Scope Ratings GmbH (Scope) has affirmed the Republic of Malta's long-term issuer and senior unsecured debt ratings at A+ in both local and foreign currency and maintained the Stable Outlook.
The short-term issuer rating has been affirmed at S-1+ in both local and foreign currency. The affirmation by Scope of Malta's long-term ratings with a stable outlook is supported by the country's robust economic outlook and strong growth potential driven by high value-added export services and the disbursement of EU funds.
This economic momentum is expected to moderate the rise in general government debt resulting from wider fiscal deficits due to a more accommodative fiscal stance. Despite delays in the withdrawal of energy support measures reflecting Malta's high dependency on energy imports and sensitivity to commodity price volatility, a record of prudent fiscal management and the Excessive Deficit Procedure launched by the European Commission underpin the projections of gradual fiscal consolidation over the coming years.
Private consumption is supported by rising real incomes, a strong labour market with the unemployment rate at around 3%, declining inflation at 2.2% YoY in June, and energy related subsidies. A relatively favourable tax system (with a derogation till 2030 of Pillar II tax) compared with rating peers, including an overall tax burden of around 30% of GDP and low corporate tax and VAT rates, continues to support private investment.
In the long run, Malta's growth potential, estimated at more than 4.5%, is high relative to peers (1.9% on average), but hindered by skill mismatches, moderate investment in research and development, and constraints on energy supply. Scope's latest rating show export sectors are expected to drive a current account surplus of around 1% of GDP between 2024 and 2026, after 0.9% in 2023, which is relatively modest compared to the pre-Covid19 trend (1.4% of GDP on average between 2010 and 2019).
Even so, sustained current account surpluses will enable the country to maintain a positive net international investment position of 71.6% of GDP in 2023, driven by the net creditor position of households and financial corporates. The 2025 Budget will also see increases in children's allowance and pensions alongside an across-the-board direct energy and fuel subsidies to buttress cost of living and lower production costs for industry. The finance minister said the government will be spending €460 million on energy subsidies, collective agreement increases for teachers, health workers and the public service, tax cuts and an increase in social benefits.
Is it a coincidence that only this week, Trump has managed to pass a law in Senate labelled "The Big Beautiful Bill". This introduces tax cuts for many, yet as can be expected it sparked heated discussions as lawmakers push to reshape the tax landscape. There were heated discussions, for example, on the restrictions on the sale of high-tech products from the USA to China, or the blocking of cheap gas from Russia to Europe, disrupting the potential for mutually beneficial trade that would have otherwise occurred based on each country's comparative advantage.
Sanctions and trade barriers imposed by one country or region can lead to retaliatory measures, further exacerbating trade tensions and impeding cross-border commerce. Can we compare Malta's economic direction by invoking David Ricardo, an influential economist of the early 19th century. Ricardo was born on 18 April 1772 in London and he is best known for his contributions to classical economics, particularly in the areas of international trade, labour theory of value and theories of rent and profits.
Let us hope our masters pulling strings at Castille succeed to make good use of the theory of comparative advantage, which Ricardo presented in his book Principles of Political Economy and Taxation (1817). This theory argues that even if a country is less efficient than another in producing all goods, it should still specialise in producing and exporting those goods in which it is relatively more efficient.
This idea laid the groundwork for the principles of free trade. Malta does have a unique mix of export sectors which it strives to excel to capture a larger share of the international market. Ricardo argued that profits tend to decrease over time due to the diminishing returns of land and the competition among capitalists, leading to a tendency for the rate of profit to equalise across industries. Ricardo's theory begins with the idea that countries differ in their ability to produce goods efficiently due to differences in factors like technology, natural resources and labour skills. He argued that even if one country is less efficient in producing all goods compared to another country, there's still potential for mutually beneficial trade if each specialises in producing the goods in which it has a comparative advantage.
Despite the advent of globalisation, Ricardo's theory of comparative advantage remains relevant and makes sense in today's interconnected world. Disregarding the negative Trump's disruptive policies by imposing tariffs on exports to the USA, one hopes that globalisation shall not wither because of retaliatory trade restrictions.
Globalisation has facilitated greater international trade, allowing countries to engage in mutually beneficial exchange based on their comparative advantages. By trading goods and services, countries can access a wider variety of products at lower costs than would be possible through domestic production alone. This benefits consumers with greater choices and lower prices. In the context of the four influential regions - China, the Gulf Arabs, the USA and Europe - comparative cost advantage remains relevant and meaningful in several ways, especially considering the diverse economic structures and resources present in each region.
Malta hopes and prays for a Renaissance. It is home to a highly-developed and integrated ecosystem with diverse economies, ranging from advanced tech companies, tourism, maritime, aviation, pharmaceuticals and i-gaming. Overall, the concept of comparative advantage remains relevant in today's globalised economy, helping regions and countries identify their strengths and specialise in the production of goods and services where they have a competitive edge.
By leveraging its comparative advantages, Malta as a tiny island in the Mediterranean, is stoically led by Silvio Schembri, (picture) economic minister.
His quest to enhance productivity, drive innovation, and foster economic development in an increasingly interconnected world, is currently challenged by the disruptive force of AI. Logic dictates that he resists any trade restrictions and geopolitical tariffs. These disrupt global supply chains can lead to increased costs, supply shortages and market uncertainty.
George M. Mangion is a senior partner at PKF Malta
gmm@pkfmalta.com