Malta’s high economic growth rates and money saved during the boom years have allowed the country to weather pandemic shocks and maintain its credit rating, German rating agency DBRS has said.
DBRS said that while COVID-19 fiscal support had eaten significantly into Malta’s coffers, generating a large deficit and higher level of public debt, a robust economic recovery underpinned by a high vaccination rate should ensure the country returns to a healthier fiscal position.
The rating agency made the assessment in a rating report which confirmed Malta’s long-term rating at ‘A’ with a stable trend.
Malta being placed on the FATF greylist has so far had “no significant or discernable impact on the real economy”, DBRS said, echoing an assessment made by fellow rating agency Fitch last month.
Greylisting’s ultimate impact, it said, would depend on how long Malta remained on the greylist – something Bank of Valletta’s chairman has also previously indicated.
Public finances
DBRS said preliminary estimates indicate that the Maltese economy grew by 7.6% year-on-year in the first nine months of 2021, with Central Bank forecasts of yearly growth of 5.1% being potentially conservative.
It noted that Malta entered the pandemic on the back of several years of “remarkable” economic growth, which led to fiscal surpluses between 2016 and 2019 and Malta closing the GDP gap with the EU average.
The government’s response to the pandemic, DBRS said, has been “critical to mitigate its impact,” with what was a 0.5% surplus in GDP swinging to a 9.7% deficit the following year.
It cited EU Commission figures, which have estimated that temporary economic measures impacted GDP by 6.3% in 2020, with a 3.9% impact forecast for 2021 and 0.1% impact in 2022.
Measures to shield private sector from high energy prices could further eat into Malta’s deficit (which is projected to reach 11.1% this year), but DBRS said it believes that stronger-than-anticipated growth in fiscal revenues could offset that.
The government expects the deficit to drop to 3% by 2024. Potential risks to that flagged by DBRS would be if Air Malta needed financial assistance and potential calls on loans given by the Malta Development Bank
Pandemic recovery
DBRS analysts said they saw a strong rebound in private investment and consumption this year, with high savings by households and investment projects restated.
The government expects public debt to peak in 2023 at 62.7% of GDP and then decline. DBRS noted that debt projections for the coming years have improved due to strong economic performance so far, and said the country was still able to raise capital at favourable rates, with the 10-year bond yield averaging 0.5% during January-October 2021.
Should growth outlooks deteriorate or the government find itself forced to step in and support the financial system of state-owned businesses, those debt projections would falter, it said. Costs related to Malta’s ageing population will also strain public coffers.
Tourism
Recovery projections will in large part depend on how well tourism rebounds, DBRS warned, with the sector being an important source of income, jobs and investment.
Tourism remains subdued, with arrivals between January and September representing just 27.5% of tourism arrivals during that same period in 2019.
While tourism arrivals are expected to register a stronger recovery in 2022 and 2023, an element of uncertainty remains for as long as the pandemic continues.
AML and governance
While DBRS said it did not see any evidence of a material greylisting impact on Malta’s real economy, it noted that the country’s performance on World Bank ‘control of corruption’ indicators is weak.
Malta’s performance on that indicator as well as one assessing rule of law “have been deteriorating in recent years,” it noted
It noted that several reforms have since been introduced and that the EU has “commended Malta” for those changes, though there is also scope to further strengthen judicial independence and ensure effective criminal prosecution.
Risks
DBRS noted several potential risks that could derail Malta’s economic recovery and lead to a rating downgrade.
Labour supply shortages could slow down the recovery in the short-run as travel restrictions limit the migration of third-country nationals, a key source of employment growth.
The pandemic could continue to rock the global economy, limiting tourist arrivals and requiring further government intervention.
Malta’s attractiveness to foreign investment could suffer if measures to address the financial integrity risks and institutional governance weaknesses noted by international bodies persist.
Addressing AML effectiveness concerns would be key to limiting the potential reputational damage to Malta’s banking system, DBRS said.
Over the medium to long term, revenues from Malta’s citizenship by investment scheme and corporate taxation could come under pressure. An OECD intiative to harmonise corporate tax rates could erode the country’s tax base and poses a threat.
Malta’s cash-for-passports scheme is facing an EU challenge, it noted, and it was therefore positive that the government was showing “prudent management” of revenue windfalls from that scheme.