Global rating agency Fitch has confirmed Malta’s A+ rating with a ‘stable’ outlook, citing the country’s resilient labour market and strong GDP growth as positive metrics.
In an assessment published late on Friday, the US-based agency said it expects Malta’s economy to grow faster than initially predicted this year, with GDP growth moderating to 3.4 per cent next year.
By comparison, the EU Commission is forecasting 2.8 per cent growth, the International Monetary Fund is predicting 3.2 per cent growth and the Central Bank expects a more optimistic 4.5 per cent growth rate.
Fitch noted Malta’s high per-capita income, a large net external creditor position and a pre-pandemic record of strong growth and sizeable debt reduction as the basis for its rating.
Conversely, the country’s large banking sector, its small economy and vulnerability to external shocks, and the sharp increase in public deficits and debt weigh against it, Fitch said.
Energy subsidies will most likely cost the country €605 million, or 3.5 per cent of GDP next year, Fitch estimates. Increased tax revenue, savings from phased-out COVID-19 measures and savings in government spending will help partially cover that cost.
But Fitch has warned that it is extremely difficult to properly calculate just how much will be spent on cushioning energy prices, as that will depend on how international wholesale energy prices develop.
Fitch now expects Malta's fiscal deficit to narrow to 5.8 per cent of GDP in 2022 from 7.8 per cent in 2021, improving to 5.2 per cent by 2023. That will still be higher than the median 4 per cent deficit that other ‘A’ rated peers run.
It described the 2023 budget as one with an “expansionary focus”, with various social spending measures seeking to mitigate the impact of higher inflation.
Government spending programmes – first to limit the impact of COVID-19 shutdowns on the workforce, then to control energy prices – have led to a spike in national debt, which Fitch noted has increased by 15.6 percentage points over the past two years.
It will rise further to just below 60 per cent of GDP in 2024, it said, and could drop if economic growth exceeds the 3-4 per cent mark and energy subsidies are phased out by then, without the need to increase or add new taxes.
Inflation will most likely average 6.2 per cent this year, moderating to 4.8 per cent next year. Fitch expects food prices to normalise but wage inflation to pick up with a lag.
Private consumption is expected to moderate somewhat, as real disposable incomes decline, while services exports are projected to further recover next year.
It noted that Malta’s labour market, which it described as having displayed “a remarkable degree of resilience amid the COVID-19 and energy crises,” did not appear to have been impacted by the phasing out of a COVID wage supplement scheme in May.
Unemployment will average 3.2 per cent this year, rising slightly to 3.4 per cent next year, Fitch predicts.
Challenges exist, Fitch notes. While Malta’s quick removal from the FATF greylist helped contain global blowback, the country is still waiting for the European Commission to approve a bailout package for Air Malta and faces an EU court case to halt its golden passport scheme.
Scrapping that scheme would cost Malta between 0.3 to 0.4 per cent of GDP annually, it said. And as it waits for the Commission to signal how much bailout money Air Malta will get, the government has been shedding airline workers. Restructuring costs will take up around 0.4 per cent of GDP for 2022/23, it said.
The Labour Party welcomed the Fitch report as “confirmation that Malta is on the right path”.