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Maltese report Maltese report
by Euro Reporter
2012-09-28 08:31:31
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Fitch affirms Malta at ‘A+’;

Fitch Ratings has affirmed Malta’s long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘A+’. The outlooks are stable. Fitch has simultaneously affirmed Malta’s country ceiling at ‘AAA’ and short-term foreign currency IDR at ‘F1’. The affirmation reflects the demonstrated resilience of Malta’s economy and financial sector; relatively strong budgetary position and secure domestic investor base for fiscal funding. The current account deficit has narrowed significantly in recent years and the economy is a net external creditor. Moreover, with a headline budget deficit below 3% of GDP, Malta is one of the few euro area member states not subject to the Excessive Deficit Procedure under the Stability and Growth Pact. With Fitch’s forecast for a primary (excluding debt interest payments) budget surplus in 2012-14, government debt to GDP ratio is projected to fall from 2013.

Government debt of 72% of GDP (89% of GDP including guarantees) is Malta’s main rating weakness. However, the public debt ratio is close to stabilisation depending on the government’s fiscal consolidation efforts. Fitch expects the incumbent government will take necessary action to ensure that the budget deficit remains below 3% of GDP this year and that any new government emerging from the elections due by March 2013 will set out a credible multi-year fiscal consolidation programme and adopt measures that will ameliorate the economic and fiscal impact of aging. The agency’s baseline assumes that the government will pass the budget and that there will not be early elections. However, its parliamentary majority is fragile and there is a risk that the budget will not pass. In the event of early elections the fiscal slippage in 2012 is likely to be wider than Fitch’s baseline. A budget deficit in excess of 3% of GDP would increase the risk of a negative rating action as it would undermine confidence in near-term stabilisation of the government debt to GDP ratio. At 72% of GDP in 2011, public debt is not a standout by eurozone standards. However, it remains high for a small country with a large banking system, and is more than 2x the ‘A’ range 10-year median. Contingent liabilities are rising and this poses additional risks to creditworthiness. Government-guaranteed liabilities raised from 11% in 2006 to 16.9% of GDP in 2011, 60% of which relate to Enemalta, the state-owned utility company.

Fitch expects public debt to peak at 74% of GDP in 2013 and to decline gradually thereafter. According to the baseline path (which assumes continued but moderate fiscal adjustment from 2013 onwards), the debt/GDP ratio could fall to 69% by 2020, assuming a primary surplus of 1% and potential growth of 1.5% over the medium term. A material deviation from this baseline could lead to a negative rating action. The adoption of a balanced budget rule envisaged by the fiscal compact is included in the baseline. Although at the time of writing the Maltese Parliament had not yet formally ratified the fiscal compact, Fitch notes there is consensus among the two main political parties to entrench the balanced budget rule in the constitution. The main long-term threat to the public finances is the unreformed pension system. Pension expenditure is projected to increase to 15.9% of GDP in 2060 from 10.4% of GDP in 2010. Demographic projections by the EU Commission suggest that the system is not sustainable without reform. This risks undermining sovereign creditworthiness and could trigger a negative rating action in the medium term. Despite its size, at 800% of GDP, the banking sector is strong and has proved resilient to the eurozone crisis so far. Exposure to troubled eurozone economies is limited, the housing market appears to have stabilised, asset quality remains good and credit growth is positive. It has a loan/deposit ratio of only around 75% and has not been drawing on any significant amount of ECB liquidity facilities. The government has not needed to provide capital or liquidity to its banks. Malta is a substantial net external creditor.


Maltese viewers’ appetite for HD TV and video on demand grows

It has been a little more than two years since Melita launched HD TV in Malta and a year since it rolled out the first commercial Maltese video on demand service. After tackling the expected teething problems, it seems both services are steadily increasing in popularity and more HD channels are added regularly and video on demand views are steadily heading to one million. “Over the last couple of years, Melita raised the bar and set new milestones for innovation in television products in the Maltese Islands,” a Melita spokesman said. “Our investment in launching high definition TV in Malta was the first milestone just in time to enable our customers to watch the 2010 FIFA World Cup. Interactive TV was rolled out along with HD TV, providing customers with more control of their viewing habits. The new Netbox allows customers to pause, rewind and record live TV meaning that customers now have tools at their disposal to never miss any part of their favourite shows.

“Later in 2010, Melita launched an app providing access to Facebook on TV. This created a completely new way of how our customers consume internet content, alongside the other Netbox function which enables customers to watch movies or listen to music on their TV screens directly from their PC. Then came OnDemand! in 2011. We registered numbers which speak for themselves. We’re steadily heading towards one million on-demand views since launch just 12 months ago. OnDemand! users are still on a growth path, watching more of the music, shows or movies we provide.” Melita provides two different video on demand services. The free OnDemand! Service offers a library in excess of 1,000 titles at no cost to clients, while Movie Rentals provides access to the latest blockbuster movies at what Melita describes as “very reasonable rates”. The service works pretty much like a DVD rental service, but at the push of a button from the comfort of your home.

Melita works very closely with its platform provider, the On Demand! Group, to push new content every week. On Mondays, the library is refreshed with new content ranging from the latest music videos, new episodes from TV series or new movies. “This summer, we were very active to secure new content. In fact, we are glad to announce two new studios, Disney and HBO along with the rest of the major studios already available on the OnDemand! Service,” added the spokesman. “Disney will ensure that our customers enjoy access to some of the biggest cinema blockbusters at the same time as DVDs are released. HBO will provide access to some of the hottest US TV series such as Hung, Big Love and the classic Sopranos.” Melita now offers 17 HD channels and is also supporting the broadcast trials of TVM HD. The latter has proven to be particularly successful especially during events such as the Eurovision Song Contest and the London Olympics. “We look forward to see TVM providing a full schedule in high definition. We are also in constant discussions with channel providers to increase our HD line up. This depends on their intentions to launch HD broadcasts, and their willingness to make them available to Malta,” the spokesman revealed.


Throwing caution to the wind

At one point during the Labour Party congress, Joseph Muscat appeared to contradict himself in a manner that must have left many wondering what the PL’s electoral manifesto will eventually look like. Never mind the bit about his declaration that a Labour government would be the most feminist government in Malta’s history, though this too requires clarification. What really stood out was that in almost one breath he said that his party’s manifesto would not be a list of promises but rather a roadmap, and then in no time he went forth and made three promises. None of them is new, but the party has to decide what it plans to do: either draw up a roadmap or resort to what political parties always do: make promises. The likelihood is that despite all the talk about roadmaps, Labour will cram its programme with promises. His party has not yet decided it is time for the electorate to know exactly what Labour has up its sleeve, but, as an indication of how far it plans to go, it courageously states as its number-one pledge a reduction in energy tariffs.

The second promise is that Labour will not reduce student stipends, and, third, that it will not raise the pensionable age. Labour has been talking about its intention to reduce the energy tariffs for some time now, but, contrary to its initial impression, it is most unlikely that it will be able deliver on this shortly after it is elected, that is, if it is elected in the first place. Dr Muscat has said the Labour Party in government will bring about a reduction in tariffs through a combination of improved technology, a better-managed energy policy and a reduction in red tape. But, quite significantly, he has not given a timeframe within which the party plans to do all this. Does the party have any idea when this can be achieved? And what kind of tariff cut does he have in mind?

Will voters go for Labour’s promise to bring down energy rates? This government had made an incalculable mistake when it raised tariffs at one go instead of gradually, as many had advised at the time. But the reasons for the rise were most valid; only the way it was executed was wrong. However, the most important point is: should Malta continue to subsidise water and electricity consumption? The government, shocked by the extent of the negative reaction to the energy tariffs rise, is most unlikely to raise tariffs again in the short-term, and definitely not before the election. But how is Enemalta, wallowing in debt, going to get out of the difficult situation it is in if it is not allowed to make up for the cost of the fuel it buys for the generation of electricity – particularly at a time when international oil prices are still high despite slowing down recently? Labour is not alone in promising not to cut stipends; the Nationalists would not dream of doing this either. And neither of the two parties would dare to touch the free health service. The more election day approaches, the greater the temptation is for the parties to throw caution to the wind, despite their promises to the contrary. The result – as the Nationalists have seen with their 2008 election campaign tax cut promise – is that reality comes back to bite the party in government. Labour will not be able to say they were not warned.

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