Fitch Ratings has affirmed Malta's Long-Term Foreign and Local Currency Issuer Default Ratings at 'A' and revised the Outlook to Positive from Stable.

The issue ratings on Malta's senior unsecured Foreign and Local Currency bonds have also been affirmed at 'A'. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign Currency and Local Currency IDRs at 'F1'.

Fitch said that the revision of Malta's Outlooks reflects the following key rating drivers and their relative weights:

"General government debt fell to 63.8% of GDP in 2015 from 67.1% in 2014 and is forecast to decline to 58% in 2018 (compared with the 'A' median of 43.9% in 2016) due to strong nominal GDP growth and ongoing fiscal consolidation."

It also said that recent pension reforms, including the lengthening of the contribution period and measures to incentivise late retirement, will improve the long-term sustainability of the pension system and ease some pressure on public spending.

The fiscal deficit is forecast to narrow to 0.9% of GDP in 2016 and to 0.8% in 2017, below the 'A' median, from 1.5% in 2015. Fitch said that this is on the back of higher expected revenues from robust economic growth, the International Investor Programme, and higher excise duties, more than compensating lower income tax following the implementation of measures providing tax relief on labour. Tighter spending management and strong nominal GDP growth will pull down expenditure/GDP.

Government-guaranteed liabilities remain high at 15.7% of GDP at the end of 1Q16, although they are set to decrease to 11.9% of GDP at end-2017, when the temporary guarantee granted by the state to ElectroGas for the construction of a new power station expires, said Fitch. "We view risks from the crystallisation of these guarantees as low as most relate to profitable companies, including the utility company Enemalta, Freeport Group Corporation and Malta Industrial Parks."

"The government estimates potential growth at 4.5% in 2015, reflecting the structural rebalancing of the economy from manufacturing towards more added-value and labour-intensive services sectors."

Fitch said that the government has implemented a range of structural reforms to improve the country's business environment and competitiveness and foster medium-term growth. In the energy sector, efficiency gains provided by the energy reform and the completion of large-scale energy projects are estimated to add nearly 3pp to real GDP growth by 2020, according to the Ministry for Finance.

Economic growth continued to outperform the eurozone average and peers in 1Q16 at 5.2%. Fitch said it expects growth to remain buoyant although moderating over 2016-2018 at 3.6%, driven by strong domestic demand. Real disposable income will be supported by rising employment, subdued inflation and wage appreciation. Residential construction and health and education projects will boost investment.

The Credit Agency stated that the impact of Brexit is likely to be negative but limited, as the decrease in tourist arrivals from the UK will likely be offset by those from elsewhere.

Fitch said that it excludes from its forecasts several large infrastructure projects that could boost investment due to uncertainties over their timeline and scale.

Fitch went on to say that it "assumes that in case of need, the government of Malta would only be predisposed towards supporting the core domestic banks, which are systemically important, in particular Bank of Valletta (110% of GDP at-end 2015)."

For HSBC Bank Malta (81% of GDP), Fitch said that it believes that any necessary support would come from its parent company. In Fitch's view, "the Maltese government would be very unlikely to support the international banks and would probably not support non-core banks either."

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