Sovereign ratings are lagging behind as risk experts continue to upgrade both countries.
Forward looking: Malta – and Cyprus – should be catching the eye of the rating agencies
Cyprus and Malta were notable among countries with higher risk scores in Euromoney’s final quarterly survey of 2018.
Malta, now 23rd from 186 countries in the global risk rankings, gained 2.3 points, and Cyprus, lying 40th, added 1.3, signalling both countries deserve higher credit ratings.
Stronger economic growth underpinned by the European Central Bank’s ultra-loose monetary policy has helped, brightening both fiscal indicators and unemployment rates.
Both islands, of course, benefit enormously from tourism, gaining recently from the perception of safety in comparison with terrorist-hit parts of Middle East and North Africa, along with cheap flights and strong disposable income growth among UK tourists.
Cyprus welcomed a record 3.93 million visitors last year, improving on its previous record set in 2017 by 7.8%.
A third of the total arrived from the UK, where the economy is growing, unemployment is low and a penchant for overseas travel is undiminished by Brexit.
Malta’s statistics show 2.5 million inbound tourist trips were made from January to November 2018 (latest available), a rise of 14.5% year on year, with €2 billion-worth of total tourism expenditure (climbing 8.2%).
The largest share (25%) of Malta’s visitors by country also arrived from the UK.
Malta is also benefiting from growth in other sectors, including semiconductor manufacturing, financial services, online gaming, filmmaking and shipping.
Both Cyprus and Malta have also enjoyed improved capital access, a question that is also asked of contributors to Euromoney’s risk survey.
Malta’s risk score is higher than that for Cyprus, with the country now in the upper half of Euromoney’s second of five tiered categories of risk, sandwiched between France and Ireland in the global rankings.
Fitch upgraded Malta from A to A+ in 2017, but Moody’s and Fitch have stood back, despite placing their A3/A- equivalent ratings on a positive outlook.
Political risk concerns may have imbued some nervousness into the ratings.
The assassination in 2017 of investigative journalist Daphne Caruana Galizia and money-laundering allegations highlighting high-level corruption – which also led to snap elections – were and, to a large extent, still are concerns.
Yet with the incumbent Labour Party led by prime minister Joseph Muscat defeating Simon Busuttil’s Nationalist Party, the government was able to continue with policies supporting the economy, without relinquishing fiscal control.
Malta’s macro-fiscal indicators have markedly improved in recent years, boosting its risk score.
GDP growth in the third quarter was a whopping 3.6% quarter on quarter (real and seasonally-adjusted), pushing the annual growth rate up from 6.2% in Q2 to 7.9%, matching Ireland for rapid expansion, according to Eurostat.
The general government balance moved from deficit to surplus in 2016, and will likely remain in surplus during the next few years, despite diminishing in size as GDP growth subsides, according to forecasts by the European Commission.
The general government gross debt, which has now fallen below 50% of GDP, is projected to hit 42% of GDP by the end of 2020.
Moody’s and S&P already rate Ireland higher, awarding A2 and A+ sovereign ratings respectively, but Malta ranks slightly higher on Euromoney’s scale, and France – which is rated AA/A2 equivalent across the board – is only one place and barely 1.5 points better off.
That can only mean one thing: it is high time for a Malta upgrade.
As for Cyprus, GDP increased on a real and seasonally adjusted basis by 0.8% in the third quarter of 2018, and by 3.7% year on year.
In its latest Economic Outlook, the economics research centre at the University of Cyprus says GDP will “continue to grow at robust rates in 2018 and 2019 [citing 3.9% and 3.5% respectively]”.
It states: “The main drivers of the outlook in 2018 and 2019 include the vigorous growth in domestic activity, the ongoing improvements in the domestic labour market, the strong fiscal performance in Cyprus and the supportive domestic financial conditions [eg low lending interest rates, deleveraging, expansion of domestic deposits and credit].”
The authorities also managed to put the general government fiscal balance into surplus in 2016, and the surplus is estimated to have grown to 2.8% of GDP last year, before it reaches 3% in 2019, according to the European Commission.
The primary surplus is among the highest of any European country, and the government continues to keep rises in spending in check, so they are comfortably financed by revenue growth.
Clearly, there are risks ahead, including slowing economic growth in the region – affecting Malta, too – the costs associated with healthcare reform, and liabilities accruing to the state from vulnerable banks, but gross debt is expected to fall to 91% of GDP by 2020, assuming the budget trend continues.
Cyprus’s credit ratings are BBB- from Fitch and S&P, with Moody’s rating the sovereign borrower lower on Ba2, which is highly questionable.
Cyprus is only half a point behind Portugal in tier three of Euromoney’s survey, commanding higher ratings from Moody’s and Fitch, and is above A-rated Malaysia.
While the case for Cyprus is less convincing, perhaps, with its history of default and legacy of debt, the survey takes an holistic approach to country risk, weighing up a range of political, economic and structural risk indicators.
With continued reforms and economic growth, Cyprus should soon be considered for ratings upgrades.
In the meantime, the case for Malta seems set in stone.