Credit rating agency Morningstar DBRS has confirmed an A rating for Malta’s long-term foreign and local currency.

It also confirmed Malta’s short-term foreign and local currency – issuer ratings at R-1. The trend on all ratings is stable.

The agency said it believed risks to Malta’s credit ratings remain balanced with the economy having strongly recovered from the pandemic.

Real GDP increased by 18% between 2019 and 2023, compared to an increase of just 3.3% for the euro area, driven by a rebound in tourism and strong growth in other important service industries such as professional services, information and communication (ICT), gambling and trade.

On the expenditure side, private consumption was bolstered by high inflows of foreign workers and large fiscal support measures which cushioned the impact of inflation on households’ purchasing power.

“While the economy is exposed to downside risks such as an escalation of geopolitical tensions, the general growth outlook is favourable,” it said.

It noted that although the strong economic recovery bolstered government revenues, fiscal performance has deteriorated markedly in recent years on the back of still sizeable fiscal support measures.

It also said that the projected narrowing of budget deficits is not based on a clear exit strategy for the untargeted energy subsidies but rather on the government’s expectation that a decrease in global energy prices will reduce the fiscal cost of subsidies.

“Therefore, higher-than-expected energy prices constitute a downside risk for public finances,” it said.

The agency noted that although public debt has increased in recent years, it is still moderate and compares favourably with most other Euro area countries.

On the other hand, the small and open nature of the Maltese economy renders it vulnerable to external shocks. Furthermore, labour productivity levels are still comparatively low.

The agency said it could upgrade Malta’s ratings if one or a combination of the following occurs:

• a material improvement in the public debt trajectory driven by a prudent fiscal approach and strong economic performance; or
• further evidence of increased economic and fiscal resiliency to external shocks.

Morningstar DBRS could downgrade Malta’s ratings if one or a combination of the following occurs:

• a significant deterioration in the public debt trajectory, potentially driven by a prolonged period of fiscal underperformance or weak economic growth; or
• a reversal of improvements in Malta’s financial crimes and institutional quality reforms.

Economic growth starts to ease but remains comparatively strong

The agency said that although economic growth decelerated moderately over the past year, it remained much stronger than in most other Euro area countries.

Real GDP expanded by 5.6% in 2023, down from 8.1% in 2022, but remained strong compared to a growth rate of just 0.4% for the Euro area in 2023.

The largest growth drivers over the past year were professional and financial services.

Growth dynamics in other service industries such as transportation, hotels and restaurants and ICT moderated, albeit to a still strong pace of growth.

On the expenditure side, growth was driven by rising net exports particularly for services.

Private consumption continued to expand at a robust pace, aided by strong labour markets and large energy subsidies.

Morningstar DBRS said that Malta’s ratings of Malta continue to be constrained by the small size of the country’s service-driven economy, which renders it vulnerable to external shocks.

Furthermore, while the inflow of European funds is projected to bolster growth prospects, infrastructure bottlenecks and still comparatively low labour productivity levels are likely to constrain potential growth.

The agency noted that higher-than-expected energy prices constitute an important downside risk for fiscal accounts.

Moreover, in the medium- to long- term, revenues from Malta’s citizenship by investment scheme and corporate taxation could come under pressure and require the country to introduce corrective measures to fill the gap.

Public debt increased but still moderate

The large fiscal deficits in recent years led to a marked increase in general government gross debt from 40% of GDP in December 2019 to 49.6% in September 2023. The latter debt level, however, still compares favourably with levels in most other EU countries and continues to provide the government with valuable space to support the economy if under stress.

Looking ahead, a stabilisation or a decrease in the debt ratio would require a step-up in fiscal consolidation measures.