S&P affirms Malta’s positive ratings – Projected Malta’s economy would expand by 5% this year

Source: www.timesofmalta.com (22/09/2018)

Ratings agency Standard and Poor has affirmed Malta ‘A-/A-2’ long-term and short-term ratings saying the country’s economy has continued to expand at a fast pace, facilitating employment growth and government debt reduction.

The outlook, it said, remained positive.

The Finance Ministry welcomed the ratings.

The positive outlook indicated that the agency could raise the ratings on Malta over the next 12 months if:

• Economic growth and government fiscal and debt metrics performed in line with its expectations; and

• The authorities strengthened supervisory standards and co-ordination with respect to the country's international financial sector.

The agency said it could revise the outlook to stable if there was a substantial slippage in Malta's fiscal performance, if risks to financial stability increased, or if external demand from Malta's key trading partners deteriorated.

S&P said its ratings on Malta were supported by its strong growth performance, recurring current account surpluses driven by its large services exports, and the improving general government budgetary position and fiscal management.

The ratings were constrained by Malta's relative vulnerability to changing international financial conditions in light of its small, open economy.

The agency viewed the resilience of some of Malta's new rapidly growing economic sectors as untested. It also considered that the high spread of bank lending rates over eurozone averages, particularly to the corporate sector, impaired the transmission of European Central Bank monetary policy to Malta.

The ratings were also constrained by the agency’s limited visibility on external risks given the presence of large flows into and out of Malta, particularly in the financial sector.

S&P said the proliferation of new sectors was fueling Malta's strong economic growth. It projected growth would decelerate over 2018-2021, averaging about 4.5% over the period, as new sectors started to mature.

Evolving global tax regulation and rapid house price growth posed risks to growth expectations.

While policymaking in recent years promoted a reduction of fiscal imbalances, the transparency and accountability of Malta's institutions appeared to have weakened.

After growing by 6.7% in 2017, S&P projected Malta's economy would expand by 5% this year with contributions from both domestic demand and net exports.
It anticipated continued strong export performance from the e-gaming and tourism sectors, which would also translate into investment activity.

The structure of Malta's economy changed significantly over the past half-decade, as the growth of traditional manufacturing and financial service exports moderated, S&P said.

Growth was instead dominated by the proliferation of new services exports such as tourism, logistics, and e-gaming. Significant investments in energy and logistics were important contributors to growth in 2014-2016.

Structural shifts in the economy created new employment opportunities, and the unemployment rate declined further to 4.6% in 2017, the lowest in two decades.

Although labour market participation had traditionally been low, reforms in recent years improved participation rates, particularly among younger women.

Malta had also been successful in attracting labour from abroad across a wide range of industries and skill levels. These factors prevented wage pressures from forming, despite the tight labour market.

Going forward, skills shortages in some areas could prompt wage increases. But these were not 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, particularly for sectors such as e-gaming.

At €13.8 per hour in 2017, Malta's labour costs were about 55% lower than the eurozone average, it said.

S&P said it expected the pace of growth to decelerate through 2021 to a still-solid 4.1% as new sectors, which had been in expansionary mode so far, started to mature.

Furthermore, several projects that contributed to growth, particularly in the energy sector, had reached completion. But even then, it anticipated
Malta's growth would likely exceed that of peers at similar income levels and stages of development.

The higher pace of growth, immigration inflows, and tourism activity led to higher house price inflation in recent years, bolstered by fiscal incentives such as government schemes for first-home buyers. Another factor could stem from the eligibility criteria for the Individual Investor Program, which required the purchase or lease of property.

House prices increased by 5.5% on average between 2015 and 2017, accompanied by rising mortgage lending. Banks' exposure to resident real estate activities, mortgages, and construction was about 60% of the total stock of credit to residents, up from 50% at the end of 2012

While recent house price inflation was not yet an issue, concerns could build over affordability in some areas.

Growth in recent years has been driven by tourism and e-gaming - sectors that may prove to be subject to significant cyclical swings, as well as potentially large GDP accounting effects.

Malta's National Statistics Office estimated that tourism directly contributes 6% to gross value added, and 16.6% if all establishments whose principal activity was related to the supply of a tourism characteristic product were considered.

The arts, entertainment, and recreation sector, of which e-gaming was a major part, increased its share in Maltese gross value added to 13% in 2017 from under 3% in 2000. The sector grew by over 17% annually over 2013-2017. Despite a marked deceleration over the past three years, the sector still grew by nearly 10% in 2017.

Other risks emanated 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 arose from evolving global tax regulation.