Malta has managed to hold on to its S&P 'A-/A-2' rating with a stable outlook, despite international headwinds pushing down its economic growth forecast.
The global ratings agency said in its most recent report on Malta, issued on Friday, that Russia’s invasion of Ukraine is likely to slow down the government’s efforts to slash its deficit, which ballooned during the COVID-19 pandemic.
Nevertheless, S&P analysts said that slowdown was unlikely to hurt the country in the medium-term, because the injection of EU funds, coupled with the government’s “track record of budgetary prudence”, should help counterbalance the impact of high energy prices and inflation.
Analysts’ key conclusion from their most recent assessment is that GDP growth this year is likely to come in at 4 per cent, down from the 5.2 per cent they previously forecast.
That downward trend is likely to continue into 2023, with the agency warning that the worst impacts of Russia’s war in Ukraine will only hit next year, as a post-pandemic boom in spending wanes.
As a result, it expects Malta’s GDP growth to drop to 2.7 per cent. The agency is forecasting even lower growth rates of 1.9 per cent across the EU as a whole in 2023.
A €2.2 billion EU aid package that will be distributed to Malta between this year and 2027 is likely to contribute between 0.3 and 0.8 per cent to national GDP, it said.
Inflation will likely remain high by local standards in the coming year, with S&P predicting a 5.6 percentage rate in 2022. That would represent a drop from July’s 6.8 per cent inflation rate, but significantly higher than the 2.6 per cent registered last year.
Efforts to contain inflation, such as the government’s decision to subsidise energy prices, will also have the effect of making it harder for the government’s coffers to return to a surplus situation.
The national deficit will however most likely be narrowed and eventually eliminated once oil prices drop and the government starts gradually phasing out its subsidy, S&P said, noting that its Malta rating is supported by the country’s high income levels, large net creditor position, and pre-pandemic track record of budgetary prudence.
FATF impact
The analysts tempered enthusiasm over an FATF decision to remove Malta from its so-called ‘greylist’, noting that the impact of that decision on local banks and businesses would not be felt immediately.
And while Malta had made “swift efforts” to fix problems that led it to be placed under FATF monitoring, “substantial improvement “ to its regulatory oversight and anti-money-laundering systems would “take time”, S&P said.
Risks
The S&P’s predictions also include a warning about specific risks that the government will need to manage in the coming period.
Chief among these is a restructuring plan for national airline Air Malta, which will see half its workforce either transferred to other parts of the public sector, or paid off with a golden handshake.
The government has asked the EU Commission for permission to inject €290 million (roughly 2 per cent of GDP) into the airline, but the final amount permitted is likely to be far lower.
Fixing its airline quandary could weigh on the country’s finances, S&P said.
The especially open nature of Malta’s economy also makes the country vulnerable to external factors out its control.
And rising inflation is unlikely to impact homeowners with mortgages, because local banks have kept their interest rates – which S&P notes were higher than those in other Eurozone countries – stable, and local citizens tend to have cash reserves that can offset any increase in mortgage payments.
Risks from the property market stem from concerns about an eventual correction in the real estate market, as that could spill over into the local banking sector, given that banks’ loan books are 60 per cent related to property.
There are no imminent signs that such a crash is coming, the S&P also noted.