Fitch forecasts Malta's real GDP will contract by 6.9 per cent in 2020, 'a moderate downward revision' from its April review (5.9 per cent), saying declining net exports played a significant role in the change. 

In a report on Malta, the credit ratings agency said Malta's tourism sector suffered a "large contraction" in the second quarter of 2020, a result of "continued traveling restrictions".

"As of April, tourism overnight stays collapsed to under 10,000 stays (871,000 in April 2019), according to Eurostat data. Malta's government plans on fully lifting traveling restrictions on 15 July.

"Nevertheless Fitch expects only a slow recovery in 2H20 and for international tourism arrivals and hotel occupancy to remain below 2019 levels in 2021 and 2022," the ratings agency said.

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While the government plans on introducing vouchers for residents to spend on domestic tourism, this might have "a limited effect" as foreign tourism represents around 97 per cent of total stays in the high-season.

Despite this, while there are still material downside risks to growth forecasts, Fitch now believes risks to be more balanced.

Potential growth

Malta's medium-term potential growth remains "strong and well above the eurozone average", at 3 to 3.5 per cent, Fitch said. Historical GDP was recently revised upwards, with 2019 growth raised to 4.7 per cent from an earlier estimate of 4.4 per cent.

"Inward migration has helped support growth in recent years. While loss of foreign labour due to the pandemic is expected to generate negative migration for 2020, this should be temporary and reversed once conditions improve. Fitch forecasts growth to rebound to 4.1 per cent in 2021, before easing to 3.6 per cent in 2022."

On the general government balance, Fitch estimates the balance will deteriorate to a deficit of 9.2 per cent of GDP in 2020 (8.2% in April's review), from a surplus of 0.5 per cent in 2019, based on the operation of automatic stabilisers and the direct budget impact of government measures.

Further to the €520 million (4.1 per cent of GDP) in government measures announced in March, in June the government announced a €900 million (6.8 per cent of 2019 GDP) fiscal support package, which includes €400 million infrastructure spending (3 per cent of GDP) over the coming years as well as the extension of tax deferrals and wage subsidy schemes, the rating agency said.

"In addition, the government allocated €350 million (2.6 per cent of GDP) in guarantees through the Malta Development Bank, which could be leveraged to a total portfolio of loans under guarantees of €780 million (6 per cent of GDP).

"Lower spending and a rebound in economic activity should help shrink the deficit in 2021 to 6.1 per cent of GDP and 3.4 per cent in 2022," according to Fitch.

The increase in the budget deficit and likely crystallisation of some of the contingent liabilities (7.5 per cent at the fourth quarter of 2019) will increase general government debt to 56.3 per cent of GDP at end-2020, from an estimated 42.9 per cent at end-2019.

The authorities estimate a maximum up to €2 billion (15.1 per cent of 2019 GDP) could be borrowed in 2020, in line with Fitch's expectations.

"Malta had €379 million (2.9 per cent of GDP) in cash buffers at end-4Q19, which we expect will be partly used to help finance the large deficit. We forecast public debt will stabilise in 2021-2022 close to 60 per cent of GDP."

Labour market dynamics

Despite the government's fiscal measures to support the economy, Fitch expects the coronavirus pandemic to affect labour market dynamics, with the registered unemployment rate increasing to 7.1 per cent in 2020, from 3.4 per cent in 2019.

"The large share of foreign labour in the workforce supports the flexibility of the labour market and the expected outflow of foreign labour could help lower the unemployment rate through the crisis, but would have a further negative effect on private consumption.

"Despite the external shock, Fitch projects Malta will maintain a current account surplus in the medium term," the agency said. 

"We forecast it to narrow to 1.4 per cent of GDP in 2020 from 9.7 per cent in 2019, before rebounding to 5.1 per cent in 2021 and 7.6 per cent in 2022, as the tourism sector starts to recover and exports of services rise to previous levels. Malta will retain its large net creditor position at 143 per cent of GDP at end-2020."

Rating sensitivities

Factors that could, individually or collectively, lead to positive rating action and upgrade:

- General government debt/GDP returning to a firm downward path over the medium term, for example due to a post-coronavirus-shock fiscal consolidation.

- Confidence that Malta can return to high GDP growth in the medium term, supporting a convergence of GDP per capita with that of higher-rated sovereigns.

- Further progress in addressing key weaknesses in governance, banking supervision and the business environment.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Severe and prolonged economic weakness due to the pandemic, including a failure of the tourism sector to revive.

- Persistent increase in general government debt, for example due to a more prolonged period of fiscal stimulus, weaker growth prospects or materialisation of contingent liabilities.

Government reacts

In a statement on Saturday, the government welcomed the analysis, describing it as "another positive certificate" for the country's economy. 

"Contrary to the negativity and fear some wanted to spread, international agencies are confirming stable prospects for our county and forecasting a negative impact that is less than that for the eurozone.

"This trust will serve as a basis for the government to lead the country towards an economic and social regeneration for a better tomorrow," it said.

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