DBRS Confirms Republic of Malta at ‘A’, Stable Trend

DBRS Ratings Limited has confirmed the Republic of Malta’s long-term foreign and local currency issuer ratings at A and its short-term foreign and local currency issuer ratings at R-1 (low). The trend on all ratings remains Stable.

The A rating reflects Malta’s Eurozone membership, which ensures reliable access to European markets, fosters strong and credible macroeconomic policies and makes available financial support from European institutions. The country’s solid external position also supports Malta’s ratings, together with a favourable public debt structure and the robust financial position of households. However, Malta’s public finances remain a source of vulnerability, and its economy is exposed to external shocks, particularly those emanating from within the EU. Furthermore, pressures from ageing costs pose a concern for the pensions system.

The Stable trends reflect DBRS’s assessment that risks to the ratings are broadly balanced. The ongoing improvement in the fiscal position counterbalances some of Malta’s fiscal and economic vulnerabilities. Continued progress on fiscal consolidation and a meaningful reduction in public indebtedness could put upward pressure on the ratings. Successful implementation of reforms to improve the efficiency of the public sector, boost private sector investment and increase labour force participation could also have a positive effect. On the other hand, the emergence of additional contingent liabilities, from the energy sector or financial sector, could have adverse implications for Malta’s ratings. Large or prolonged external shocks could also pose downside risks.

Malta joined the European Union (EU) in 2004 and adopted the Euro in 2008. The expansion of trade and travel links with Europe – and with Malta serving as an access point to Europe – has provided a significant boost to the country’s growth prospects. Rising employment generated by trade and tourism have increased national income, while fiscal, monetary and financial policy institutions have strengthened in line with EU and Eurozone rules. Multinational corporations are also attracted to Malta in spite of relatively high marginal tax rates, thanks to a full imputation tax system that eliminates the double taxation of dividends paid out of company profits.

Malta’s solid external position is another credit strength. The current account surplus has averaged 4.6% of GDP in 2012-2015 and the country is also a net external creditor, with a net external asset position of 29.0% of GDP on average over the past five years. Moreover, its low reliance on external financing has supported the country’s resilience over recent years. The Maltese government meets its financing requirements domestically, and the core domestic banking sector is conservatively funded by domestic retail deposits.

Malta’s public debt composition and structure also provide support to its rating. The Maltese Treasury has followed a strategy of lengthening the maturity of government debt in recent years. The average maturity of government bonds was 8.7 years, as of end of 2015, which compares favourably to other European economies. Moreover, a comparatively wealthy population and stable financial system have been reliable domestic sources of funding.

Maltese households enjoy high levels of savings and moderate indebtedness. Household net financial assets are sizable at over 200% of GDP. Real estate values rose significantly in the decade prior to the global financial crisis, but without a large increase in household financial liabilities. Prudent lending practices prevented Malta from building up the financial imbalances that have afflicted other Eurozone countries. Private consumption growth is consequently quite resilient and overall economic performance has been strong.

Some of Malta’s credit challenges are associated with the exposure of its public sector and the still high level of public debt. The government has extended guarantees to several large state owned enterprises (SOEs), which have faced financial difficulties. The high degree of concentration in the domestic financial sector could also be a source of contingent liabilities, though the overall financial condition of the core domestic banks appears strong. The restructuring of some of the SOEs has reduced risks to the public sector balance sheet. Nevertheless, the public sector remains vulnerable to debt shocks. Although public debt has started to decline, it remains moderately high at an estimated 64.6% of GDP in 2015.

Malta’s reliance on tourism and other industries catering to foreign demand also exposes the economy to unfavourable external developments. Although tourism benefits from a market of wealthy European economies, it could be adversely affected by an economic downturn in the region. If a sustained erosion in tourist arrivals or other shocks in external demand were to have an impact on domestic real estate prices, this could have serious implications for household finances and financial stability. The islands’ competitive position could also be eroded if domestic costs rise. Similarly, the financial and gaming industries could be adversely impacted by competition from other markets.

Finally, pressures from age-related costs present another challenge for Malta. Healthcare costs and pension liabilities have increased rapidly in recent years and demographic trends appear unfavourable. Although net migration inflows have supported population growth, the working age population is forecast to decline in the longer term. Labour-market participation remains among the lowest in the EU, particularly among women and older workers, despite major improvements from recent reform efforts. Pension reform measures are being implemented, but additional measures might be needed to secure the long-term sustainability of the system.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Malta Ministry for Finance; Central Bank of Malta; Malta National Statistical Office; Malta Fiscal Advisory Council; European Commission; European Central Bank; IMF; UN; BIS; Enemalta; Air Malta. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

DBRS does not typically accept editorial changes other than to correct for factual, accuracy and/or to remove confidential, material non-public, or sensitive information that might otherwise be inadvertently disclosed.

Lead Analyst: Adriana Alvarado, Assistant Vice President
Initial Rating Date: 3 April 2015
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Last Rating Date: 2 October 2015

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