Credit rating reviews on Malta

In recent weeks, three of the major international credit rating agencies issued their updated ratings on Malta. Although the main conclusions were reported in the local media immediately as the announcements were issued, it may be helpful to gather these in one article for the benefit of investors exposed to the Maltese capital market.

The publication of a country’s rating reports and economic data (GDP, unemployment, inflation, etc) is widely followed by analysts across international financial markets as this can impact the performances of equities, bonds and also currencies. In fact, certain stockmarkets fluctuate widely if economic growth figures differ, for example, from expectations.

While Malta’s economic performance and its credit rating naturally does not impinge on the value of the euro, they should nonetheless impact the Maltese equity and bond markets since most issuers on the Malta Stock Exchange are intrinsically dependent on the performance of the local economy.

Comments by the rating agencies should therefore be an important source of information for all investors exposed to the Maltese equity and bond markets.

On 3 August, Fitch Ratings confirmed Malta’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A+’ with a ‘stable’ outlook. The website of Fitch provides a reasonably detailed summary of the main highlights.

Fitch explained that following the budget surplus of 3.9% of GDP in 2017 due to large tax revenues and proceeds from the Individual Investor Programme (IIP) as well as lower than expected capital expenditure, it forecasts that Malta will maintain a budget surplus also in 2018 but this will decline to 1% of GDP. Fitch noted that revenues are expected to decline in 2018 on lower inflows from the IIP while expenditure will increase partly due to additional lending related to a capital injection into Malta Air Travel Ltd for the purchase of landing slots from Air Malta. Moreover, Fitch cited the launching of the new EU funding cycle and investments by the National Development and Social Fund financed by IIP revenues which will also support an increase in capital expenditure.

Fitch stated that it expects fiscal policy to remain prudent and it remarked that the government revised its budget surplus targets upwards in the April Stability Programme Update given the strong performance in 2017.

Fitch also remarked that Malta’s public debt dynamics are very favourable, with low interest payments, strong nominal growth and recurrent primary surpluses leading to a sustained downward trend in the level of government debt. In fact, Fitch reported that the government debt to GDP ratio will decline to 47.2% in 2018 and 40.9% in 2020. Malta’s government debt to GDP ratio had peaked at 70.1% in 2011.

Fitch expects Malta’s real GDP growth to remain robust at 5.6% in 2018, supported by strong growth in public and private consumption and a recovery in investment. Unemployment declined to 3.9% in June 2018 from 4.6% in December 2017.

Fitch anticipates that pressures on the infrastructure and rising labour shortages will constrain the expansion of the economy in the medium term. In fact, the ratings agency estimates Malta’s medium-term potential growth at 3%, which is more conservative than the European Commission’s latest forecast within the range of 3.5% to 5.2% in 2022.

With respect to the banking sector, Fitch remarked that it “remains sound”, the capitalisation remained strong and the asset quality is improving although it highlighted risks to the sector stemming from the high and rising exposure to the housing market, with mortgage lending accounting for 48.3% of the total lending to residents.

Fitch believes that two factors can lead to an upgrade in Malta’s rating, namely (i) further fiscal consolidation leading to a sustained and significant decline in government debt to GDP and (ii) convergence of GDP per capita with that of higher rated sovereigns and progress in addressing key weaknesses in the business environment. On the other hand, there are three main developments that could potentially result in a downgrade, namely (i) significant fiscal slippages leading to deteriorating public debt dynamics; (ii) the crystallisation of material contingent liabilities or a shock to the banking sector that requires fiscal support and (iii) a serious external shock that could affect growth and debt dynamics.

On its part, the rating agency DBRS confirmed on 17 August its long-term rating at A (high) and medium-term rating at R-1 (middle) with a ‘stable’ outlook. DBRS commented that the Maltese economy remains one of the euro area’s top growth performers as economic growth accelerated to 6.4% in 2017. Although it expects economic activity to decelerate gradually, it highlighted Malta’s growth projections by the International Monetary Fund of an average rate of 4.8% between 2018 and 2020. The rating agency also noted the strong fiscal surplus as a result of the IIP receipts as well as economic growth and the resultant improvement in the government debt to GDP ratio. DBRS however also mentioned that corporate tax reforms at the EU level and in the US could diminish the attractiveness of Malta for multinational companies in the longer-term. DBRS also indicated that the gaming industry could also be effected by regulatory changes at the EU level. With respect to the banking sector, DBRS explained that the conservative core banks and the strong housing market limits risks to financial stability.

Moreover, last week, Moody’s Investor Service confirmed its ‘A3’ rating for Malta with a ‘positive’ outlook. The local media reported that Moody’s highlighted Malta’s sustained progress on public sector debt reduction and the prospects for further fiscal consolidation on the back of a buoyant economic performance. It was also reported that Moody’s pointed out that it will be upgrading Malta’s rating to A2 if its improvement in fiscal strength is sustained.

The other major rating agency, Standard & Poor’s, last updated Malta’s rating in March 2018 giving an ‘A-‘ rating and a ‘positive’ outlook. However, on 1 August 2018, the rating agency revised its industry score rating downwards for the Maltese banking sector. As a result of the downward revision to the overall banking sector, it then downgraded BOV’s long-term Issuer Default Rating to “BBB” from “BBB+”.

The overall assessment of Malta’s economic dynamics by several rating agencies is indeed very positive although this month’s remark by S&P regarding the banking sector should not go unnoticed.

The numerous investors exposed to equities or bonds of Maltese companies listed on the regulated main market of the Malta Stock Exchange should be pleased at the robust performance of the local economy which is leading to improved financial performances by several companies as highlighted in some of my articles in recent weeks. This is reflected in higher share and bond prices in many cases.

Meanwhile, some investors would also expect a positive impact on Malta Government Stock prices. However, as I had mentioned in several articles in the past, MGS prices are very highly dependent on international developments and prices recently declined due to the evolving political developments in Italy.

Malta Government Stock prices generally fluctuate around the indicative bid prices quoted by the Central Bank of Malta on a daily basis. The Central Bank of Malta has never formally disclosed its pricing mechanism for MGS and given the improvement in Malta’s economic dynamics compared to some of the peripheral countries in the eurozone, perhaps MGS prices should start to mirror more closely the movements in sovereign bonds of the higher-rated eurozone countries as opposed to those in Italy and Spain.

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