Fitch has affirmed Malta's 'A+' rating with a stable outlook, in a credit rating report that highlighted the country’s strong economic basis while also pinpointing fiscal challenges and uncertainties.

Malta’s GDP surpassed that of pre-pandemic 2019 levels by approximately 17 percentage points by the end of Q4 2023, the agency noted in a report issued on Friday.

It noted that the country’s 5.6% GDP growth rate last year was significantly higher than the 3.5% rate Fitch had initially forecasted.

The agency attributed that mostly to the full recovery of the tourism sector, which closed the year with almost three million arrivals, exceeding 2019 figures by more than 8%.

It said that while Malta has the potential to grow those numbers even further, capacity constraints, including at the airport, could hamper that.

The agency said it expects Malta’s economy to grow by 4.1% this year and 3.7% the next, with previously booming sectors like the online gaming one slowing their pace of growth.

Prime Minister Robert Abela welcomed the report and its conclusions.

Unemployment is expected to average 2.8% over the forecast horizon, a notable dip from the pre-pandemic 4.1% rate, it said.

Employment was buoyed in 2023 by the continued influx of foreign workers, which, helped stabilise wages, boost GDP growth and keep economic costs related to an ageing society at bay.

However, Malta’s labour market continues to experience low productivity and skill shortages, Fitch noted.

The agency said there were indications that a “novel” government initiative to slash the prices of various basic food prices by 15% had a positive impact, with HICP food index inflation dropping in February.

Fitch said it expects food and service prices to gradually normalise and described Malta’s inflation rate, which hit 5.6% in 2023, as broadly in line with that of similar-rated peers.

The fiscal deficit is narrowing, Fitch said, and dropped to 5% in 2023 from 5.6% the year prior.

But it remains much higher than the 3.2% deficit other A-ranked countries tend to have, and that is in large part to the cost of energy subsidies, which ate up 1.3% of GDP last year.

As it and other rating agencies have noted, the government does not appear to have an exit plan to transition away from those subsidies.

Fitch said that creates fiscal risks if global energy prices were to rise.

The government has said that subsidies are essential to keep fuelling the economy and has given no indication of when they will be removed, despite IMF and EU pressure to do so.

Speaking before last year's budget, Finance Minister Clyde Caruana said that in his view the energy subsidies should be retained until Malta diversified its sources of energy and brought down the unit cost of electricity.

Fitch also noted that potential tax changes aligned with the EU's Minimum Tax Directive pose a challenge and threaten Malta's appeal to multinational companies.

Malta has availed of a six-year transition period to introduce that minimum 15% effective tax rate for companies.

While debt is gradually rising and is likely to hit 54.0% of GDP in 2024, it remains below the EU's 60% threshold, with Fitch saying the fiscal burden appears manageable.

The banking sector, described by Fitch as robust, features strong capitalization, a low ratio of non-performing loans and one of the highest liquidity coverage ratios in the EU.

Fitch said that Malta could see its credit rating upgraded if it managed to improve its debt situation or register more progress in addressing key weaknesses in governance and economic diversification.

The country could see its rating downgraded if government debt continues to grow due to weaker economic growth or a growing deficit, and if further regulatory changes – especially to taxation – make Malta less attractive to foreign companies as an investment destination, Fitch said.