Last Updated on Saturday, 25 May, 2024 at 11:57 am by Andre Camilleri
Malta’s economy is on solid ground but the concerns about rule of law and the control of corruption remain, according to a periodic review of the country carried out by credit rating agency Moody’s earlier this month.
The review was conducted through a rating committee held on 16 May 2024 in which Moody’s reassessed the appropriateness of the ratings in the context of the relevant principal methodology(ies), and recent developments.
Malta’s A2 ratings are supported by its moderate debt burden, a sound institutional framework, and reasonably diversified economy given its small size. The country’s strong trend growth and a reliable domestic funding base are additional credit strengths, the report says.
At the same time, Malta’s key credit challenges include a significant fiscal deficit due to a comprehensive policy response in terms of energy-related support measures and remaining concerns over the rule of law and control of corruption in the country.
Malta’s real GDP expanded by 5.6% in 2023, after 8.1% in 2022, well above the euro area’s average growth of 0.4% and 3.4%, respectively, the report says.
Moody’s expects continued strong real GDP growth of 4.5% in 2024 and 3.7% in 2025. Domestic demand will be supported by real wage growth, while tourism activity will remain solid.
In parallel, Malta’s fiscal deficit declined to 4.9% of GDP in 2023 from 5.5% in 2022 as revenue growth of 9.8% outpaced expenditure growth (8.3%). Looking ahead, Moody’s projects a general government deficit of 4.5% of GDP in 2024 and 4.0% of GDP in 2025, and the public debt ratio to increase to 53.9% of GDP by 2025 from 50.4% of GDP in 2023.
Malta’s “baa1” economic strength score balances high per-capita income levels and relatively strong economic diversification against an elevated susceptibility to external shocks due to the small economic size and very high degree of openness. The “a3” institutions and governance strength reflects benefits for the country’s institutional environment from EU (Aaa stable) and euro area membership.
The small size is a constraint for institutional capacity, with particular challenges related to control of corruption, rule of law and supervision of money laundering-related risks, although the government has embarked on a process to tackle these issues, the report states.
Moody’s assessment of fiscal strength at “a1” reflects Malta’s moderate public debt burden and strong debt affordability metrics. However, both will deteriorate as high fiscal deficits and the gradual impact of higher interest rates will more than offset the favourable effect of the country’s strong nominal growth, the report adds.
Malta’s susceptibility to event risk score of “baa” is driven by banking sector risk, which balances the sector’s large size relative to the economy and high domestic concentration against the low contagion risk between the sector’s domestically and internationally oriented segments, as well as the solid financial strength of the domestically oriented institutions.
The stable outlook reflects Malta’s wealthy and fast-growing economy as well as solid debt affordability and moderate exposure to susceptibility to event risk which balance the economy’s small size and related high real GDP volatility, as well as high openness to international trade, the report says.
While the country faces institutional challenges, Moody’s expects Malta to continue to engage with the financial community to ensure a more effective enforcement of the regulatory framework, which should support the island’s financial competitiveness in a sustainable fashion.
Upward pressure could build on the rating if a faster reduction in the deficit than currently expected by Moody’s were to lead to a firm decline in Malta’s debt burden.
Further evidence of reforms to strengthen the country’s institutional framework and bring it closer to A1-rated peers would be credit positive, as would be increased economic diversification and policies geared towards ensuring Malta’s sustainable development over the medium-term.
Downward pressure could build on the rating if Moody’s were to see a sustained and significant increase in Malta’s debt burden which would lead to a structural worsening of the country’s public finances, the report says.
This could be compounded by a weaker-than-expected economic outlook. Institutional shortcomings in the fields of anti-money laundering and combating the financing of terrorism (AML-CFT) would also be credit negative, as would the re-classification of Malta under the Financial Action Task Force’s “grey list”.
