Fitch affirms Malta at ‘A+’; outlook stable

Last Updated on Wednesday, 20 September, 2023 at 3:01 pm by Andre Camilleri

Rating Agency Fitch has given Malta an A+ score, with a stable outlook, the agency said in a statement Friday.

Ratings strengths and weaknesses: Malta’s rating is supported by high per-capita income and a pre-pandemic record of strong growth and sizeable debt reduction. These strengths are balanced against its large banking sector, the small size of its economy, which is highly vulnerable to external developments and a recent deterioration in public finances with large fiscal deficits, which have led to an increase in the moderate public debt burden.

Economic activity withstands headwinds: We forecast real GDP growth to slow to 3.5% this year from 6.9% in 2022, still significantly outperforming our projections for the eurozone of 0.6% and the “A” median of 1.6%. Real GDP expanded by 3.9% yoy in 2Q23, supported by positive contributions from private consumption and net exports, as a deep contraction in investments was partly offset by a reduction in imports (reflecting a normalisation following last year’s extraordinary acquisition of imported aircraft equipment). Real disposable income growth has slowed but remains positive, supported by robust wage growth and stable energy prices.

Employment growth remained strong at 6% yoy in 2Q23, supported by the continued return of foreign workers, while unemployment remained at a record low of 2.5% in July. Tourist arrivals exceeded the respective pre-pandemic levels in 1H23, while manufacturing is also positively contributing to growth, benefiting from stable energy prices that have allowed firms to raise prices without losing competitiveness. We anticipate that the Maltese economy will grow close to potential growth in 2024 and 2025, reaching 3.7% in each year.

Inflation elevated despite government intervention: After peaking at 7.4% in October 2022, headline inflation fell to 5% in August this year. We project that inflation will average 5.8% in 2023 (broadly in line with the 5.7% projected for the eurozone) as food prices only gradually normalise and service price inflation remains elevated amid strong wage growth. Wage growth has been fuelled by labour market shortages and an increase in the cost-of-living adjustment, which is a key component of the wage bill for all employees. The government remains committed to limiting fuel and electricity price increases, meaning we expect a zero contribution from energy prices to inflation over the projection horizon.

Limited impact from higher interest rates: The pace of monetary transmission in Malta has been much slower than other eurozone economies, reflecting the banking sector’s exceptionally strong liquidity levels and the lack of competition in the market. The ECB’s composite borrowing rate for households as of July shows that the level and increase of borrowing rates since mid-2022 is the lowest compared with other euro area countries. As a result, the Central Bank of Malta has estimated that the direct impact from rising rates on economic activity and inflation will be limited this year, reducing real GDP growth by only 0.04% and with no visible impact on inflation this year.

Annual house price growth (actual transactions) remained high at 6.6% in 1Q23, driven by the weaker monetary transmission but also by the continued existence of government support schemes. Rents have risen, reflecting higher demand for short-term rentals as tourism recovers and foreign workers return after the pandemic.

Sizeable fiscal deficits: We project that the fiscal deficit will remain sizeable at 5% of GDP in 2023 and 4.8% in 2024, exceeding the “A” medians of 4% and 2.6%, respectively. The majority of pandemic measures (2% of GDP in 2022) will be phased out this year, but sizeable energy subsidies will continue to weigh on the budget balance, reaching an estimated total of almost 1.5% of GDP by year-end (2022: 2.3% of GDP). Our fiscal forecast also includes 0.5% of GDP in restructuring costs for state-owned airline Air Malta.

Government expenditures over the forecast horizon will be further affected by various social spending measures to mitigate the impact of higher inflation on consumers. The government has no plans to phase out energy subsidies at present, which represents a concern for the evolution of public finances over the medium-term.

Public debt gradually increasing: We forecast that public debt will remain relatively stable at 52% of GDP this year (slightly below the 52.3% reported last year and the forecast “A” median of 54%). The government aims to keep the public debt burden below 60% of GDP, and we expect that general government debt will remain on a gradual upward path, reaching 56% of GDP by end-2027. Sizeable fiscal deficits are partially offset by continued strong nominal GDP growth, with potential growth estimated at 3-4%.

Sound banking fundamentals: Bank balance sheets are strong, including strong capitalisation and low leverage and non-performing loans (2.4% according to EBA data as of 1Q23), even as banks suffer from weak profitability. Liquidity levels are exceptionally strong, with Malta reporting the largest liquidity coverage ratio among EU countries (426% as of 1Q23). At the same time, Malta also reported one of the highest capitalisation rates in the EU with a common equity Tier 1 ratio of 19.3%, exceeding the EU average of 15.8%.

ESG – Governance: Malta has an ESG Relevance Score (RS) of “5[+]” for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Malta has a high WBGI ranking at 77.2, reflecting its long track record of stable and peaceful political transitions, well established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.


Rating sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade

Public finances: Continued upward trend in general government debt, for example, due to a more prolonged period of energy-related subsidies, weaker growth prospects or loss of key sources of revenues.

Structural features: Further deterioration in governance or banking supervision or concerns over wider financial sector transparency that could adversely impact Malta’s attractiveness as an investment destination.

Factors that could, individually or collectively, lead to positive rating action/upgrade

Public finances: General government debt/GDP returning to a firm downward path over the medium-term, for example, due to sustained fiscal consolidation.

Structural features: Further progress in addressing key weaknesses in governance, banking supervision and economic diversification.

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