The Finance Minister and the leader of the Labour Party this morning blamed each other after ratings agency Standard and Poor's downgraded Malta's long term rating.

This is what the agency said:

"-- The dissolution of Malta's parliament on Jan. 7, 2013, will prevent a 2013 budget from being adopted until after the elections set for March 9, thus raising questions about the government's ability to restore the fiscal flexibility it has gradually lost, and resolving the recurrent budgetary risks caused by loss-making state-owned enterprises.

-- Gross general government debt has risen to just above 75% of GDP, and could continue to increase on the back of weaker-than-projected growth or stock-flow adjustments.

-- We are therefore lowering our long-term sovereign credit rating on Malta to 'BBB+' and affirming the short-term rating at 'A-2'.

-- The outlook on the long-term rating is stable, reflecting our view of Malta's relative resilience to the ongoing political, financial, and monetary challenges in the eurozone."



"The ratings are supported by our view of Malta's strong political institutions and its relative resilience. The ratings are constrained by our view of Malta's sizable government debt burden; significant contingent liabilities from what we view as permanently loss-making state enterprises; the external vulnerabilities of the narrowly based economy; and structural issues such as high private-sector indebtedness. Female labour force participation also remains very low, despite recent improvements.

Given its high government debt burden, Malta possesses limited fiscal space to counter prolonged periods of lower growth

"Given its high government debt burden, Malta possesses limited fiscal space to counter prolonged periods of lower growth. We view its contingent liabilities as relatively large. They stem from Malta's sizable financial system (banking system assets are estimated at over 700% of GDP, although nearly 60% of these belong to foreign institutions that have little interaction with the domestic economy) and Enemalta, its ailing energy utility. Recent progress on Enemalta's restructuring could reduce the amount of government guarantees and reduce the overall stock of contingent liabilities. However, we anticipate that Enemalta will remain loss-making over the foreseeable future. Support for Enemalta and other public-sector entities had led to general government debt increasing at a rate above the government's reported budgetary deficit since 2009. The Maltese government guarantees debt worth almost 16% of GDP issued by state-owned enterprises, on top of an estimated gross debt burden of 75% of GDP in 2013.

"Malta dissolved its parliament after an effective vote of no confidence was triggered by a rejection of the 2013 budget bill. This will prevent a 2013 budget from being passed until the end of the first quarter, at the earliest. While a fiscal rule that limits expenditures is in place, we expect that the 2012 deficit, at just under 3% of GDP, will exceed its target of 2.2% of GDP. Malta has a high government debt burden (estimated at 75% of GDP in 2013) and a significant proportion of entitlement spending; some 27% of total expenditure between January and November 2012 was on social security benefits. Given these factors, we consider that continuing to achieve sustainable consolidation is increasingly important, especially considering the longer-term impact of a rapidly ageing population.

"Downside risks to growth, stemming from continued poor external demand in Europe and slow improvements in domestic demand are likely to keep real GDP per capita growth lower than pre-crisis levels. Real GDP per capita growth is also likely to remain below the government's budgeted growth projections, which appear to us to be quite optimistic.

The Maltese economy has displayed resilience against a poor external environment

"That said, the Maltese economy has displayed resilience against a poor external environment, despite its openness and significant financial services activity. Net exports of goods and services turned positive in 2010 and have contributed to growth throughout the crisis."


"The stable outlook balances our view of Malta's relatively wealthy and diversified economy against risks stemming from a narrow economic base, slowly adjusting public finances, and an uncertain growth outlook.

"We could lower the ratings if we see the government's borrowing requirement widening substantially beyond our expectations of close to 2.5% of GDP in 2013. We could also lower the ratings if the government's interest burden as a proportion of government revenues were to continue to trend upward and surpass 10% for several years; to give this context, we estimate that this ratio was 8.2% in 2012. We could raise the ratings if we saw contingent liabilities decline, the government's debt burden begins to fall materially, and economic growth strengthens without a return to the sizable current account deficits of the pre-2011 period."

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