Updated 8.50am
Rating agency Fitch has reaffirmed Malta’s A+ rating and maintained the country’s outlook at stable, saying it expects the country to resume growing its economy as the pandemic subsides.
In a report issued on Friday, the US-based agency said that Malta’s high per capita income levels, large net external creditor position and its pre-pandemic record of strong growth and debt reduction all played in its favour.
Counterwise, the country’s large banking sector and the open nature of its economy served as risks, as did the continuation of the coronavirus pandemic and the risk of “adverse developments” in governance.
The government welcomed the rating, contrasting it to rating downgrades some other countries had incurred, and said it would serve as another building block for strong growth in the future.
Public finances
Fitch said it expects Malta’s deficit to reach 11.5 per cent this year, slightly lower than the government’s own 12 per cent projections, and to narrow sharply to 5.4 per cent by 2022 as the economy grows and spending on COVID-19 measures declines.
Similarly, the agency is predicting 4.7 per cent GDP growth for 2021, which is more than the 3.8 per cent forecast presented in Malta’s stability programme but less than the 5.4 per cent it previously predicted for the year, with more growth deferred to 2022.
“We believe there may be some underspending as the economy recovers in the second half of the year,” Fitch said.
It now expects GDP growth to rise to 6 per cent in 2022, up from the 3.9 per cent it had previously forecast. In the medium-term, it expects GDP growth of around 3 per cent.
Fitch expects national debt to peak in 2022 at 65.5 per cent of GDP before gradually declining to below 60 per cent in 2026. It noted that despite the pandemic-induced increase in public debt, “debt will remain almost 5pp below the 2011 peak of 69.3% of GDP, illustrating Malta's strong fiscal track record.”
Malta had managed to knock 27.3 percentage points off its national debt between 2011 and 2019, it noted.
Interest payments would likely also decline and average 3.2 per cent of revenue between 2020 and 2022, versus 3.9 per cent among ‘A’ rated peers and the 8 per cent rate from a decade ago in 2010.
Corporate tax, passport risks
Fitch also warned that G7 plans to push ahead with plans for a global corporate tax rate could pose a downside risk to public finances and inward investment over time, given its focus on attracting corporations through a low-tax regime.
The country’s golden passports scheme, now dubbed the Citizenship by Direct Investment programme, could also pose a risk, with Fitch noting ongoing EU infringement proceedings against Malta and reporting concerning the Passport Papers as examples of threats. Losing this revenue stream would cost Malta 0.7 per cent of GDP, it said.
Tourism and gaming
Fitch highlighted Malta’s strong vaccination record but said that despite the country’s best efforts, tourism receipts would likely remain significantly below pre-pandemic levels for some time yet.
“While we anticipate that international travel will rebound in 2H21, international arrivals in 2021 will remain 55% lower compared with pre-pandemic levels but the gap will substantially narrow to 15% by 2022. Uncertainty remains about when the UK will add Malta to its so-called "green list", allowing quarantine-free travel for British tourists, which accounted for almost a quarter of all tourist arrivals in 2019,” the agency said.
Malta’s gaming sector makes up an increasingly large share of gross value added, it said, at 8.3 per cent by the first half of 2020. The country’s labour market remained “remarkably resilient”, with unemployment only rising marginally from 3.6 per cent in 2019 to 4.3 per cent in 2020.
Governance risks
Fitch took note of Malta’s “progress in addressing the significant deficiencies in the anti-money laundering and funding of terrorism framework” and noted that the Council of Europe’s Moneyval had ranked the country as largely compliant or compliant.
However, the agency expressed uncertainty about “how sustained recent improvements will be” and noted that while the country’s World Governance Indicators remained above the A-rated median, “perceived weaknesses in the quality of Malta's institutions and governance framework led to a sharp deterioration in last year”.
Fitch singled out indicators concerning Control of Corruption and Regulatory Quality, which crashed by almost 11 percentile ranks in a single year – “some of the largest drops in our rated universe”, Fitch noted.
Corruption allegations in the context of the murder of Daphne Caruana Galizia could further affect Malta’s scores, it said.
Malta’s rankings for World Bank governance indicators remainMa high, it said.
Fitch’s assessment is based on the assumption of eurozone growth of 4.7 per cent in 2021 and 4.5 per cent in 2022. The rating assessment was undertaken at Malta’s request.