A ratings agency has confirmed Malta’s rating at 'A', noting also the trend on all ratings is a stable one.

DBRS Morningstar Ratings, the German agency also said it expects Malta's economic outlook to remain solid.

"The stable trend reflects DBRS Morningstar's view that risks to the ratings remain balanced. The Maltese economy has recovered faster than previously anticipated from the COVID-19 pandemic shock, despite a partial revival in foreign tourism in 2021.

DBRS said it expects Malta’s economic outlook to remain solid, benefitting from a fuller return of foreign tourism, a healthy private-sector balance sheet, sustained fiscal support, and European funds. However, the potential economic impact from Russia’s invasion of Ukraine and, to a lesser extent, the evolution of the coronavirus cloud Malta’s economic outlook," the agency said in a statement on Saturday.

While the country has limited trade and energy links with Russia and Ukraine, Malta remains vulnerable to the impact of the conflict through weaker external demand, higher inflation, and tighter monetary policy conditions, it said.

"On the other hand, DBRS Morningstar takes the view that the Financial Action Task Force’s (FATF) initial determination that Malta has substantially completed its action plan mitigates the risks associated with Malta’s inclusion in its list of jurisdictions under enhanced monitoring, the so-called grey-list.

"Malta’s strong fiscal performance and debt-ratio reduction efforts before the pandemic created valuable headroom to support the economy."

COVID measures continue to weigh on public finances

While the economic recovery is helping to rebalance fiscal metrics after the severe deterioration in 2020, the agency said, the measures to deal with the effects of COVID-19 and to mitigate the impact from inflation continue to weigh on public finances.

"Nevertheless, Malta’s cost of funding remains favourable and DBRS Morningstar expects a gradual return to a healthier fiscal position, supported by the growth outlook and the expected phaseout of temporary measures.

Malta’s euro area membership, a moderate level of public debt, a solid external position, and households’ strong financial position support the country’s A (high) rating."

On the other hand, Malta’s "small and open economy remains exposed to external demand or confidence shocks". In this sense, the tourism sector - an important source of income, employment, and investment in Malta - presents a potential vulnerability if the pandemic situation were to worsen, DBRS noted.

"Similarly, Malta’s attractiveness to foreign investment could suffer if measures to address financial integrity risks and institutional governance weaknesses noted by international bodies persist.

"Despite Malta’s sound public finances, medium- to long-term challenges could stem from its contingent liabilities, changes in international taxation affecting its attractive tax system to foreign companies, or increasing age-related spending."

DBRS said it could upgrade Malta’s ratings if a combination of the things occur, namely: (1) a sustained material reduction in the public debt ratio, driven by sound fiscal management and economic performance; (2) effective implementation of reforms to enhance Malta’s governance framework, including the financial and judicial sector; or (3) further evidence of increased economic and fiscal resiliency to external shocks. DBRS Morningstar could downgrade Malta’s ratings if one or a combination of the following occur: (1) a sustained deviation from a prudent fiscal approach, materially deteriorating the fiscal and public debt outlooks; (2) a material deterioration in Malta’s medium-term growth; or (3) a substantial weakening of investors’ confidence due to insufficient progress on improving the effectiveness of its Anti-Money Laundering and Combating the Financing of Terrorism framework.

'Outlook remains sound, but clouded by geopolitical and pandemic risks'

Malta’s economic performance prior to the pandemic was remarkable, DBRS said.

"Annual GDP growth averaged 7.0% from 2013 to 2019 with strong job creation and a shrinking GDP per capita gap with the European Union (EU).

"The pandemic had a massive impact on the Maltese economy, with GDP contracting by 8.3% in 2020 due to the collapse in tourism-related activities and private consumption. Despite a partial rebound in foreign tourism, the recovery was faster than anticipated last year."

DBRS also said it considers that the strong performance of the financial and gaming sectors thus far mitigate concerns over the impact of FATF’s grey-listing on activity.

As a small and open economy, however, Malta is vulnerable to the effects of Russia’s invasion of Ukraine principally because of its impact on European demand and higher inflationary pressures.

"The government’s efforts to lessen the impact of inflation on the private sector, mainly through fuel and energy subsidies, have helped to keep inflation below euro area levels, albeit still high.

"DBRS Morningstar takes the view that Malta’s economic growth will remain robust in coming years, despite the intensified risks and dampening effect from the conflict in Ukraine."

DBRS said it also views the government’s fiscal plan as credible given Malta’s track record of fiscal reduction before the pandemic, but "significant uncertainties persist".

"The macroeconomic risks remain a source of uncertainty, given the lingering pandemic and geopolitical risks to activity and inflation.

"Persistently high inflation will put additional pressures on public expenditures, through the cost-of-living adjustment, and could lead the government to introduce or extend measures to protect the private sector," it said.

Similarly, additional support to state-owned enterprises, including the national airline Air Malta, and potential calls on the Malta Development Bank-administered loan guarantee scheme could also widen the deficit in coming years. On the other hand, stronger economic performance could lead to a faster rebalancing path, the agency said.

An overhaul of the global corporate tax system could reduce Malta’s tax regime attractiveness to investors and erode its corporate tax base. The ultimate impact on future corporate revenues will depend on final details and could be offset, at least partially, by new fiscal measures.

Financial system sound, grey-listing impact contained

The risks associated with FATF’s grey-listing have moderated in light of FATF’s initial determination in February 2022 that Malta has substantially completed its action plan, the DBRS said.

"This reflects Malta's progress in terms of ensuring the accuracy of beneficial ownership information, increasing the Financial Intelligence Analysis Unit’s focus on the analysis of criminal tax and related money laundering cases, and the use of this intelligence to support law enforcement authorities in pursuing these cases.

"Malta could be removed from the grey list as soon as this June if the FATF plenary confirms that sufficient progress has been made in implementing the reforms and that political commitment to continue and improve them remains in place," the agency said. 

DBRS Morningstar said it believes that continuing to address anti-money laundering effectiveness concerns will remain key in containing the potential reputational damage to the banking system to avoid further de-risking and straining Maltese banks’ correspondent banking relationships.