Credit rating agency DBRS Morningstar has confirmed Malta’s A rating with a stable outlook, saying energy subsidies have helped the country cushion the impact of war in Ukraine but warning that it should be clear about when subsidies will end.
DBRS said that Malta’s post-pandemic recovery has been stronger than that of most other European peers and that its growth prospects “remain solid” despite a near-term slowdown.
That recovery was fuelled by government support of the private sector as well as a strong rebound in tourism numbers. It had works of praise for the labour market, saying “job growth has been remarkable over the last three years”.
On the other hand, it noted that the country’s deficit is among the EU’s highest, even with COVID-19 aid having been phased out and also had some words of warning about the decision to continue subsidising energy prices.
“The government has so far not articulated a clear exit strategy for the untargeted energy subsidies, and a higher-for-longer global energy prices scenario could complicate the fiscal consolidation path,” it said.
Domestic lending rates have not been overly impacted by the tightening of monetary policy when compared to other Eurozone countries, helping to fuel domestic demand. However, DBRS said it expects the lagged transmission of that tightening is likely to weigh on Malta’s economic growth in the medium-term.
It said the country’s public finances are “generally sound” with some challenges from contingent abilities, an ageing population and the prospect of global tax rules making Malta less attractive to foreign companies.
Although public debt is growing, the country still has “valuable space to support the economy if under stress,” analysts concluded.
The country’s structural shortage of labour and infrastructural bottlenecks are also major challenges, it said, describing both as “important limiting factors” on growth.
Analysts said Malta has registered progress in fixing regulatory shortcomings in the past years, DBRS said, and continuing those efforts will be key to limiting the reputational impact on banking activities in Malta. There is still significant room for improvement: while Malta ranks well on worldwide governance indicators, it compares poorly to its peers in terms of control of corruption.
“DBRS Morningstar expects Prime Minister Robert Abela to pursue broad policy continuity and remain committed to improving the country’s institutional and governance framework during the current legislature,” it said in its credit rating report.
DBRS had few worries about the health of Maltese banks, noting they have a strong capital position and ample liquidity levels. Stress tests also suggest local banks could weather an economic storm.
The agency said that it would upgrade Malta’s ‘A’ rating if the country managed to improve its public debt trajectory or showed evidence of increased resilience to external shocks.
Malta’s rating could fall if debt grows at a higher rate or if the country reverses improvements it has made in policing financial crimes and introducing institutional reform.