestic economy.

"A subset of the system is funded by resident deposits (which are partly guaranteed under the depositor compensation scheme) and short-term foreign bank lines, but has no domestic assets. These institutions could become increasingly systemically important if they develop domestic activities. We note that banks in this category have assets totalling 77% of GDP. Malta's external data are skewed by the presence of foreign-owned financial institutions doing little or no business with the domestic economy. For this reason, the country's reported net external asset position of about 7% of current account receipts (10% of GDP) may be overstated. If we exclude these banks, Malta appears to have a modest net external liability position."

The agency said that as a member of the eurozone, Malta benefits from the stability of the euro. Largely because of its small size and heavy fiscal burden, there could be times when European Central Bank policy is not particularly suited to the Maltese economy. However, the country's improving external performance and its avoidance of housing or other bubbles limit this risk, and monetary policy has been a supportive factor.

OUTLOOK

It said the stable outlook, which indicated that there wasa less than one-in-three likelihood of a rating change over the next two years, balanced its view of Malta's improving prospects for economic reform against its recurrent fiscal imbalances, although these were declining, and external data inconsistencies.

"We could raise our ratings on Malta if the government's reform program boosts growth and reduces the government debt burden more quickly than we currently expect, without a return to current account deficits. Conversely, we could lower our ratings on Malta if fiscal slippages raise the government's debt burden and the country's net external liabilities."

GOVERNMENT WELCOMES ANALYSES

In a statement, the government welcomed S&P's analysis which it said was a clear recognition of its efforts.

"This administration will keep working to pave the way to further economic growth which exceeds expectations.

"The government remains determined to, through responsible governance, keep creating wealth and ensuring that this wealth is distributed fairly among Malta’s hardworking population. So that Malta becomes stronger and fairer."