Negative outlook marks stable credit rating

Moody's affirmation of  Malta's A3 government bond rating, despite what the rating agency called “a continuing negative outlook”, was of course welcome.  It has been greeted by the Nationalist Government as some exceptional feat, but economic analysts have serious doubts about the government’s ability to maintain the fiscal deficit below 3 percent.

Last year’s fiscal imbalance of 2.7 percent of GDP was, of course, a positive step towards the EU’s aim of a fiscally-neutral balance and avoided further action by the European Commission  under the excessive deficit procedure.  But it has to be remembered that that result was achieved on the back of real output expanding by 2.1 percent.

In contrast, real output in the first three months of the year contracted by 1.0 percent and, though Malta seems to be avoiding the worst of the economic conditions in the rest of the EU, it would seem unlikely that the real growth rate this year will exceed 1.0 percent.  Moody’s forecast, in fact, is for a very subdued 0.5 percent.  The impending figures for the second quarter of the year, now eagerly awaited, will tell us more about the immediate prospects.

As Moody’s said, there remain significant macroeconomic and fiscal downside risks, keeping growth well below potential and raising the spectre of a deterioration of key credit metrics which the credit agency described as “already weaker relative to ‘A’ category medians”.   The fiscal balance during the first seven months of this year, at €333.3m, was 40 percent worse than last year’s and has already forced the Minister of Finance to publicly admit that it will be very difficult to meet the target of €125m set in the Budget.

In fact, if the fiscal deficit this year were to reach €200m, even assuming nominal growth of 4.0 percent (vis a vis 4.4 percent last year and 1.0 percent  in the first quarter of this year) in  nominal GDP, the deficit would reach just under 3.0 percent of GDP.  This is what Moody’s suggests is the likely outcome.     

However, economic observers differ over the growth rate prospects.  If GDP grows by only 3.0 percent, the fiscal ratio could range between 2.24% at an imbalance of €150m, though 2.62% at an imbalance of €175m to 3.0% at an imbalance of €200m.  If the nominal growth rate in GDP is only 2.0%, the imbalance ratio could range between 2.3%-3.05%.  Looking further ahead, Moody’s forecasts a gradual recovery in 2013 growth, with real GDP expending 1.1 percent.   Although it expects the general government deficit to remain below 3% of GDP, it expects that the fiscal imbalance will only decline to 2.6% in 2013.

The rating agency expects general government debt to rise to 73.7% of GDP in 2012 and 74.5% of GDP in 2013 before trending downward.  Malta's debt ratios will therefore remain well above peer medians.   The government’s consolidation strategy is deemed to be “optimistic” given the weaker economic environment at home and abroad.  Moody’s even goes as far as to say that it expects the deficit to widen in the pre-election period.