Dagong Upgrades the Sovereign Credit Ratings of Malta from A- to A
Dagong Global Credit Rating Co., Ltd.
June 26, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided to upgrade the local and foreign currency sovereign credit ratings of the Republic of Malta (“Malta”) from A- to A, each with a stable outlook. The debt repayment environment of Malta has improved. Although the country‘s economic growth rate is expected to decrease, the solid government repayment resources which are ensured by a sustained fiscal surplus, a certain scale of government financial assets and comparatively low financing costs, as well as the declining debt burden altogether guarantee the improvement of government solvency.
The main reasons for upgrading the sovereign credit ratings of Malta are as follows:
1. The debt repayment environment exhibits improvement mainly thanks to a steady domestic political transition. A snap general election was held on June 3, 2017 because of corruption allegations, resulting in the reappointment of the Labor Party with 55.0% of the vote. Majority seats have provided a great ruling space for the government, ensuring stability and continuity of the country‘s policies. The European Central Bank's (ECB) continuous quantitative easing policy will help to boost domestic credit growth, meanwhile the banks’ asset quality continues to improve due to the real estate market’s warming up, and thus the robustness of the banking system has been enhanced. Furthermore, the banking system’s vulnerable state, as influenced by large external debts and maturity mismatches, is controllable owing to strict and prudent regulations.
2. Malta’s economic growth will endure a gradual slowdown in the short term, and the wealth creation capacity will be limited in the medium to long term. In the short term, personal income tax rate reduction and employment improvement will both support the private consumption. However, the private investment will be inhibited by the slowdown of the expansion of aviation industry, and the contribution of investment activities, which are financed by EU funds, to economic growth might not be witnessed immediately. Additionally, the momentum of net exports has been weakened due to an uplifting domestic import demand. Therefore, the country‘s growth rate is estimated to decrease to 4.1% in 2017 and 4.0% in 2018. In the medium to long term, the high level of dependency upon the EU and the single industrial structure lead to significant economic vulnerability. An aging population will also jeopardize economic development. Therefore, Malta’s average economic growth rate over the medium to long term is estimated to hover around 3.3%.
3. The government will maintain a slight fiscal surplus in the short run, and the government’s repayment sources will be improved. Thanks to a relatively high economic growth and the effectiveness of the fiscal consolidation, a slight fiscal surplus of the general government was achieved in 2016. In the short term, influenced by gradually slowing economic growth and personal income tax rate cuts, fiscal revenue will decrease sharply. However, the government is devoted to consolidate fiscal state by implementing measures such as scaling down public servants, delaying mandatory retirement age and the interest expenses will constantly descend. The general government fiscal surplus is estimated to narrow to 0.6% of GDP in 2017 and 0.5% of GDP in 2018, and the government’s financing need will decline to 5.2% and 4.8% of GDP over the same period. In the medium to long term, the consecutive improvement of fiscal condition and low financing costs under the accommodative monetary policy will support the solid government repayment sources.
4. With the medium-term government debt burden consistently declining, government solvency will be enhanced. In the short term, the debt burden rate of Malta’s general government is expected to move on a downward trend to 56.2% in 2017 and 54.2% in 2018, owing to the durative fiscal surplus, and subsequently fall to around 48% in the medium term due to the improvement of government’s structural deficit. Currently, most of the government debts are long-term debt denominated in euro, and short-term debt accounts for only 4.8% of the total. Also, considering the declining debt burden, the reasonable debt structure, very low financing costs and financing need, Malta’s government solvency will be enhanced.
In the short term, Malta’s political environment remains stable, and its banking system remains robust. Economic deceleration slightly squeezes fiscal surplus. Yet, given a certain scale of government financial assets and comparatively low financing costs, government solvency can be secured. Considering all the aforementioned factors, Dagong has decided to assign a stable outlook to the local and foreign currency sovereign credit ratings of Malta for the next one to two years.