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Ratings agency DBRS has confirmed Malta’s long- and short-term credit ratings at ‘A’ and ‘R-1’ respectively while maintaining the country’s outlook trend at ‘Stable’.

In a report issued on January 8, the agency said that while Malta’s GDP had contracted by a greater-than-expected 9.9 per cent between July and September and challenges stemming from the COVID-19 pandemic continued to pose difficulties, Malta had some “valuable headroom” with which to soften the economic blow.

The agency said that it expected Malta to return to a better fiscal position once the pandemic eased off, adding that it was crucial that the government managed to introduce effective institutional reform.

“The success of the Maltese authorities in strengthening the country’s governance framework will remain central to avoid reputational risks that could spill over to the broader economy,” DBRS said.

DBRS said that Malta’s economy had been hard-hit by COVID-19 containment measures, with a massive 33.9 per cent year-on-year decline in the food and accommodation sector. Measures such as offering a wage supplement to affected businesses helped protect employment, it said, though it cautioned that this the spectre of potential job losses “when the scheme is eventually phased out”.

Spending on the wage supplement and other economic mitigation measures, such as direct subsidies, tax deferral measures and a voucher scheme mean the government and EU are projecting that Malta ended 2020 with a 9.4 per cent fiscal deficit, with government debt rising to 55 per cent of GDP (compared to 42.6% in 2019).

But DBRS said it expected Malta to return to healthier fiscal positions with the passing of time, as the pandemic receded and the economy got back on its feet.

The agency however expressed some concern about some of the drivers of revenue growth in the country, which appear vulnerable to external changes. It cited the country’s golden passport scheme and corporate taxation regime as cases in point, though it said approvingly that it “takes comfort” from Malta’s “prudent management of revenue windfalls” from the passports scheme.

While the pandemic had hurt banks’ profitability, their share of non-performing loans stood at a “moderate” 3.5 per cent in the second quarter of 2020. This could rise once loan moratoria offered to counter pandemic shutdowns lapsed, it said, noting that 11.7 per cent of total outstanding loans were subject to moratoria

If Malta found itself backed into a corner, it could opt to financially support its “large and concentrated” financial system or its state-owned enterprises or recapitalise the flailing Air Malta, DBRS said.

Malta’s anti-money laundering framework remained under Moneyval scrutiny, it noted, and Malta had introduced a series of “ambitious reforms” in the sector and picked up the pace in terms of enforcement and inspections. However, a negative assessment by the Council of Europe body would deteriorate the country’s reputation and further strain its banking system.

Malta’s governance ratings had declined over the past years, the ratings agency noted, and while new laws to reform institutions have been commended by the Venice Commission, the body also “underscored the fact that more needs to be done to achieve an adequate system of checks and balances,” DBRS said.

The agency said that Malta’s high credit rating was backed by the country’s eurozone membership, decent fiscal metrics, solid external position and a strong financial position for households. The country’s rating could improve if public debt was brought down in a sustained manner, if governance reforms were effectively enacted or if there was further evidence of increased resilience to external shocks.

On the other hand, the country faces risks due to the open nature of its economy and reliance on tourism and from the chilling effect institutional governance weaknesses could have on foreign investment. The country’s rating could be downgraded if fiscal metrics worsened substantially, if the pandemic’s economic shocks led to “substantial deterioration” of Malta’s GDP growth or if investors lost significant confidence in Malta due to governance weaknesses, DBRS concluded.

Reacting to the report, the government said the DBRS rating was the "best rating ever given by this agency."

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