DBRS Ratings GmbH (Morningstar DBRS) on Friday confirmed Malta's Long-Term Foreign and Local Currency - Issuer Ratings at A (high). At the same time, Morningstar DBRS confirmed Malta's Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (middle). The trend on all ratings is Stable.

The credit rating agency however said Malta's ranking for Voice and Accountability, Government Effectiveness, Control of Corruption, and Rule of Law have been deteriorating in recent years.

While the EC commended Malta for its progress on reforms, the EC also noted that there is room for further improvement in the government's efforts to strengthen the judiciary's independence and to ensure effective criminal prosecution in corruption cases.

The country ranks broadly in line with the EU average in the Worldwide Governance Indicators for Voice and Accountability (77.0 percentile rank) and Rule of Law (75.5 percentile rank) but compares weakly in terms of Government Effectiveness (65.6 percentile rank) and Control of Corruption (58.5 percentile rank). 

Political stability is high, the agency said. Malta's political environment is dominated by the ruling center-left Labour Party and the center-right Nationalist Party which have alternated in government over the past decades with peaceful transfers of power. The next elections are scheduled to take place in March 2027.

Morningstar DBRS said it expected policy continuity to remain high after the elections. The Worldwide Governance Indicators for Malta are relatively strong and broadly in line with EU averages but "compare weakly in terms of control of corruption".

Malta has made significant progress in improving its governance and its institutional framework in recent years, including implementing reforms to the justice system. However, Morningstar DBRS considers that "there is room for further convergence toward other sovereigns with very strong assessments on the Political Environment building block, including more tangible evidence of enhanced efficiency, and effectiveness in the country's judiciary and control of corruption".

KEY CREDIT RATING CONSIDERATIONS

The Stable trend reflects Morningstar DBRS' view that the risks to Malta's credit ratings remain balanced. Economic growth is projected to normalize from high levels, driven by a slowdown in employment growth and a moderation in external demand for key service exports such as tourism. The Central Bank of Malta (CBM) forecasts real GDP growth to ease from 5.9% in 2024 to 3.9% in 2025 and 3.5% in 2026. The economic outlook is exposed to important downside risks such as an escalation of global trade or geopolitical tensions. At the same time, Morningstar DBRS expects the economic repercussions of higher US tariffs to impact Malta's service-driven economy to a lesser extent than is the case for EU countries with larger manufacturing industries. Fiscal pressures are still comparatively large and projected to subside only gradually. While the economy's still strong growth dynamics are likely to continue to bolster government revenues, the pace of fiscal consolidation has been slowed by the recent adoption of new fiscal support measures to households and the continuation of energy subsidies. CBM forecasts the general government budget deficit to narrow from 3.6% of GDP in 2024 to 3.4% in 2025 and 3.0% in 2026.

Malta's A (high) credit rating is supported by its Euro area membership, solid external position, and the banking sector's strong capital and liquidity buffers. Moreover, public debt is still moderate and compares favourably with most other Euro area countries. On the other hand, the small and open nature of the Maltese economy renders it vulnerable to external shocks. Furthermore, Malta's high population density challenges its labour-intensive growth model. In terms of governance, Morningstar DBRS considers the commitment by authorities to improve the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) framework as crucial for protecting the international reputation of the banking sector.

CREDIT RATING DRIVERS

Morningstar DBRS could upgrade Malta's credit ratings if one or a combination of the following occurs: (1) a material improvement in the public debt trajectory driven by a prudent fiscal approach and strong economic performance; or (2) further evidence of increased economic and fiscal resiliency to external shocks. Morningstar DBRS could downgrade Malta's credit ratings if one or a combination of the following occurs: (1) a significant deterioration in the public debt trajectory, potentially driven by a prolonged period of fiscal underperformance or weak economic growth; or (2) a reversal of improvements in Malta's financial crimes and institutional quality reforms.

CREDIT RATING RATIONALE

Economic growth in Malta decelerated this year. After growing by an annual rate of 6.8% in 2024, real GDP growth eased to an, albeit still strong, rate of 3.1% on a year-on-year basis during the first half of 2025. This easing can primarily be attributed to a slowdown in private consumption growth whereas service exports (particularly tourism) continued to grow at a very strong pace. The number of inbound tourist arrivals rose by 12.1% on a year-on-year basis during the first seven months of 2025. On the production side, the biggest growth drivers were trade, transport, hotels and restaurants, public services, and information and communication services.

Looking ahead, CBM projects the gradual moderation of growth dynamics to continue over the next years. Annual real GDP growth is forecast to ease to 3.9% in 2025, 3.5% in 2026 and 3.3% in 2027, as the growth rates both of domestic employment and external demand for service sector exports are projected to moderate. CBM forecasts employment growth to decelerate to 2.3% in 2027, from an estimated 5.0% in 2024, considering several proposed government measures which aim to restrain employment growth of non-EU nationals. Between 2014 and 2024, high levels of labour migration increased Malta's population by around 32%, the highest growth rate among EU countries. Going forward, Malta faces the challenge of changing its labour-intensive growth model as continued strong population growth would likely strain the country's infrastructure given an already high degree of population density. Similar to other EU countries, the economic outlook is exposed to downside risks such as an escalation of geopolitical or global trade tensions. That said, Morningstar DBRS takes the view that the adverse direct and indirect impacts of higher US tariffs are likely to be smaller for Malta than for most other EU countries due to the service-driven nature of the Maltese economy. In general, Malta's credit ratings are constrained by the small size of its economy, which renders it vulnerable to external shocks.

Malta's Wide Fiscal Deficit is Projected to Narrow Gradually

Malta's fiscal deficit is narrowing but remains larger than for most other EU countries. Over the past year, the general government budget deficit decreased to 3.6% of GDP from 4.6% in 2023 compared to an unweighted average deficit of 2.1% for the other EU countries in 2024. The narrowing of the budget deficit resulted from an upswing in income tax revenues which resulted from higher corporate income taxes from internationally-oriented companies and administrative reforms which aim at strengthening the efficiency of tax revenue collection. This increase in revenues more than offset a one-off increase in the public wage bill on the back of a new collective agreement with the teachers' union, and a one-off support to the national airline.

Looking ahead, the government plans to further reduce the fiscal deficit in line with the requirements of the EU's excessive deficit procedure which had been launched by the European Council against Malta in July 2024. The CBM forecasts the general government budget deficit to narrow to 3.4% of GDP in 2025 and 3.0% in 2026. While public revenues are likely to continue to benefit from strong, albeit moderating, economic growth, the introduction of new fiscal household support measures (e.g. income tax cuts), the fiscal cost of which is estimated at 0.5% of GDP, slows down the pace of fiscal consolidation adjustment. Furthermore, the government does not plan to phase out untargeted household energy subsidies for fuel and electricity. The decrease in international energy prices is projected to lower the fiscal cost of the latter subsidies from 0.9% of GDP in 2024 to 0.7% in 2025. At the same time, higher-than-expected energy prices constitute a downside risk for fiscal accounts. Furthermore, over the medium-to-long term, revenues from corporate taxation could come under pressure and infrastructure and climate spending pressures are likely to rise. These factors account for Morningstar DBRS' negative qualitative adjustment of the Fiscal Management and Policy building block assessment.

Public Debt Stock Is Projected to Remain Moderate

The credit ratings are supported by Malta's still moderate stock of public debt. General government debt stood at 46.2% of GDP in March 2025. Looking ahead, CBM forecast increases in the debt ratio to 48.3% of GDP in 2025 and to 48.7% in 2026, based on the expectations of a gradually consolidating budget deficit and a moderation of economic growth. While debt is higher than prior to the Covid-shock in 2019, the current debt level continues to provide the government with valuable space to support the economy if under stress. The interest burden is projected to increase but to remain low. CBM forecasts general government interest expenditure to rise from 1.2% of GDP in 2024 to 1.4% in 2027. In terms of financing, the government benefits from stable funding sources. According to the national statistical office, around 79% of outstanding general government debt in 2024 was held by residents (particularly domestic banks).

Domestic Banks Have Strong Capital Buffers but Are Exposed to Concentration Risks from The Housing Market

The financial condition of domestic banks is strong, underpinned by strong capital and ample liquidity buffers of domestic banks. The regulatory Tier 1 capital ratio of domestic core banks amounted to 21.1% in June 2025. The current stock of NPL is low with the NPL ratio standing at 2.2% in June 2025. Asset quality of banks has benefited from a favourable economic environment in recent years and the limited pass-through of higher interest rates on domestic lending rates. Looking ahead, pockets of vulnerability for asset quality might arise from banks' sizeable loan exposure to the housing market, a large part of which relates to residential real estate. Loans related to construction, mortgages and real estate accounted for a large 71.5% of total resident bank loans to the private sector in August 2025.

While the increase of the sectoral systemic risk buffer for residential mortgages in spring 2024 has raised banks' resilience to a potential shock, Morningstar DBRS notes that mortgage loan growth has so far remained strong, expanding by 9.1% year-on-year in August 2025. Real estate prices have increased markedly in recent years. The Residential Property Price Index of the national statistical office rose by 29.3% between 2021Q1 and 2025Q1. At the same time, households' housing affordability has been bolstered by strong wage growth in recent years. Moreover, households' debt repayment capacity is supported by the economy's low unemployment rate.

Morningstar DBRS viewed the government's commitment to improving the AML/CFT framework as crucial to the international reputation of the banking sector. Malta's significant progress on this front permitted the country to exit from the grey list of the Financial Action Task Force (FATF) in June 2022, just one year after being added to the list of jurisdictions under enhanced monitoring.

Malta's role as a small financial hub has resulted in the development of a large banking system relative to its domestic economy, including international banks, and domestic noncore banks which have few or no linkages to the domestic economy. Morningstar DBRS applies a negative qualitative adjustment to the Monetary Policy and Financial Stability building block assessment to reflect its view on Malta's relative positioning compared with other larger and more sophisticated financial systems in this building block