Fitch has affirmed its A+ credit rating for Malta, keeping its outlook for the country as ‘stable’.
In a country analysis report published on Friday, the credit rating agency said Malta’s economy was withstanding headwinds, with higher-than-average GDP growth, strong employment growth and limited impact of high interest rates on economic activity.
It however noted that large fiscal deficits were weighing down public finances, with national debt gradually increasing, and that inflation remained stubbornly high despite the government’s energy subsidies. Fitch said it was concerned about the impact on public finances those subsidies would have over the medium term unless they are phased out.
The agency said Malta could be upgraded if it managed to reverse the trend and bring debt down over the medium term or showed further progress in fixing weaknesses in its governance, banking supervision and economic diversification.
If those two factors deteriorate, the country could see a rating downgrade.
Reacting to the report, Prime Minister Robert Abela emphasised that Malta was poised to outperform similarly-rated countries and attributed that to energy subsidies "improving firms' competitiveness and supporting household consumption."
Fitch said it expects Malta’s GDP to grow by 3.5 per cent this year, down significantly from the 6.9 per cent figure registed in 2022 but significantly higher than the ‘A’ rated median growth rate of 1.6 per cent.
Real disposable income growth has slowed by remains positive, it said, with wage growth “robust” and stable energy prices.
Unemployment remains at record low levels of 2.5 per cent and tourist arrivals outpaced pre-pandemic levels in the first half of the year. Stable energy prices have helped manufacturing rebound and contribute to growth, allowing firms to raise prices without losing competitiveness, Fitch noted.
“We anticipate that the Maltese economy will grow close to potential growth in 2024 and 2025, reaching 3.7% in each year,” Fitch analysts said.
Higher interest rates have had a limited impact on Malta’s economy, reducing real GDP growth by just 0.04 per cent and having no visible impact on inflation this year, the report noted.
Inflation remains high, despite government intervening through energy and fuel subsidies to cap prices. Inflation measured 5 per cent in August and Fitch expects it to average 5.8 per cent this year (compared to 5.7 per cent for the eurozone). Much of that will be due to food price and service price inflation, coupled with “strong” wage growth that is fuelled by labour market shortages and an increase in the Cost-of-Living-Adjustment.
Annual house price growth measured 6.6 per cent in the first half of the year and rent prices have risen, Fitch noted.
There are concerns about the state of Malta’s public finances, however. Fitch expects the fiscal deficit to stand at around 5 per cent this year and 4.8 per cent in 2024, in line with forecasts presented by Malta's finance minister. By comparison, the medians of ‘A’ rated countries are 4 per cent and 2.6 per cent respectively.
That high figure is in large part due to energy subsidies, which will cost Malta 1.5 per cent of GDP this year. In 2022, subsidies impacted GDP by 2.3 per cent. Fitch also expects restructuring costs for national airline Air Malta to cost the country 0.5 per cent in GDP. Government spending on measures intended to mitigate high inflation levels will also eat into the national budget, analysts noted.
High deficits mean public debt will continue to gradually increase, though Fitch said Malta will likely end 2023 with a debt-to-GDP ratio of 52 per cent, which is lower than the forecast ‘A’ median of 54 per cent.
Fitch expects debt to continue growing and reach 56 per cent of GDP by the end of 2027.
Finance Minister Clyde Caruana said last week that a primary objective is to contain public finances to ensure debt remains below a 60 per cent threshold that the EU intends to enforce in the coming years.
Fitch said bank balances in Malta are strong, with exceptionally strong liquidity levels, low leverage and just 2.4 per cent of loans classified as non-performing, though it said local banks struggle with “weak profitability”.