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Long-Term Rating On Malta Lowered To 'BBB+'; Outlook Stable

January 17, 2013 Standard & Poor's
The dissolution of Malta's parliament on Jan. 7, 2013, will prevent a
2013 budget from being adopted until after the elections set for March 9,
thus raising questions about the government's ability to restore the
fiscal flexibility it has gradually lost, and resolving the recurrent
budgetary risks caused by loss-making state-owned enterprises.
Gross general government debt has risen to just above 75% of GDP, and
could continue to increase on the back of weaker-than-projected growth or
stock-flow adjustments.
We are therefore lowering our long-term sovereign credit rating on Malta
to 'BBB+' and affirming the short-term rating at 'A-2'.
The outlook on the long-term rating is stable, reflecting our view of
Malta's relative resilience to the ongoing political, financial, and
monetary challenges in the eurozone.

LONDON (Standard & Poor's) Jan. 16, 2013--Standard & Poor's Ratings Services
today lowered its long-term sovereign credit rating on the Republic of Malta
to 'BBB+'. At the same time, we affirmed our short-term sovereign credit
rating at 'A-2'. The outlook on the long-term rating is stable.

The ratings are supported by our view of Malta's strong political institutions
and its relative resilience. The ratings are constrained by our view of
Malta's sizable government debt burden; significant contingent liabilities
from what we view as permanently loss-making state enterprises; the external
vulnerabilities of the narrowly based economy; and structural issues such as
high private-sector indebtedness. Female labor force participation also
remains very low, despite recent improvements.

Given its high government debt burden, Malta possesses limited fiscal space to
counter prolonged periods of lower growth. We view its contingent liabilities
as relatively large. They stem from Malta's sizable financial system (banking
system assets are estimated at over 700% of GDP, although nearly 60% of these
belong to foreign institutions that have little interaction with the domestic
economy) and Enemalta, its ailing energy utility. Recent progress on
Enemalta's restructuring could reduce the amount of government guarantees and
reduce the overall stock of contingent liabilities. However, we anticipate
that Enemalta will remain loss-making over the foreseeable future. Support for
Enemalta and other public-sector entities had led to general government debt
increasing at a rate above the government's reported budgetary deficit since
2009. The Maltese government guarantees debt worth almost 16% of GDP issued by
state-owned enterprises, on top of an estimated gross debt burden of 75% of
GDP in 2013.

Malta dissolved its parliament after an effective vote of no confidence was
triggered by a rejection of the 2013 budget bill. This will prevent a 2013
budget from being passed until the end of the first quarter, at the earliest.
While a fiscal rule that limits expenditures is in place, we expect that the
2012 deficit, at just under 3% of GDP, will exceed its target of 2.2% of GDP.
Malta has a high government debt burden (estimated at 75% of GDP in 2013) and
a significant proportion of entitlement spending; some 27% of total
expenditure between January and November 2012 was on social security benefits.
Given these factors, we consider that continuing to achieve sustainable
consolidation is increasingly important, especially considering the
longer-term impact of a rapidly aging population.

Downside risks to growth, stemming from continued poor external demand in
Europe and slow improvements in domestic demand are likely to keep real GDP
per capita growth lower than pre-crisis levels. Real GDP per capita growth is
also likely to remain below the government's budgeted growth projections,
which appear to us to be quite optimistic.

That said, the Maltese economy has displayed resilience against a poor
external environment, despite its openness and significant financial services
activity. Net exports of goods and services turned positive in 2010 and have
contributed to growth throughout the crisis.


The stable outlook balances our view of Malta's relatively wealthy and
diversified economy against risks stemming from a narrow economic base, slowly
adjusting public finances, and an uncertain growth outlook.

We could lower the ratings if we see the government's borrowing requirement
widening substantially beyond our expectations of close to 2.5% of GDP in
2013. We could also lower the ratings if the government's interest burden as a
proportion of government revenues were to continue to trend upward and surpass
10% for several years; to give this context, we estimate that this ratio was
8.2% in 2012. We could raise the ratings if we saw contingent liabilities
decline, the government's debt burden begins to fall materially, and economic
growth strengthens without a return to the sizable current account deficits of
the pre-2011 period.
Company — Malta
  • Full name
    The Republic of Malta
  • Registration country
    Malta