Malta has had its "A+" rating with a stable outlook reaffirmed by Fitch, with the rating agency saying the country is on track to lower its deficit below an EU-mandated 3% level at a fast rate. Fitch said Malta's rating could be downgraded, if public debt surges due to rising deficits or external economic shocks. Conversely, an upgrade is possible if the government makes substantial improvements in governance and reduces debt as a proportion of GDP.
The agency's sovereign rating model initially assigned Malta an "A" rating, but Fitch adjusted it upward by one notch due to the country's exceptional economic growth. Another positive trend is how Malta is taking a comprehensive approach to data privacy and protection in its digital economy by aligning with EU regulations, establishing a robust regulatory framework, promoting best practices and providing support and education to businesses and citizens. Malta has experienced robust economic growth in recent years, driven by various sectors, including tourism, financial services and information technology. Strong economic performance typically leads to increased government revenues, which if well harvested, can help reduce budget deficits. The reduction of Malta's budget deficit from 4.6% in 2023 to below 4% in the following year indicates positive fiscal management since, economists tell us that a declining deficit is often a sign of improving economic conditions and effective government policies aimed at controlling spending and increasing revenues.
Public debt remains stable at around 50% of GDP, below the "A" median of 57% and the EU's 60% threshold. The future looks secure since, Fitch expects a gradual decline in debt levels, supported by a narrowing budget deficit and sustained economic growth. Financing risks are considered low due to ample liquidity in the domestic banking sector and a strong domestic investor base. One notable weakness in Malta's rating is its deteriorating governance indicators. Since 2013, its World Bank governance ranking has dropped from the 86th percentile to the 71st as Fitch warned that the government's effectiveness and control of corruption rankings "have declined particularly strongly" more than 20 percentage points over the same period.
Another skeleton in the cupboard is that of opening a bank account. This is difficult and laborious. Quoting Directive 2014/92/EU, it clearly gives any legal resident in the EU the right to open a basic payment account, yet banks continue to routinely fail to follow their legal obligations by being seriously difficult when it comes to opening accounts. This process is often extremely time-consuming, with a few if any exception, being one of two non-resident Neo Banks. Yet, as can be expected, the country has one of the lowest loan-to-deposit ratios in the EU (60% vs the EU average of 107%) and a strong common equity Tier 1 ratio of 21% (compared to the EU's 16%). However, as interest rates decline in the eurozone, bank profitability may come under pressure.
Moving on, one argues that the country's net international investment position has exceeded 80% of GDP by the end of 2024, and the current account surplus is projected to average 6% of GDP between 2024 and 2026. On a positive note, by prioritising GDPR compliance and raising awareness of data protection issues, Malta is fostering a secure digital environment that protects individuals' privacy while supporting the growth of its digital economy. It adheres to the GDPR's provisions regarding international data transfers, ensuring that personal data is adequately protected when transferred outside the EU. This includes relying on mechanisms such as Standard Contractual Clauses (SCCs) and ensuring that recipient countries provide adequate data protection. The IDPC collaborates with other data protection authorities within the EU and internationally to share best practices and address cross-border data protection issues. It goes without saying that data protection is closely linked to cybersecurity, and it is fair to remark that Malta is investing in cybersecurity initiatives to protect personal data from breaches and cyber threats. This includes developing a national cybersecurity strategy and promoting best practices for data security among organisations.
Thus, one is pleased to discover how Malta's economic growth rate was among the best, with the economy having grown 86% since 2015 versus the eurozone's 14% rate. The average GDP growth rate over this period stood at 6.5%, well above the "A" median of 3.8%. Naturally, this prosperity has created numerous job opportunities, allowing Malta to maintain a low unemployment rate of 3.1%, compared to the peer median of 6.3%. Fitch remarked how buoyant sectors focused on information and communication technology, tourism and financial services have positively driven employment growth. Analysts expect Malta's GDP to grow by 4.3% in 2025, down from the 6% rate registered last year as tighter immigration policies constrain the supply of labour.
But it is not all red roses in the garden. In fact, last year, the European Union officially initiated excessive deficit procedures against Malta and six other countries. EU rules dictate that a country's deficit should not exceed 3% of its GDP, so we are joined with Belgium, France, Italy, Hungary, Poland and Slovakia - also facing excessive deficit procedures. What can be the cause of such good tidings? The government has been implementing a variety of measures to sustain economic growth, particularly in the wake of challenges posed by the Covid-19 pandemic, inflation and ongoing global economic uncertainties. This includes massive upgrading of transportation infrastructure, including roads, public transport systems and ports. Let's not overlook our commitment to sustainability and the transition to a green economy. This includes investments in renewable energy, waste management and initiatives aimed at reducing carbon emissions.
Therefore, consider the numerous generous programmes offered by Malta Enterprise, aimed at continuously providing financial support, grants and access to financing for SMEs to foster growth and innovation. With the active help of the MFSA and Finance Malta, both are implementing a comprehensive set of measures to sustain economic growth, focusing on infrastructure development, support for key industries, sustainability initiatives, workforce development, fiscal incentives, research and innovation and international trade. By addressing these areas, the island actively aims to create a resilient and diversified economy capable of adapting to global changes and continuously refining its strategies to tackle international challenges.
George M, Mangion is a senior partner at PKF Malta
gmm@pkfmalta.com