Fitch Ratings has affirmed Malta's 'A+' credit rating with a stable outlook, highlighting the country's robust economic performance while drawing attention to fiscal challenges that could pose risks in the future.

Malta's economy continues to show strong momentum, Fitch noted, highlighting projected GDP growth of 5.7% this year (versus 0.8% for the Eurozone and 2% for other A-rated countries).

This upward trend has been bolstered by the services and financial sectors and a robust recovery in tourism. In the first half of 2024, tourist arrivals surged past pre-pandemic levels by 32%, according to the credit rating agency.

Fitch’s GDP projections for Malta have grown more optimistic in the past few months. When the agency last rated Malta, in March, it said it expected 4.1% growth this year and 3.7% in 2025.

Now it is saying the economy will grow by 5.7% in 2024 and 4.3% in 2025.

Despite the upbeat growth figures, Fitch pinpointed structural challenges, particularly in the labour market.

Unemployment is expected to remain low at 3.2% on average over the rating horizon, well below the eurozone average of 6.5%. However, the Maltese economy faces skill shortages and low productivity – issues which persist despite a massive influx of foreign workers. These challenges could hinder future growth potential if not addressed, Fitch warned.

Prime Minister Robert Abela highlighted the disparity in projected growth rates between Malta and the Eurozone average. That fast economic growth would allow Malta to lower taxes and maintain energy subsidies "while still reducing the deficit," he said.

Fiscal Concerns and Narrowing Deficits

Fitch projects Malta’s fiscal deficit to gradually narrow, reaching 4% of GDP this year and declining to 3% by 2026. However, the agency flagged uncertainties regarding the government's fixed-price energy policy, which currently lacks a clear exit strategy. Energy subsidies are closely linked to international price developments, and their future cost could pose fiscal risks, it noted.

The government has previously said that it will keep subsidies in place until new, cheaper ways of purchasing energy become available. That is expected to happen when a second interconnector is completed.

Malta’s deficit, which is high by European standards, means the country is currently the subject of EU excessive deficit procedures under new rules introduced this year.

The government has said it is committed to keeping debt below the 60% of GDP threshold and wants to slash the deficit to 3% within the next two years.

Debt and external accounts

Following a revision of Malta's national accounts, the country’s debt ratio stood at 47.3% of GDP at the end of 2023. Fitch forecasts that this ratio will rise to 49.6% by the end of 2024, still below the 'A' median of 53.3%. Financing risks are considered low due to ample liquidity in the domestic banking sector and a strong domestic investor base, with only 18% of government debt held by non-residents.

Malta's external position remains solid, with the country being one of the largest net external creditors in Fitch's sovereign universe. The net international investment position is forecasted to exceed 80% of GDP by the end of 2024, with modest current account surpluses averaging 1.4% of GDP from 2024 to 2026. However, Fitch noted that these external assets are inflated by multinational activities in sectors like finance and aviation, which have limited ties to the domestic economy.

Taxation

Fitch noted that uncertainties surrounding the EU's Minimum Tax Directive could also pose medium-term risks to public finances. Corporate tax revenues are a crucial source of government income, helping to balance the low share of labour taxes and the considerable VAT gap, one of the largest in the EU. Malta has opted for a six-year transition period for the introduction of the 15% minimum effective tax rate for companies.

Fitch noted the government's efforts to improve VAT tax collection and address concerns over tax planning structures as part of Malta's Recovery and Resilience Plan.

It again highlighted uncertainty surrounding Malta’s cash-for-passports scheme, which was projected to generate revenues of 0.6% of GDP this year. Malta is currently being sued by the European Commission's at the European Court of Justice to end the scheme.

Malta ranked high on Fitch’s ESG relevance score metric, with the agency saying the country enjoys a stable political environment, effective rule of law, and relatively low levels of corruption.

Outlook and potential risks

Fitch indicated that Malta's credit rating could be upgraded if the government manages to achieve sustained fiscal consolidation, leading to a downward trend in debt. Conversely, the country risks a rating downgrade if government debt continues to rise, economic growth slows or regulatory and taxation changes make Malta less appealing to foreign investors, the agency said.