DBRS Ratings GmbH (DBRS Morningstar) confirmed Malta’s Long-Term Foreign and Local Currency – Issuer Ratings at A (high), but says that the impact of Malta’s grey-listing by the Financial Action Trask Force “remains unclear”.
At the same time, DBRS Morningstar 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 DBRS Morningstar’s view that Malta’s high economic growth rates and fiscal surpluses prior to the Coronavirus Disease (COVID-19) shock have supported its private and public sector’s capacity to soften the pandemic setback and mitigate the risks to the ratings.
Malta’s high vaccination coverage, a gradual return of foreign tourism, and continued fiscal support are underpinning a robust recovery in 2021. In the first three quarters of 2021, real GDP grew by a cumulative 7.6% YoY. The extension of COVID-19 fiscal support in 2021 will lead to another sizable fiscal deficit and a higher public debt ratio this year. Nevertheless, Malta’s cost of funding remains favourable and DBRS Morningstar expects a gradual return to a healthier fiscal position, helped by the growth outlook and the phase-out of COVID-19 support to lead to a stabilisation, or even a reduction, of the public debt ratio in coming years.
The evolution of the pandemic poses risks to the outlook with the resurgence of COVID-19 cases across Europe and the emergence of the new Omicron variant, remaining a source of concern. Nevertheless, Malta’s high vaccination rate and improved adaptability to the pandemic environment should mitigate the risks, DBRS said.
DBRS Morningstar takes the view that no significant or discernible impact on the real economy has materialised thus far as a consequence of the decision of the Financial Action Task Force’s (FATF) decision in June 2021 to include Malta on its list of countries under enhanced monitoring. The ultimate impact from the grey-listing remains unclear and will most likely depend on the speed with which the Maltese authorities provide tangible evidence of the effectiveness of their Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework.
Malta’s euro area membership, a moderate level of public debt, a solid external position, and households’ strong financial position support the country’s A (high) rating, DBRS said. On the other hand, Malta’s small and open economy remains exposed to external demand or confidence shocks. In this sense, the tourism sector—an important source of income, employment, and investment in Malta—presents a potential vulnerability as long as the adverse effects of the pandemic continue.
Similarly, Malta’s attractiveness to foreign investment could suffer if measures to address the financial integrity risks and institutional governance weaknesses noted by international bodies persist. Despite Malta’s sound public finances, medium- to long-term challenges could stem from its contingent liabilities, changes in international taxation affecting Malta’s attractive tax system to foreign companies, or increasing age-related spending.
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