Malta ‘A-/A-2’ Ratings Affirmed; Outlook Positive (S&P)

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S&P Global Ratings affirmed its ‘A-/A-2’ long-term and short-term sovereign credit ratings on Malta. The outlook remains positive.

S&P declared that the positive outlook indicates that Malta’s ratings over the next 18 months could increase if:

  • Economic growth remains in line with our expectations and concerns around the housing market abate;
  • General government debt to GDP continues to decline and the reform of state-owned enterprises continues; and
  • Transparency around large financial flows, as well as external and national accounts, improves.

On the other hand S&P maintains that the outlook could be revised to stable if they see unabated growth in house prices and a further concentration of banks’ loan books in mortgage lending, as well as a substantial slippage in Malta’s fiscal performance, due for example to weaker tax-raising ability. They could also consider an outlook revision to stable if we see increasing risks in the financial sector, or if we see an erosion of institutional checks and balances.

Excerpts from Press Release about Malta

The ratings on Malta are supported by its strong growth performance, recurring current account surpluses driven by its large services exports, and its improving budgetary position and fiscal management. The ratings are constrained by Malta’s relative vulnerability to changing international financial conditions in light of its small, open economy. In addition, the resilience of its new economic sectors to external shocks is untested, monetary flexibility is limited, and there are weaknesses in the transmission of European Central Bank (ECB) monetary policy to Malta. The latter pertain specifically to bank lending rates to the domestic corporate sector being much higher than in the euro area on average.

S&P maintained that the structure of Malta’s economy has changed significantly over the past half-decade, as the growth of traditional manufacturing and financial service exports has moderated. Growth has instead been dominated by the proliferation of new services exports such as tourism, logistics, and e-gaming. We also note that significant investments in energy and logistics were important contributors to growth in 2014-2016. Structural shifts in the economy have created new employment opportunities, and the unemployment rate declined to 4% in 2017. While labor market participation has traditionally been low, reforms in recent years have improved participation rates, particularly among women. OECD data indicates that the participation rate increased to 69% in 2016 compared to 58% in 2000. Malta has also been successful in attracting labor from abroad across a wide range of industries and skill levels. As a result, the country’s population increased by 2% on average between 2013 and 2017 (compared with 0.6% between 2008 and 2012).

These factors have prevented wage pressures from forming thus far, despite the tight labor market. Going forward, skills shortages in some areas could prompt wage increases. Even then, we do not feel these are likely to hamper Malta’s external competitiveness over the medium term, given other non-cost factors such as regulation, which might be more relevant for Malta.

The higher pace of growth, immigration inflows, and tourism activity have also led to higher house price inflation, bolstered by fiscal incentives such as government schemes for first-home buyers. On average, house prices increased by nearly 5% from 2015 through the third quarter of 2017 (Eurostat house price index) accompanied by rising mortgage lending. House prices are now nearly 18% higher than their pre-crisis peak. Banks’ mortgage stocks grew by 8.3% (measured year-on-year) on average in 2017, slightly faster than in 2016 (7.5%). In fact, real estate activities, mortgages, and construction (from September 2017 onward) were among the few areas where bank lending grew during the year. Banks’ exposure to these sectors is now about 60% of the total system loan book, up from 51% at the end of 2013. Indeed, high mortgage growth rates are not new–banks’ exposure to mortgages has doubled to nearly half of the total loan book from about 25% at the end of 2004. Some of the elements contributing to house price inflation may not be permanent, however. For instance, any significant reversal of immigration and tourist inflows could put pressure on prices.

The economy is increasingly concentrated in tourism and e-gaming–sectors which may prove to be subject to significant cyclical swings, as well as potentially large GDP accounting effects. Tourism contributes about 14% to GDP directly, though the sector is probably larger taking into account indirect contributions. The International Monetary Fund estimates that arts, entertainment, and recreation, of which e-gaming is a major part, increased its share in Maltese gross value added to nearly 14% in 2016 from 4% in 2004. The sector grew by over 17% annually over 2012-2016.

Other risks emanate from the small and very open nature of Malta’s economy, exposing it to various potential external shocks. A rising trend toward protectionism and Brexit could have important implications for Malta’s trade, services, and financial channels. Further challenges arise from evolving global tax regulation. Malta’s tax regime, an important factor for investors in certain sectors, is challenged by a variety of adopted and proposed measures at European and global levels.

The Anti-Tax Avoidance Directive (ATAD) requires Malta to reform some aspects of its corporate taxation by 2019, while other proposals like the Common Consolidated Corporate Tax Base (CCCTB) may put further pressure on it, especially as the political balance within the EU may change after the U.K.’s departure. Any regulatory pressures on the e-gaming sector in the future could also potentially have negative implications for Malta’s economy given the increase in contribution to growth from this industry in recent years.

In our opinion, the transparency and accountability of institutions bear directly on sovereign creditworthiness. Moreover, transparent and accountable institutions enhance the reliability and accuracy of information and help make known in a timely manner any significant shifts in a country’s policymaking or the occurrence of risks relevant to sovereign credit risk.


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