“Significant fiscal slippage” has prompted credit rating agency Fitch to downgrade Malta’s rating from A+ to A while keeping a stable outlook.
Fitch said that, last year, government deficit was 3.3 per cent of GDP, well above the Government’s target of 2.2 per cent and its own September 2012 forecast of 2.6 per cent.
This slippage was carried over to 2013, when Fitch forecasts a 3.6 per cent deficit, substantially higher than the 2.7 per cent target set in the original 2013 Budget, which was defeated in Parliament last December and led to an early election that the Nationalist government lost in March.
Fitch referred to the “worsening” dynamics of public debts, forecasting that the general government gross debt will peak at 74 per cent of GDP in 2015 and decline marginally in the medium term, remaining above 73 percentage points of GDP by 2020.
The credit rate agency warned that such a high debt ratio for a prolonged period reduced the fiscal space to absorb future adverse shocks. Fitch criticised the Government for its slow response to the 2012 fiscal deterioration, adding that this year’s Budget was moderately expansionary rather than starting consolidation.
It added that even though the Government had committed to fiscal consolidation, so far there had been no clarity on the fiscal measures underpinning the adjustment.
Regarding contingent liabilities, Fitch said that government-guaranteed liabilities rose from 11 per cent in 2006 to 17.6 per cent of GDP in 2012, of which 60 per cent related to Enemalta.
This implied that total public debt, including guarantees in 2012, stood at 90 per cent of GDP.
It said no concrete policy was announced since the change in government
The credit rating agency issued a stern warning about the pension reform, describing the current system as relying on “a pay-as-you-go” model. It said no concrete policy was announced since the change in government despite years of consultation by the Pensions Working Group.
Fitch said that demographic suggestions by the EU indicated that the system was not sustainable without reform.
On the positive side, Fitch said public debt was predominantly held by Maltese investors and financing capacity was underpinned by a liquid banking sector.
Also positive was the fact that the Government enjoyed a strong parliamentary majority, which “bodes well for political stability”, Fitch noted. It welcomed the Government’s strong mandate to reform the energy sector and Enemalta.
However, it said the Government had yet to articulate a detailed plan on healthcare and pensions. It drew on the fact that economic growth has outperformed the eurozone in recent years, whereas unemployment in July was at its lowest level since the last quarter of 2009.
Fitch said that, despite its size at 800 per cent of GDP, the banking sector was strong and proved resilient to the eurozone crisis.
The agency warned that if the 2014 Budget failed to deliver a credible medium-term consolidation plan, the debt ratio could be a trigger for negative rating action.
Yet controlling contingent liabilities through restructuring State-owned enterprises could lead to a positive rating.
The Government attributed Fitch’s downgrade to the excessive deficit accumulated under the previous Administration. It said it was addressing the situation and expressed confidence in lowering the deficit to below three per cent by the end of the year.
It noted that the credit agency report highlighted the fact that the economy was still creating jobs.
The Government said that it had already started to address the debt-stricken Enemalta through the agreement with a Chinese strategic partner.
Last July, rating agency Standard & Poor’s affirmed Malta’s sovereign credit rating at BBB+/A-2 with a stable outlook.
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