Fitch: Malta's Budget Surplus Underscores Fiscal Progress 

Malta's 1% of GDP budget surplus for 2016 underscores our view that the public debt/GDP ratio is on a downward trajectory, Fitch Ratings says. We do not believe the early general election called this week is likely to significantly affect fiscal settings.

Recent Eurostat data showed that Malta recorded a 1% budget surplus last year, following a 1.3% deficit in 2015. Fitch had forecast a 0.7% 2016 deficit. The better-than-expected outcome was driven by both rising revenues (up 4.5%) and falling spending (down 1.4%).

The biggest contributors to higher revenues were market output and income tax, which increased by EUR154.3 million and EUR138.4 million respectively, according to the National Statistics Office. Social security contributions and indirect tax revenues also rose. A 38.2% fall in capex, reflecting lower utilisation of EU funds and associated capital spending, drove the fall in spending. Current expenditure rose 4.6%.

The 2016 surplus continues the fiscal improvement seen in recent years, which has been driven by robust economic growth (including retrospective revisions to national accounts), falling unemployment and additional indirect tax measures.

We do not believe that Prime Minister Joseph Muscat's decision to call a snap election for 3 June, one year before his term was due to end, will result in a major change in fiscal settings. Muscat's announcement on Monday followed opposition calls for his resignation over allegations by a blogger that his wife owned an offshore company in Panama.

We think that Muscat's Labour party and the opposition Nationalists (who currently trail Labour in opinion polls) share a broad commitment to fiscal responsibility. The Nationalists' most recent pre-budget document dated October 2016 contained proposals for expansionary fiscal measures but these were coupled with reforms to contain public spending. The Fiscal Responsibility Act of 2014 enacted EU fiscal rules; established an independent fiscal council; and provided for the publication of a Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy and the building-up of a contingency reserve.

Structural fiscal efforts have been modest in recent years, with the public-sector wage bill and expenditure on goods and services increasing rapidly in 2013-2015, although the proportion of GDP spent on social benefits has been reduced by nearly 1pp since 2013. Efforts to improve tax collection, increase excise duties and reduce expenditure on social benefits should support a positive fiscal structural adjustment in 2017-2018.

The 2016 surplus helped bring debt/GDP below 60%. This is still somewhat higher than the 'A' category median, but we forecast the ratio to fall steadily over the rating horizon, narrowing the gap to ratings peers. Risks to our forecasts include an unexpected growth shock, long-term spending pressures related to ageing, and government guarantees and contingent liabilities. The authorities are moving to address some of these challenges. Planned structural fiscal adjustment should build up additional fiscal headroom, and several pension reforms have been passed. Contingent liabilities have declined from 15.1% of GDP at end-2015 to 14.1% of GDP at end-2016 and are set to decrease further, to an estimated 9.7% of GDP by end-2017 when the temporary guarantee provided to ElectroGas for the construction of a new power station expires.

Our view that the public debt/GDP ratio is on a downward trajectory and that economic growth will keep outperforming similarly rated peers is reflected in the Positive Outlook on Malta's 'A' sovereign rating.