Fitch Ratings has affirmed Malta's long-term foreign-currency issuer default rating (IDR) at 'A+' with a stable outlook.
It said the country’s ratings reflected its high income per head compared with the 'A' median, robust economic growth and a large net external creditor position, together with eurozone membership.
Malta's ratings, Fitch said, were constrained by the small and highly open nature of its economy, which made it vulnerable to external shocks, and its high, albeit declining level of contingent liabilities and outsized banking sector relative to GDP.
Domestic banks' assets accounted for 225.7% of GDP in December 2017 and Malta's large international banking sector was not exposed to the domestic economy.
Earlier this week, credit ratings agency Standard and Poors highlighted increased reputational and operational risks for Malta’s banking sector, moving its risk score up two notches on its 10-point scale.
Fitch forecast Malta would maintain a fiscal surplus of 1% of GDP in 2018, after outperforming its fiscal target by 3.1pp in 2017 with a surplus of 3.9% of GDP due to large tax revenues and proceeds from the Individual Investor Programme (IIP) and lower than expected capital expenditure.
Revenues would decline by 1.7pp to 38.7% of GDP as inflows from the IIP moderated while expenditure would increase by 1.2pp to 37.7% of GDP due in part to net lending: a capital injection into Malta Air Travel Ltd for the purchase of landing slots from Air Malta (accounting for 0.5% of GDP).
The launching of the new EU funding cycle and investments by the National Development and Social Fund financed by IIP revenues would also support an increase in capital expenditure.
Fitch said it expected fiscal policy to remain prudent. The government revised its fiscal surplus targets upwards in the April Stability Programme Update (SPU), given the strong 2017 fiscal outturn, and aimed to achieve fiscal savings net of IIP proceeds over the forecast horizon.
Malta's structural balance improved by an additional 3pp in 2017 to an estimated 3.5% of GDP, according to the European Commission. The government expected to keep meeting its medium-term objective in 2018 of a balanced structural budget.
Public debt dynamics were very favourable, with low interest payments, strong nominal growth and recurrent primary surpluses leading to a sustained downward trend in the gross general government debt (GGGD)/GDP ratio.
Fitch forecast GGGD/GDP to decline to 47.2% in 2018 and 40.9% in 2020, compared with a historical 'A' median of 41%. Contingent liabilities declined to 9.6% of GDP at-end 2017 following the expiration of the Electrogas guarantee in 4Q17, from 13.7% at-end 2016.
Real GDP growth was set to remain robust at 5.6% in 2018, supported by a strong growth in public and private consumption and recovery in investment.
Unemployment declined further to 3.9% in June, from 4.6% in December 2017 and compensation per employee rose 1.8% in 2017, supporting private demand.
Net trade contribution to growth would likely decrease after a surge in 2017 as investments-related imports contracted but strong performances by the remote gaming, tourism and financial services sectors would support robust services exports.
Fitch estimated Malta's medium-term potential growth at 3%, but was more conservative than the European Commission's latest forecast in the 3.5%-5.2% range in 2022, as it expected pressures on the infrastructure and rising labour shortages would constrain the expansion of the economy in the medium term.
Price pressures were increasing given tightening labour market, but it expected inflation to remain contained at 1.6% in 2018 and 1.8% in 2019 as the strong inflow of foreign workers and rising labour participation would prevent a sharp increase in wages.
Property prices (based on transactions) rose 5.3% y-o-y in 2017, and advertised prices rose 11.8%, boosted by strong housing demand, low interest rates leading to portfolio re-allocation to real estate investments, a booming tourism sector and exemption of stamp duty for first-time buyers.
However, increasing housing supply should help curb the rise in property prices, while the Fitch Macro Prudential Indicator (MPI) score of 1 for Malta indicated that only moderate risks were arising from private sector credit to GDP and real property prices.
Fitch forecast the current account surplus to decline in the forecast horizon to 10.9% of GDP in 2018, from 13.7% in 2017 as investments in housing, health and education ramp-up and good imports picked up.
Malta's net external creditor position was strong relative to peers at a forecast 199.5% of GDP compared with a historical 'A' median of 8.3%, but benefitted from the categorisation of special-purpose entities, which were large net external creditors, as Maltese residents.
The banking sector, it said, remained sound, although highly concentrated with core domestic banks' assets accounting for 206% of GDP at-end 2017, non-core domestic banks' assets representing 19.7% of GDP and international banks' assets 205%.
Capitalisation remained strong with a common equity Tier 1 ratio of 15.1% in 2017 (for core banks) and asset quality is improving, with non-performing loans (NPLs) accounting for 4.1% of total loans (5.3% in 2016), although legacy resident corporate NPLs of core domestic banks remained high at 11%.
Risks to the sector stem from the high and rising exposure to the housing market, with mortgage lending accounting for 48.3% of the total lending to residents. Lending standards to households remained prudent, also due to households' net worth with a loan-to-value ratio for residential properties at 73.5% in 2017 and debt service-to-income ratio at 23%.
Malta's GDP per capita increased gradually since 2010 and accounted for an estimated 145% of the 'A' median in 2018.
World Bank governance indicators exceeded the 'A' median and were comparable with the 'AA' median, although the "rule of law" subcomponent of the governance indicators was on a declining trend. Malta's Ease of Doing Business was also weaker than the 'A' median, ranking 84th out of 190 in 2018.
In a statement, the government said Fitch’s analysis confirmed the confidence that existed in Malta and the economy’s excellent progress.
This should lead to further interest in Malta by foreign investor and a stronger economy for the benefit of families and businesses.
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