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Rating Action:

Moody's changes the outlook on Malta's A3 rating to positive from stable; A3 ratings affirmed

23 Feb 2018

London, 23 February 2018 -- Moody's Investors Service, ("Moody's") has today changed the outlook on Malta's rating to positive from stable and affirmed the A3 long-term issuer, senior secured and senior unsecured debt ratings.

Moody's decision to change the outlook to positive on Malta's A3 rating reflects the following two key drivers:

(1) Malta's improving fiscal strength, due to a sustained pace of public sector debt reduction supported by prudent fiscal policy and containment of contingent liabilities;

(2) Robust medium-term growth prospects supportive of further improvements in fiscal metrics in the future;

In a related rating action, Moody's has today also affirmed the senior unsecured rating of Freeport Terminal (Malta) Limited at A3 and revised the outlook to positive from stable, in line with the sovereign's ratings. The senior debt instruments issued by Freeport Terminal (Malta) Limited are backed by unconditional and irrevocable guarantees from the Maltese government.

Malta's local-currency bond and deposit ceilings and long-term foreign-currency bond and deposit ceilings are unchanged at Aaa. The short-term foreign currency bond and deposit ceilings are also unaffected by this rating action and remain Prime-1.

RATINGS RATIONALE

RATIONALE FOR A POSITIVE OUTLOOK

FIRST DRIVER -- IMPROVING FISCAL STRENGTH

A strengthened fiscal framework, together with a combination of faster fiscal consolidation and stronger GDP growth than previously projected, has strengthened Malta's government balance sheet relative to Moody's expectations when it affirmed the A3 rating with a stable outlook in 2016. If sustained, the improvement in fiscal strength will support the upgrade to an A2 rating.

Malta's general government balance shifted into a surplus of 1.1% of GDP in 2016, and an expected surplus of 1.5% in 2017, from a deficit of 1.1% of GDP in 2015. At around 3.6%, the primary surplus in 2017 is expected to be over twice that expected back in 2016. The fiscal balance has gradually narrowed from a deficit of 3.5% of GDP in 2012 and the surplus posted in 2016 was the first positive budget balance recorded in more than three decades. While some of the improvement derived from stronger than expected revenues from the Individual Investor Programme (IIP) scheme, which is volatile in nature and of uncertain duration, the improvement also reflects fiscal consolidation efforts and sustainably strong economic performance. Moody's projects the fiscal balance to continue to post a small surplus in 2018-19, underpinned by continued robust growth and IIP receipts.

The strong fiscal position resulted in a faster than foreseen decline in Malta's debt burden to 57.7% of GDP in 2016, below the 60% Maastricht threshold, from 68.4% of GDP in 2013. The debt burden is forecast to have fallen further, to around 54%, in 2017. Looking ahead, while the general government debt to GDP ratio remains relatively high compared to A-rated peers, continued prudent fiscal policy and strong economic growth performance should contribute to a continued rapid reduction in the coming years, supporting further convergence with Malta's A-rated peers. After a decline of about 11pp achieved in 2013-2016, Moody's projects an additional reduction of about 10pp in the debt to GDP ratio in the period 2016-2019, bringing the debt level to around 47% of GDP by 2019, with further reductions likely in succeeding years.

Malta's fiscal position continues to remain vulnerable to sizeable contingent liabilities from SOEs which, along with its track record of support to public corporations, acts as a constraint on Malta's rating and limits Moody's assessment of fiscal strength to "High (+)". However, the value of government guaranteed debt is estimated to have declined to around 10% of GDP at end-2017 from about 14% of GDP at end-2016, due to the termination of the government guarantee to Electrogas. Hence, while contingent liabilities remain high compared to similarly rated EU peers and are likely to remain an important factor in Moody's assessment of Malta's fiscal strength in the years to come, the overall fall in the level of guarantees and contingent liabilities will, if sustained, support a move to the higher rating level.

SECOND DRIVER -- ROBUST GROWTH PROSPECTS SUPPORTIVE OF IMPROVING FISCAL TRENDS

Fiscal consolidation has been supported by higher than expected growth. Some of the outperformance reflects cyclical factors and supportive external tailwinds that will dissipate over time, and growth is expected to fall back towards its potential of a little over 3% over the medium-term. Nevertheless, structural reforms have played a part in higher growth outturns. If sustained, and particularly if supported with further investment in infrastructure, the move to a higher level of GDP and the prospect of sustained higher growth levels in future will also support a move to a higher rating level.

Despite its small size, Malta's economy is competitive and wealthy, with GDP per-capita of almost $40,000 (PPP basis) in 2016, which supports its ability to absorb economic shocks. Economic growth accelerated last year and Moody's estimates real GDP to have grown by 6.8% in 2017 from 5.5% in 2016 -- more than 3 percentage points higher than expected in 2016 -- driven by robust private consumption and strong contribution from services exports. The strength of the economic performance has been accompanied by favourable labour market dynamics, with the unemployment rate reaching a record low of 3.6% in December 2017 with the increasing inflows of foreign workers and increased labour force participation contributing to keep wage growth in check. The tourism sector has so far been resilient to the decision of the United Kingdom to leave the EU, and has the potential to continue growing in the medium-term, benefiting from Malta's improving connectivity, and geopolitical concerns in competing destinations, especially if capacity constraints are addressed.

Real GDP is expected to expand by 5.7% and 4.6% in 2018 and 2019, respectively, exceeding both the average for euro area countries and A-rated peers, supported by solid, albeit moderating, private consumption growth and still strong performance of the external sector. Investment is expected to recover, supported by the increased absorption of EU funds and by activities of the Malta Development Bank, which is expected to become fully operational this year. Thereafter, Moody's expects growth to moderate but to remain strong, supported by a dynamic service sector. Measures implemented in recent years targeting the labour market have resulted in significant improvements in labour force participation, while substantial progress has been made in diversifying Malta's energy sources and increasing energy efficiency. Additional reforms in the labour markets and planned upgrades of infrastructure could further enhance medium-term growth potential and ease potential sources of inflationary pressures.

RATIONALE FOR THE AFFIRMATION

Overall, Malta's credit profile displays relatively stronger economic prospects and higher wealth levels than A-rated peers. At the same time, due to its small size and high openness, Malta's economy remains vulnerable to external shocks such as changes in international corporate tax law. Furthermore, a number of structural weaknesses continue to weigh on Malta's long-term growth potential, including skills shortages and infrastructure gaps. Despite the improving fiscal position, the public sector debt burden remains above the median for A-rated peers, with a material risk posed by contingent liabilities.

WHAT COULD MOVE THE RATING UP

Malta's rating would be upgraded to A2 if Moody's were to conclude that the recent positive economic and fiscal dynamics are likely to be sustained and that the relatively high debt burden will continue to converge steadily towards the A-median. That conclusion would be supported by a sustained track record of fiscal consolidation accompanied by further reforms to eliminate the reliance on volatile IIP receipts, and by evidence of further progress in addressing structural challenges such as labour markets and infrastructure bottlenecks and in strengthening the business environment. The positive outlook signals that Moody's would expect to draw such a conclusion, or not, over the next 12-18 months.

WHAT COULD MOVE THE RATING DOWN

The positive outlook signals that the rating is unlikely to be downgraded over the next 12-18 months. However, the outlook could be reversed to stable if the pace of the debt reduction decelerates, or the government's commitment to fiscal prudence weakens. Weaker than expected economic growth, or a deterioration in the financial performance of SOEs, increasing the risks of the materialization of contingent liabilities, would also be credit negative. Evidence of an erosion of the institutional strength, in particular in relation to rule of law or corruption, could also negatively weigh on the sovereign's credit profile. The rating could also be downgraded if the financial system were to undergo a large negative shock that hinders its ability to provide funding to the sovereign.

GDP per capita (PPP basis, US$): 39,878 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 5.5% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.0% (2016 Actual)

Gen. Gov. Financial Balance/GDP: 1.1% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 6.6% (2016 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 20 February 2018, a rating committee was called to discuss the rating of the Malta, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have increased. The issuer's institutional strength/framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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