4 SEPTEMBER 2002
UK-based ratings agency, Fitch Ratings last week warned that to remain outside the European Union could damage Malta's creditworthiness, and prove detrimental to the country's economic progress.
In its latest report on Malta, Fitch Ratings rated long-term foreign currency at 'A', short-term at 'F1' and long-term local currency at AA, while it the outlook for the ratings was rated as Stable.
In the report released on Thursday, the ratings agency commented, "Malta's referendum next spring on EU membership could prove critical for the future course of the economy. The move to join the EU has been forcing radical changes on many aspects of Maltese economic life. Government intervention and monopolistic and protectionist measures that hamper growth are being removed. The government achieved a major step forward this spring in implementing an early retirement scheme for the dockyards - a historically important industry that had maintained a large workforce while business declined, and had become a burden on taxpayers.
"Although opinion polls currently show a small majority in favour, EU membership remains contentious. The opposition Labour Party believes EU rules will erode Malta's competitiveness and is particularly concerned at restrictions on state aid and loss of state control through privatisation. They would prefer to remain outside the EU and negotiate a bilateral agreement, though it is doubtful the EU would have much appetite for such negotiations."
Fitch adds that remaining out of the EU would damage Malta's creditworthiness unless a new government were clearly determined to retain and develop the parts of the EU acquis that are starting to enhance the efficiency and competitiveness of the Maltese economy. To steer such a course outside the EU might be possible but would require considerable self-discipline, the report adds.
Fitch explains that after enjoying annual growth of around five per cent for a decade, Malta was hit hard last year by the global economic downturn. Tourism and microelectronics proved vulnerable, and GDP contracted 0.8 per cent.
According to Fitch, "Also, competitiveness has been damaged by the strength of the US dollar, which was until last week overweighted in Malta's fixed exchange rate basket. Even so, the current account deficit fell to under 5 per cent of GDP from 13 per cent in 2001, when it had been bloated by expansion of the microelectronics company and profits due to foreign investors. Over the last four years, Malta has attracted enough foreign investment to comfortably cover its current deficits. The country remains a net external creditor, and official foreign reserves rose by USD465m over the 12 months to June.
"Growth has resumed this year, but is unlikely to return to the 4.5 per cent pace of the late 1990s before autumn 2003 unless the EU recovers more quickly than currently seems likely. The slowdown has not helped the government's efforts to improve its fiscal position. Adherence to European statistical norms has also shown the deficit and the debt to be larger than previously thought; and privatisation, which should have been helping reduce government debt, stalled completely last year. Consequently, the general government deficit was seven per cent of GDP in 2001 and debt rose to over 65 per cent, as against our previous projections of five per cent and 59 per cent."
Fitch believes privatisation can help reduce the debt, as well as improving the efficiency of the large public enterprise sector. But there were no sales at all last year and receipts in 2002 are likely to be only two per cent of GDP rather than the five per cent budgeted.
Improving tax compliance - helped by an amnesty encouraging declaration of foreign assets - is aiding revenues, Fitch asserts, but it adds that the government may find it hard to restrain spending ahead of next year's EU referendum and general election.