Last Updated on Saturday, 7 December, 2024 at 3:30 pm by Andre Camilleri
S&P Global Ratings has affirmed its ‘A-/A-2’ long- and short-term sovereign credit ratings on Malta. The outlook remains stable.
In their review published late on Friday, S&P noted that Malta’s economy has continued to expand rapidly and that its debt levels are manageable. The agency also noted that strong migratory flows are boosting economic activity but are unlikely to be sustainable.
The agency also commented that a key fiscal risk emanates from the government’s fixed energy price subsidy, and that while measures to improve the rule of law and governance have been implemented, Malta still faces challenges. Malta nevertheless still falls short in a number of areas compared to international standards, and the country scores weakly in corruption perceptions, particularly in a European context, the agency commented.
The full report may be seen below:
Outlook
The stable outlook reflects the balance that, over the next 24 months, we expect growth outcomes to moderate from currently high levels, while also expecting the fiscal deficit will gradually decrease, broadly in line with the government’s consolidation commitments.
Upside scenario
We could raise the ratings if Malta’s growth prospects–on a per capita basis–were to materially improve. A similar rating action could also occur if we saw a meaningful reduction in the government’s exposure to oil prices, for instance through an elimination of energy subsidies or a very significant increase in renewable generation.
Downside scenario
We could lower the ratings if Malta’s external sector competitiveness were to diminish, leading to an unwinding in the current account surplus. A reversal of authorities’ efforts to enhance and implement governance and anti-money-laundering frameworks could also trigger a negative rating action.
Rationale
Malta’s economy has continued to expand rapidly
We estimate real GDP growth will be 6.2% this year and average 4% over 2025-2027. This is despite still-weak economic conditions among key trading partners, in particular in the eurozone (for more information, see “Economic Outlook Eurozone Q1 2025: Next Year Will Be A Game Changer,” published Nov. 26, 2024, on RatingsDirect). Malta’s growth is being driven by strong tourism demand and robust private consumption, particularly given strong inward migratory flows.
The government is running a procyclical fiscal policy
Malta entered the EU’s excessive deficit procedure (EDP) in July 2024 due to its lingering government deficit, which came to 4.6% of GDP in 2023, the fourth consecutive year above the 3% of GDP threshold set by EU fiscal rules. The government is exposed to oil price swings due to a subsidized energy price fix, although in our baseline scenario, we assume oil prices will stabilize at $75 for the foreseeable future (see “S&P
Global Ratings Revises Its Oil Price Assumptions; North American And Dutch Title Transfer Natural
Gas Price Assumptions Unchanged,” published Oct. 1, 2024). We therefore expect the government will modestly consolidate before bringing the deficit back below 3% of GDP by 2027.
Government debt levels are manageable
We estimate the government gross debt stock will end 2024 at 48% of GDP, a level we expect it will broadly plateau at thanks to the consolidation efforts and favorable economic growth prospects.
Supporting our ratings on Malta are the country’s high income levels, large net creditor position, and contained level and cost of public debt. These strengths are balanced against rule of law challenges, a weak monetary transmission mechanism, and exposure to external shocks as a small and highly open economy.
Institutional and economic profile: As migratory flows are likely to ease, so will economic growth
Economic growth will moderate to a projected 4.0% over 2025-2027, down from 5.2% averaged annually over 2020-2023, as external demand and migratory flows both slow.
Major corporate income tax reforms have been deferred, but the eventual implementation could negatively affect Malta’s competitiveness in attracting foreign direct investment.
Despite progress in some areas, the country scores weakly in corruption perception and rule of law assessments compared with most EU peers.
Malta’s real GDP expanded by 6.9% in the first three quarters of the year compared with the same period in 2023. Private consumption and tourism exports have been central to recent momentum. Inbound tourists for the first 10 months were up 19% over the same period in 2023, while total tourist expenditure was up 22%. Tourism demand has remained robust despite challenging economic conditions in most, if not all, source markets, and potentially also reflects the worsening geopolitical situation in the Middle East leading European travelers to holiday more within Europe.
Strong migratory flows are boosting economic activity but are unlikely to be sustainable
Malta’s population is 25% larger than in 2015, which owing to having the EU’s lowest birth rate and subsequent shrinking native population reflects the liberal migration policies of recent governments. The migrants have come from a blend of EU countries (mostly high-skilled workers) and non-EU countries (mostly low-skilled workers), and together have contributed to the country’s very strong economic growth in recent years.
Nevertheless, given that Malta is already the most densely populated country in the EU and the worsening infrastructure bottlenecks in the archipelago, we expect the government to continue tightening migration policy, particularly from non-EU countries, over which it has more policy levers. The extent to which migratory flows to Malta will decline because of tighter migration policy, and more so its impact on economic activity, is unclear, although we assume some easing in economic growth in the later years of our forecast principally for this reason.
Corporate income tax reform has been deferred for now
Malta has enacted regulation transposing the EU Directive on minimum taxation rules, while exercising its right to defer for six years the application of parts, including those relating to tax levels for corporations based in Malta. Separately, the government is still in discussion with the European Commission (EC) regarding reforming its tax credit system to ensure it is compatible with state aid regulations.
Despite a headline rate of 35%, the effective rates paid are typically significantly lower due to refundable tax credits. In our opinion, this low tax burden is an important competitive advantage
Malta has over peer jurisdictions; eventual changes to this framework could undermine Malta’s success in attracting foreign direct investment.
While measures to improve the rule of law and governance have been implemented, Malta still faces challenges
Following the public inquiry into the assassination of journalist Daphne Caruana Galizia in 2017, a number of anti-corruption recommendations were made. Authorities have taken steps recently to improve the judicial system, and overall perceptions of judicial independence is high. Malta nevertheless still falls short in a number of areas compared to international standards, and the country scores weakly in corruption perceptions, particularly in a European context. We therefore assess checks and balances and the overall accountability of institutions as somewhat weaker compared with that of peers at similar income levels, which weighs on Malta’s creditworthiness.
Flexibility and performance profile: Notwithstanding Malta’s relatively weak budgetary performance, debt levels remain modest and affordable
Malta’s deficits have placed it under heightened EU surveillance, although we expect consolidation.
Data revisions suggest the country has been running significant current account surpluses in recent years, which we assume will continue.
Monetary transmissions are weak and constrain monetary flexibility.
Malta is running a fiscal deficit well above pre-pandemic levels
After running consistent surpluses over 2016-2019, the country’s budgetary performance deteriorated during the pandemic and has not completely recovered. Owing to last year’s 4.6% deficit, Malta is now one of eight EU members in an EDP. The government is therefore subject to enhanced budgetary monitoring from the EC at least until it brings the deficit back below 3% of GDP, which we expect only by 2027.
The 2025 budget prioritizes social measures while remaining compliant with EDP-required consolidation efforts
The main measures include a re-rating of tax bands to make up for inflation and increases to pensions, child benefits, and the minimum wage. Teachers’ wages also rose, while revenue compliance efforts from 2024 will be built upon. At 3.5% of GDP, the proposed deficit achieves the necessary 0.5 percentage point consolidation asked for by the EC, while staying within the 6% growth of net expenditure limit.
A key fiscal risk emanates from the government’s fixed energy price subsidy
Following the expiry of a long-term liquefied natural gas import contract in 2022, which allowed Malta to enjoy 2014 level prices in energy, the government stepped in to offset importers’ losses and keep energy prices fixed. The policy likely shored up economic confidence and allowed strong growth to continue. However, it has become a procyclical fiscal support to the economy and exposes the government to potentially very significant fiscal outlays should wholesale energy prices spike.
Nevertheless, authorities have hedged their petrol purchase price for the coming year, and in our baseline scenario, we expect energy prices to remain stable for the foreseeable future.
Malta’s debt stock is manageable and has broadly favourable characteristics
We estimate net government debt to GDP will end 2024 at 39%, rising modestly to 42% by 2027. Interest costs on new issuances spiked last year but have moderated this year, in line with ECB monetary easing.
We project interest costs will occupy an average of 4.1% of government revenue over 2024-2027, which is low on a global comparison.
Revisions to Malta’s external sector statistics suggest the country has been running a very high current account surplus
Malta has revised economic data this year, including national, fiscal, and external accounts. The revisions to the balance of payments statistics suggest the current account balance was 7.5 percentage points of GDP better on average over 2018-2023, significantly restating our understanding of external risks in the country. We estimate Malta will average a current account surplus of 5.4% of GDP over 2024-2027, although past current account surpluses have not always translated into improving net external investment positions, likely due to the unusually large gross stock of both assets and liabilities. In this context, small valuation changes can have outsized impacts on Maltese residents’ overall position vis-à-vis non-residents. We estimate residents’ net claim on the world will be about 1.2x its GDP at the end of 2024, comprising liabilities worth 26.4x GDP offset by assets worth 27.6x GDP.
The banking system is liquid and well capitalized, although is highly exposed to real estate and tourism
Despite recent increases in residential real estate prices, the appreciation has been in line with fundamentals including Malta’s rapidly growing population and high economic growth.
While Malta was removed from the Financial Action Task Force’s grey list in 2022 and has made other progress in strengthening supervisory effectiveness, we still consider the banking sector exposed to reputational risks.
Malta has more constrained monetary flexibility than euro area peers
As a member of the eurozone, the country benefits from the ECB’s monetary credibility. However, as the smallest economy in the union, we think Malta’s economy can be unsynchronized with the zone at large, and in addition, its monetary transmission mechanism is effectively broken. Excess deposits in the financial system (due to high savings rates) combined with limited competition have led to a disconnect between domestic interest rates in Malta and those set by the ECB. This lack of pass-through is an additional constraint on the contracyclical effect of the ECB’s monetary policy to stimulate or cool activity as necessary, heightening economic volatility. While the Central Bank of Malta has the flexibility to oscillate sectoral systemic risk buffers on banks, we do not think this is adequate to offset the otherwise-broken transmission of ECB base rates into the domestic economy.
