Malta is facing a ‘high risk’ to its medium- and long-term financial sustainability, the European Commission has warned, calling for policies to rein in public spending.
In its Fiscal Sustainability Report for 2021, published earlier this week, Brussels moved Malta from a ‘medium risk’ to the high-risk category for both its medium- and long-term public financing.
This, it says, is mainly driven by the country’s current budgetary position, which has been severely depleted by government spending during the pandemic.
The immediate risks to Malta’s sustainability, however, remain classified as low in the report.
Maarten Verwey, who heads the Commissions’ Economic and Financial Affairs Directorate, said in the opening of the hefty document that the predictions should not be taken lightly.
“These results call to pursue, once economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability,” he writes.
Short-term risks remain low
According to Brussels’ forecast, the short-term risks to Malta’s financial sustainability are not cause for concern. Government financing needs, the Commission says, are expected to decline to 13 per cent of GDP this year, down around four per cent when it peaked between 2020 and last year.
Foreign investors have a fairly positive outlook for the country with credit rating agencies giving Malta’s debt good ratings, the Commission commented.
Medium-term risks are high
However, the situation changes when looking at a slightly longer timeline, with Malta now deemed to have a high risk to its medium-term financial sustainability.
Assuming Malta’s fiscal policy remains the same, government debt would steadily increase to reach around 73 per cent of GDP by 2032, the report warns.
That said, the Commission believes Malta has a fair amount of wiggle room.
The report predicts that the government’s gross financing needs will remain broadly stable over the next 10 years, at around 13 per cent of GDP.
The Commission also ran what are known as ‘stochastic simulations’ which try to forecast, based on probability, what are generally viewed as unpredictable situations.
The Commission concluded that, based on the historic volatility of Malta’s economy, there is a 76 per cent chance that the country’s debt ratio will be greater in 2026 than in 2021.
Maarten Verwey, who heads the Commissions’ Economic and Financial Affairs Directorate said in the opening of the hefty document that the predictions should not be taken lightly
However, it said that if the government’s fiscal policy were to return to pre-pandemic spending, it would stop the national debt from climbing. If Malta were to return to its historical average of the last 15 years (a surplus of 0.3 per cent of GDP), then Brussels predicts that the country’s debt ratio would start to decline from 2025.
By 2032 the debt ratio would be about 22 percentage points of GDP lower than it is today.
Conversely, a negative shock, the Commission warns, would result in a much higher debt ratio by 2032. This could increase by as much as 21 percentage points of GDP over the next decade if Malta were to only implement half of the spend cuts it ought to over the next year.
Long term
According to the report, Malta’s long-term financial sustainability also appears to be at a high risk.
This risk is mainly driven by the projected increase in ageing costs. As Malta’s population gets older, expenditure on pensions and healthcare increases.
Several factors mitigate the risks to Malta over the long term.
These include Malta’s positive international investment position, relatively stable financing sources, the currency denomination of Malta’s debt, and historically low borrowing costs.
In 2020, 20 per cent of government debt was held by the Eurosystem, the monetary authority of the eurozone.
On the other hand, several factors may increase risks to Malta’s long-term sustainability.
Some liability risks also stem from the private sector, including the possible materialisation of state guarantees given to firms and the self-employed during the COVID-19 crisis.
The share of non-performing loans is slightly higher than the EU average, however, risks from the banking sector appear limited.