International credit rating agency ‘Standard & Poor’s’ yesterday affirmed it’s ‘A’ long-term and ‘A-1’ short-term sovereign credit ratings for Malta, however it warned that in the case of sustained and significant fiscal deterioration, or significant setbacks in implementing the reform agenda and deterioration in the competitiveness of the economy, the ratings would come under pressure.
According to S&P the outlook so far is stable while the Transfer and Convertability (T&C) assessment on the island-state remains ‘AAA’.
S&P explained that the stable outlook balances its expectation of continued fiscal consolidation in the medium term against the challenges of the economic reform agenda in combination with a high debt burden.
As the ongoing restructuring of the traditional economic sectors and the diversification into new services sectors continues, Malta’s creditworthiness could improve if a more competitive economy emerges. A significant decline in the debt burden would also support higher creditworthiness.
In its experts’ rationale, S&P states that the ratings on Malta are supported by strong political institutions and a commitment to economic reforms, which the agency deems are needed to maintain competitiveness.
While noting that Malta acceded to the Economic and Monetary Union (EMU) on January 1, 2008 – which legally shields the country from potential exchange rate pressures – The ratings are constrained by Malta’s narrow economy, which is vulnerable to external shocks, and by the sizeable public sector burden.
As it notes that government is supporting the private sector’s diversification into higher value-added manufacturing, as well as into new services sectors, in particular information and communications technology (ICT), S&P comments that this ongoing diversification should decrease the volatility of Malta’s growth path and moderate the economy’s vulnerability to external shocks, as well as offset the ongoing decline in manufacturing. The policy focus on improving the quality of human capital is crucial for implementing this higher growth strategy, it said.
S&P has taken note that the 2008 general government deficit has deteriorated significantly to 4.7 per cent of GDP after several years of fiscal consolidation.
“We expect the government to consolidate its fiscal position once the economy starts to
recover, but at a modest pace. We also expect general government debt (including the state-guaranteed debt of Malta Freeport Corp. Ltd.) to remain at around 70 per cent of GDP in the coming few years before starting to trend down towards the end of the forecast period,” S&P said.
