14 – 20 February 2001

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EU membership, new industries key to Malta's economic development

By David Lindsay

International rating agency, Fitch, this week gave Malta a favourable rating in its most recent report on the state of the Maltese economy. The agency placed Malta alongside countries such as Hong Kong and Kuwait, in terms of long-term foreign currency - generally the main factor considered by investors as indicative of a country's investment potential.

However, the rating agency echoed last year's affirmations by fellow rating agency, Moody's, in that Malta's credit rating and investor outlook is closely linked to Malta's EU accession bid.

Fitch also cites Malta's response to new industries such as electronics and software, as well as restructured industries such as that of furniture, integral to the opening up of the economy – a response that suggests to Fitch that "Malta could flourish like a mini Ireland in the European Union."

According to Fitch, the developments have come about as a result of the modernisation of the Maltese economy that has been spurred by the government's ambition to join the European Union.

On the other hand, the report states, rather forlornly, "But the possibility remains that the electorate will decide to stay outside the EU. In that event, the stimulus that is opening up a relatively closed and monopolistic economy would disappear, the islands' attraction to investors would be dimmed, and the credit outlook would become more risky."

On a more positive note, Fitch cites many strong points within the Maltese economy such as: a solid growth record and rising GDP per capita; modest net external creditor; low unemployment and inflation, and stable exchange rate; large inward direct investment; and the prospect of joining the European Union.

However, on the negative side of the spectrum, Fitch cites: volatile external current account deficits; a weak, though improving, fiscal position; various state aids and barriers to competition still to be removed; and the fact that over half of merchandise exports stem from one electronics company – ST Microelectronics.

Fitch's report, titled "Tightrope to Europe," emphasised that Malta has been attracting considerable foreign direct investment, averaging 13 per cent of the country's Gross Nation Product over the last three years, partly to create new industrial capacity, partly as privatisation receipts.

Fitch gave Malta a long-term foreign currency rating of 'A', short-term currency at 'F1' and long-term local currency at 'AA-' (AA minus). The ratings apply to senior unsecured debt of the Maltese government and the overall outlook for the ratings is stable. While a ‘AAA' is the optimum rating, meaning that the probability of a government defaulting on foreign currency is very low – a category that all EU member countries, barring Greece, fall into – the majority of Malta's fellow applicant countries have ratings of ‘B', ‘BB' and ‘BBB'.

According to the report, the general government deficit, over 10% of GDP in 1998, was brought down to five% last year. Tax revenues have been raised, in part by better collection; but spending cuts have fallen relatively hard on capital expenditure, despite the need to improve infrastructure to meet EU requirements. Privatisation sales were also postponed, so general government debt (nearly all domestic) rose to 60% of GDP instead of falling. More positively, the debt of non-financial public enterprises has been cut to 30% of GDP from 50% over the last three years.

Meanwhile, Fitch is adamant that Malta's economy grew again last year, by about four% last year, unemployment dropped to four%, and inflation remained low. But the islands' current account deficit swelled to perhaps USD425 million (12% of GDP).

The rating agency view a USD700 million surge in imports of capital goods and industrial supplies as a key development, partly reflecting a continued expansion in the export-oriented electronics industry, while fixed investment reached 30% of GDP.

However, on the EU accession front, Fitch warns that the government must to tread a narrow path to achieve the fiscal tightening and structural reforms needed for EU entry, while not losing electoral support and that cutting state aid to the dry docks and shipbuilding will be particularly difficult.

While the modernisation of the economy has been spurred by the government's ambition to join the European Union, the rating agency Fitch cites the European Commission's recent statement that Malta and Cyprus are, economically, the best equipped of the 13 applicants to join the Union, but much remains to be done.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt