Fitch Ratings has affirmed Malta's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A+' with a Stable Outlook.
"Malta's rating is supported by high per capita income, strong growth rates and EU and euro area membership. These strengths are balanced against its large banking sector, the small size of its economy, which is highly vulnerable to external shocks, and a recent deterioration in public finances with large fiscal deficits, which have led to an increase in the moderate public debt burden," Fitch said.
Strong Economic Momentum
"We forecast that real GDP growth will average 5.7% this year, well above the 'A' median and eurozone growth forecasts of 2.0% and 0.8%, respectively. Strong growth contributions in recent quarters have come from the services sector, the financial sector (due to higher interest margins) and tourism, where arrivals in 1H24 surpassed pre-pandemic levels by 32%. We have revised up our growth forecasts for 2025 and 2026 to 4.3% and 4.1%, given stronger carry over and higher potential growth estimates."
Malta's statistical office has made a benchmark revision of the national accounts, with nominal GDP at end-2023 now 6.3% higher, it said. "This has a positive impact on ratios that flow into our Sovereign Rating Model, including GDP per capita, now 91% of the eurozone average."
High Potential Growth
"Potential growth estimates from the IMF and European Commission are 4%-5% for this and next year, well above regional peers, and supported by dynamic population growth. But we expect potential growth to gradually fall due to a declining contribution from labour due to a moderation of historically high net migration and an ageing population."
Sound Labour Market
"The Maltese labour market has sound participation rates, strong employment growth and low unemployment. We forecast unemployment to average 3.2% over the rating horizon, well below our eurozone forecast of 6.5% and the pre-pandemic rate of 4.1% in 2019. Weak labour productivity and skill shortages in a fast-growing economy remain structural challenges for the economy and increased hiring from abroad has only mitigated the problem."
Narrowing Fiscal Deficits
"Our updated fiscal projections are broadly in line with the government's new medium-term fiscal forecasts. We now project this year's deficit at 4.0% of GDP, subsequently falling to 3.5% by 2025 and to 3.0% by 2026. Our forecasts factor in the higher nominal GDP base and lower energy prices (putting the total cost of energy subsidies at around 0.8% of GDP for 2024) and include the recently announced income tax reduction for the middle class."
"The government lacks a clear exit strategy from the fixed-price policy, creating fiscal risks around the future cost of energy subsidies as these are closely tied to the development of international energy prices. The European Commission has opened excessive deficit procedures against Malta, based on the 2023 fiscal deficit of 4.6% of GDP. The government appears committed to keeping debt below 60% of GDP and aims to bring back the deficit to 3% over the next two years."
Fiscal Uncertainties
"Uncertainties around the EU's Minimum Tax Directive are another, more medium-term, risk for public finances as Malta has opted for a six-year transition period. Corporate tax revenues are an important source of income for the government, mitigating the low share of labour taxes and a sizeable VAT gap, which is one of the largest in the EU. The government is undertaking steps to improve VAT tax collection and has started addressing concerns over tax planning structures as part of its Recovery and Resilience Plan. The European Commission has referred Malta to the European Court of Justice due to concerns over its Citizenship for Direct Investment programme, which the government expected to generate revenues of 0.6% of GDP this year," Fitch said.
Improved Debt Trajectory
"The national accounts revision brought Malta's debt ratio below 50% of GDP to 47.3% of GDP at end 2023. A slowdown in nominal GDP growth and moderate fiscal deficits mean the debt ratio will start rising again, reaching 49.6% of GDP by end-2024, still below the 'A' median of 53.3%. Financing risks are low, despite large deficits, with ample liquidity in the domestic banking sector and a strong domestic investor base (only about 18% of government debt is held by non-residents as of July 2024)."
External Finances
"Malta's external accounts have also been significantly revised. The net external creditor position is now reported at more than 1,300% of GDP for end-2023 (according to IMF data), making Malta one of the largest net external creditors in our sovereign universe. However, external assets are inflated by the activities of multinationals in the financial, maritime and aviation sector that have limited ties to the domestic economy but engage in tax reduction strategies with their associated foreign entities through their Maltese subsidiaries. The net IIP is position is large and we forecast it to exceed 80% of GDP by end-2024, while we expect the current account to post modest surpluses averaging 1.4% of GDP in 2024-2026," Fitch said.
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. These 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 75.4, 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 relatively low level of corruption."