Last Updated on Saturday, 12 October, 2024 at 9:36 am by Andre Camilleri
DBRS Ratings GmbH (Morningstar DBRS) confirmed Malta’s long-term foreign and local currency – issuer ratings at A (high). At the same time, Morningstar DBRS confirmed Malta’s short-term foreign and local currency – issuer ratings at R-1 (middle). The trend on all ratings is stable.
The stable trend reflects Morningstar DBRS’ view that the risks to Malta’s credit ratings remain balanced. Growth dynamics in the Maltese economy remained strong in recent months. During the first half of 2024, real GDP expanded by 6.0% on a year-on-year basis, driven by strong external demand for service exports from tourism and other service industries, the credit rating agency said. Moreover, domestic demand was bolstered by fiscal support measures for households and large inflows of foreign labour.
While economic growth is projected to ease over the medium-term, it is likely to continue to outpace real GDP growth in most other EU countries. The Central Bank of Malta (CBM) forecasts real GDP to expand by 3.5% in 2025 and by 3.4% in 2026. At the same time, fiscal pressures remain comparatively large, reflecting the budgetary cost of support measures such as freezing domestic energy prices at pre-pandemic levels. The government seeks to narrow the general government budget deficit to 4.0% of GDP in 2024 from 4.6% in 2023. By 2027, the government seeks to attain the EU deficit target of 3.0% of GDP. The projected narrowing of budget deficits, however, is not based on a clear exit strategy for the untargeted energy subsidies but rather on the government’s expectation that a decrease in global energy prices will reduce the fiscal cost of subsidies. Therefore, higher-than-expected energy prices constitute a downside risk for public finances.
Malta’s A (high) rating is supported by its Euro area membership, solid external position, and the banking sector’s strong capital buffers. Moreover, although public debt has increased in recent years, it is still moderate and compares favourably with most other Euro area countries. On the other hand, the small and open nature of the Maltese economy renders it vulnerable to external shocks. Furthermore, labour productivity levels are still comparatively low. In terms of governance, Morningstar DBRS views a further strong commitment by authorities to improve the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) framework as crucial for protecting the international reputation of the banking sector.
Morningstar DBRS could upgrade Malta’s ratings if one or a combination of the following occurs: (1) a material improvement in the public debt trajectory driven by a prudent fiscal approach and strong economic performance; or (2) further evidence of increased economic and fiscal resiliency to external shocks. Morningstar DBRS said it could downgrade Malta’s ratings if one or a combination of the following occurs: (1) a significant deterioration in the public debt trajectory, potentially driven by a prolonged period of fiscal underperformance or weak economic growth; or (2) a reversal of improvements in Malta’s financial crimes and institutional quality reforms.
Economic growth decelerated in recent months but remains much stronger than in most other Euro area countries. Real GDP expanded by 4.4% on a year-on-year basis in Q2 2024, down from growth rate of 7.6% in Q1 2024. Economic growth during the first half of 2024 was driven by rising service exports particularly from tourism, professional services and financial services. Furthermore, private consumption continued to grow at a robust pace, aided by strong employment growth and large energy subsidies. According to the statistical office’s Labour Force Survey, total employment rose by 6.2% year-on-year in Q2 2024, driven by rising levels of foreign workers. Overall, labour markets remain tight with the harmonized unemployment rate standing at 3.0% in July 2024.
On an annual basis, the CBM forecasts real GDP growth to ease from 4.4% in 2024 to an, albeit still strong, 3.5% in 2025 as growth dynamics both for private consumption and for service sector exports are projected to moderate. In terms of 2024, Morningstar DBRS noted that annual real GDP growth is likely to be higher than forecast as these projections were based on national accounts data prior to the recent revision by the national statistical office which led to a large upward revision of real GDP growth in Q1 2024. While the growth outlook is favourable, the economy is exposed to downside risks such as an escalation of geopolitical tensions which might weigh on external demand for Maltese exports. In general, the ratings of Malta continue to be constrained by the small size of its service-driven economy, which renders it vulnerable to external shocks. Furthermore, while the inflow of European funds is projected to bolster growth prospects, infrastructure bottlenecks and still comparatively low labour productivity levels are likely to constrain potential growth.
Budgetary pressures are larger than in most other Euro area countries. In 2023, Malta’s general government budget deficit amounted to 4.6% of GDP compared to an average of 3.6% for Euro area countries. Fiscal accounts were adversely affected by the continuation of energy subsidies, the fiscal cost of which is estimated at 1.4% of GDP in 2023, and support measures for the restructuring of Air Malta, the now-liquidated national airline. In July 2024, the European Council launched an excessive deficit procedure against Malta which forces the government to reduce its deficit below 3% of GDP over the next 4 years. The government’s Medium-Term Fiscal Structural Plan which was published in September 2024 forecasts the general government budget deficit to decline gradually from 4.0% of GDP in 2024 to 3.0% in 2027.
Planned fiscal adjustment is aided by the phase-out of budgetary support measures to Air Malta in 2024, strong revenue growth and a projected gradual decrease in the fiscal cost of energy subsidies over the next few years, the agency said. Tax revenues increased markedly during recent months, supported by a favourable economic environment and recent administrative reforms which aimed at strengthening the efficiency of tax revenue collection. During the first eight months of 2024, government revenues from income taxes and VAT (on a cash basis) rose by 21.3% and 20.7%, respectively on a year-on-year basis. In terms of the energy subsidies, Morningstar DBRS noted that the projected decrease in fiscal costs does not result from a gradual exit from the untargeted energy subsidies but rather from the government’s expectation that global energy prices will decrease gradually over the next few years. As a result, higher-than-expected energy prices constitute an important downside risk for fiscal accounts. Furthermore, over the medium to long term, revenues from Malta’s citizenship by investment scheme and corporate taxation could come under pressure and require the country to introduce corrective measures to fill the gap. These three factors account for Morningstar DBRS’ negative qualitative adjustment of the Fiscal Management and Policy building block assessment.
The large fiscal deficits in recent years led to a marked increase in general government gross debt from 39.2% of GDP in 2019 to 47.3% in 2023. The latter debt level, however, still compares favourably with levels in most other EU countries and continues to provide the government with valuable space to support the economy if under stress. Looking ahead, the Medium-Term Fiscal Structural Plan forecasts general government debt to increase to 49.2% of GDP in 2024, reflecting a still large deficit and a positive stock-flow adjustment which largely relates to the government’s capital injection into the new national airline KM Air Malta, the agency said. Beyond, the government debt-to-GDP ratio is projected to peak in 2026 at 49.9% and to decrease modestly thereafter based on the assumptions of a narrowing fiscal deficit and still favourable debt dynamics. The interest burden is projected to increase but to remain moderate. The EC forecasts general government interest expenditure to rise from 1.1% of GDP in 2023 to 1.3% in 2025. In terms of financing, the government benefits from stable funding sources. According to Eurostat, around 78% of outstanding general government debt in 2023 was held by residents.
The following Governance factor had a significant effect on the credit analysis: Institutional Strength, Governance and Transparency. The country ranks broadly in line with the EU average in the Worldwide Governance Indicators for Voice and Accountability (83.6 percentile rank), Rule of Law (76.4 percentile rank), and Government Effectiveness (76.9 percentile rank), but compares weakly in terms of Control of Corruption (61.8 percentile rank). Furthermore, Malta’s ranking for Control of Corruption, Rule of Law, and Regulatory Quality have been deteriorating in recent years. While the EC commended Malta for its progress on reforms, the EC also noted that there is room for further improvement in the government’s efforts to strengthen the judiciary’s independence and to ensure effective criminal prosecution.
