While Malta's healthy economic prospects and access to a large and stable funding pool support its credit profile, the government's fiscal accounts continue to constrain the rating, Moody's Investors Service said in a report today.
The annual update, "Government of Malta - A3 Stable Annual Credit Analysis", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of the hyperlinked press release. The research is an update to the markets and does not constitute a rating action.
"The government's fiscal accounts continue to constrain Malta's credit quality, despite recent improvements," said Evan Wohlmann, a Moody's Vice President -- Senior Analyst and co-author of the report. "Nevertheless, fiscal consolidation has helped to shift the budget to a surplus of 1% of GDP in 2016 from a deficit of 1.3% of GDP in 2015."
Malta's economic growth beat expectations in 2016, with real GDP expanding by 5%, driven by robust private consumption and a strong contribution from net exports. This year, Moody's expects real GDP growth to slow to 4.3%. Although decelerating, economic growth is becoming more balanced and remains well above the euro area average.
After the general government balance registered a surplus of 1% of GDP in 2016, Moody's forecasts that Malta will post a small surplus in 2017-18. This forecast takes into account the better than expected fiscal outturn in 2016 and Moody's more optimistic macroeconomic assumptions for 2017. However, Malta's general government debt burden, which declined to 58.3% in 2016, remains above the A-rated median.
Malta's fiscal performance will face downside risks from slippages in intermediate consumption as a result of higher costs related to hosting the European Union presidency. Furthermore, Malta's material exposure to contingent liability risks stemming from public utilities continues to constrain its credit quality. Total general government guaranteed debt, with a large share coming from the energy sector, remains around 14% of GDP at the end of 2016.
Malta's fiscal performance over the next two years faces upside potential from higher than envisaged tax receipts due to stronger than expected economic growth. In addition, a further over-performance in proceeds from the Individual Investor Programme would also lead to a stronger budget position.
Malta's sovereign rating could be upgraded in the event of a very marked improvement in the government's balance sheet, including a significant reduction in contingent liabilities, leading to a faster convergence of the debt burden with A-rated peers.
On the other hand, downward pressure on the ratings could develop if fiscal slippage or lower than expected economic growth jeopardise the anticipated decline in the debt burden. Sustained and significant disruptions in Malta's large financial system would also be negative.
Press release by Moody's.