Fitch Ratings has affirmed Malta's Long-term foreign and local currency Issuer Default Rating (IDRs) at 'A'. The outlooks is stable.

The issue ratings on Malta's unsecured foreign and local currency bonds have also been affirmed at 'A'. The agency has also affirmed Malta's Short-term foreign-currency IDR at 'F1' and the Country Ceiling at 'AAA'.

The ratings agency said the affirmation and the stable outlook reflected the following key rating drivers:

"The Maltese economy is on the road to recovery. In 2013 the economy grew by 2.4%, better than 2012 (0.9%) and higher than the eurozone average (negative 0.4%), but still some way short of the 'A' median of 3.3% over five years. Fitch expects Malta's GDP growth to continue outperforming the eurozone average in 2014-15.

"At 6.5% the unemployment rate is in line with the 'A' median and well below the eurozone average, while the employment rate has risen, underpinned by the increasing female labour market participation rate.

"Public finances remain a sovereign rating weakness. However, while public debt/GDP continues to exceed the 'A' median, positive budget outturns for 2013 indicate that the general government deficit (GGD) is converging to the rating median (2.6%). Fitch estimates the GGD declined to 3% of GDP in 2013, from 3.3% of GDP a year earlier. Recent data points to significant growth in both indirect and direct tax receipts in the 11 months to November 2013. Positive labour market dynamics and corporate profitability have underpinned growth in income tax receipts, despite changes to the income tax brackets.

"Stronger revenues contrast with rising expenditure, reflecting significant underlying pressures in the Maltese economy. Fitch estimates general government expenditures increased to 44.2% of GDP in 2013 from 43.4% of GDP in 2012. Significant increases in compensation of employees, social benefits' expenditures and capital expenditure have only been partially offset by expenditure reduction at ministerial level. However, total expenditures relative to GDP remain well below the eurozone average."

Fitch said the 2014 budget does not address these expenditure pressures and, as a result, it expects government expenditure relative to GDP to increase further. Nevertheless, the budget, which includes mainly revenue-based measures, should result in GGD declining to 2.8% of GDP this year.


Turning to Enemalta, Fitch said it poses the main risk to 2014 fiscal outturns.

"Fitch notes the authorities' decision to reduce energy tariffs from March 2014, while simultaneously cutting energy production costs at Enemalta. However, the latter is subject to execution risk and the plan could negatively impact Enemalta's profitability, should cost savings fail to materialise. This in turn would have an impact on the budget and be rating negative.

It noted that Shanghai Electric Power Company agreed to acquire a 33% stake in Enemalta. While full details are not yet available, this deal reportedly has the potential to enhance the utility's profitability over the medium term and reduce its debt. A successful restructuring of the company would allay concerns around crystallisation of contingent liabilities.


It said public debt sensitivity analysis has marginally improved from the previous review. It projected that general government gross debt (GGGD) will peak at 73% of GDP in 2014 (74% in 2014-15 previously) and decline only marginally in the medium term, reaching 70% of GDP by 2020.


Fitch said the outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could individually or collectively, result in a downgrade include:

- Significant slippage from fiscal targets leading to a deterioration in the public debt dynamics.
- 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 individually or collectively could trigger positive rating action are:
- An improved track record in consolidating the public finances that leads to a significantly lower public debt level.
- A significant decline in contingent liabilities.


Finance Minister Edward Scicluna said that with this report the Maltese could put their mind at rest that the Government had achieved a sustained economic turnaround and that the country could optimistically look forward to higher economic growth and employment.

The Labour Party also welcomed Fitch's statement saying this was confirmation of the country's economic progress.


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