Malta’s credit rating has been confirmed at A+ by Fitch ratings. The agency said Malta’s credit rating is supported by high per capita income levels, by a large net external creditor position and thea pre-pandemic track record of strong growth and sizeable debt reduction. These strengths are balanced against its large banking sector and the small and highly open nature of its economy, which makes it vulnerable to external developments.
The Stable Outlook reflects Fitch’s expectation that GDP growth will recover and that debt will resume a gradual downward path following the fiscal shock caused by the pandemic. At the same time, there is continued downside risk from the path of the coronavirus and its effect on the tourism sector and public finances, as well as adverse developments in governance.
Public finances have deteriorated significantly from a surplus of 0.4% of GDP in 2019 to a deficit of 10.2% of GDP in 2020. The government implemented a comprehensive fiscal stimulus package to safeguard employment and growth, including 5% of GDP in direct fiscal measures and an additional 1.5% in tax deferrals. The 2020 fiscal deterioration was the second largest in the EU and well above the EU average fiscal deficit of 6.9% of GDP. The fiscal deficit turned out to be marginally larger than projected by the government, largely due to the underperformance of tax revenues, which declined by 11%.
In a report issued on Friday, the US-based agency said that the 2021 budget maintains an accommodative policy stance. Fitch projects a fiscal deficit of 11.5% this year, slightly below the government’s fiscal target of 12%. Fitch believes that there may be some underspending as the economy recovers in the second half of the year. The higher 2021 budget deficit is underpinned by the extension of most economic stimulus measures from March 2021 until the end of 2021. The budget also foresees higher investment spending, amounting to 5.4% of GDP in 2021, partly supported by a number of infrastructure projects in the tourism, transportation and health sector. It is expected that the deficit will narrow markedly to 5.4% of GDP in 2022, driven by the cyclical recovery and the phasing-out of Covid-19-related stimulus measures.
Fitch also warned that G20 plans to push ahead with plans for a global corporate tax rate could pose a downside risk to public finances and inward investment over time, given its focus on attracting corporations through a low-tax regime. Malta has established itself as an attractive low-tax destination for international companies and corporate taxes are a key source of fiscal revenue, accounting for around 17% of total tax revenues prior to the pandemic. Any potential impact will depend on the details of the agreement, which is expected to be reached during the G20 meetings this summer.
The European Commission’s ongoing infringement procedure into Malta’s citizenship investment programme (replaced by the Citizenship by Direct Investment programme in 2020) and reports that conditions attached to the programme were not fulfilled represent further downside risks. The termination of the programme could reduce revenues by around EUR100 million or 0.7% of Malta’s GDP.
Fitch debt simulations indicate that the debt-to-GDP ratio will peak at 65.5% of GDP in 2022 and gradually fall back to below 60% of GDP only by 2026. Despite the increase, debt will remain almost 5pp below the 2011 peak of 69.3% of GDP, illustrating Malta’s strong fiscal track record.
Fitch has revised down its GDP growth forecast to 4.7% for 2021 (from 5.4% previously). It is anticipated that the economic recovery will be further shifted towards 2022, for which we have raised our growth expectation to 6.0% (from 3.9% previously).
It was also recognized that Malta has been a frontrunner in terms of vaccination distribution, becoming the first EU country to achieve the 70% vaccination threshold for “herd immunity” on 24 May. It is anticipated that international travel will rebound in the second half of this year. Uncertainty remains about when the UK will add Malta to its so-called “green list”, allowing quarantine-free travel for British tourists, which accounted for almost a quarter of all tourist arrivals in 2019.
In addition, Malta’s labour market remained remarkably resilient, with an increase in employment and an only moderate increase in the very low unemployment rate to 4.3% in 2020 from 3.6% a year earlier.
It was also recognized that the authorities have made progress in addressing the significant deficiencies in the anti-money laundering and funding of terrorism framework. In May, Moneyval announced that Malta is now ranked largely compliant or compliant on all initial 40 recommendations to prevent money-laundering and strengthen financial supervision. Uncertainty remains about how sustained recent improvements will be. The Financial Action Task Force will use Moneyval’s technical assessment as an input to determine if Malta is re-classified as a high-risk jurisdiction, a decision expected to be taken later in June.
While Malta’s World Governance Indicators (WGI) remain above the ‘A’-rated median, perceived weaknesses in the quality of Malta’s institutions and governance framework led to a sharp deterioration in last year. Control of Corruption and Regulatory Quality indicators experienced some of the largest drops in our rated universe, declining by almost 11 percentile ranks. Unfolding corruption allegations in the context of the public inquiry into the murder of journalist Daphne Caruana Galizia could further affect Malta’s governance scores.
In fact, Factors that could lead to a negative rating are public finances, deterioration in governance or banking supervision and prolonged economic weakness due to the pandemic including a failure of the tourism sector to revive.