Ratings agency Fitch expects Malta’s economy to contract by 5.9 per cent this year before rebounding to moderate 3.6 per cent growth in 2021, and has revised its outlook for the country down on the back of coronavirus pandemic concerns.
It said the forecast was on the optimistic side, with factors potentially contributing to an even sharper economic decline than that.
Fitch’s assessment is based on the assumption that the coronavirus pandemic will ease in the second half of the year, with economies getting back to work.
Its predictions for Malta are far gloomier than those made by the International Monetary Fund and fellow rating agency Moody's, which also used that assumption as a basis for their economic modelling.
Earlier this week, the IMF said it expected Malta’s economy to shrink by 2.8 per cent this year and bounce back with 7.1 per cent growth in 2021.
While the IMF expects Malta’s economy to shrink by a smaller amount than others across the EU, Fitch thinks otherwise: the agency is predicting a 4.2 per cent decline across the eurozone this year. By contrast, the IMF said it expected eurozone economies to shrink by an average of 6.6 per cent.
Ratings agency Moody's, meanwhile, is predicting a decline somewhat steeper than that forecast by the IMF but less drastic than what Fitch is expecting. Moody's said on Friday that it believes Malta's economy will contract by 3.8 per cent this year before returning to 3.2 per cent growth in 2021.
Moody's analysts noted that Malta's small and open economy made it exposed to external shocks, but also said that the country had a relatively well-diversified economy in terms of trade partners and sectors. That would help cushion the pandemic blow, they said.
"We currently expect the outbreak to have limited lasting, negative impact on Malta’s economy or public finances," Moody's said.
Fitch said the coronavirus pandemic’s impact on Malta’s economy and public finances meant that it now considers the country’s outlook to be ‘stable’ rather than ‘positive’. It’s A+ long-term foreign currency rating remains unchanged.
Moody's has also set its outlook for Malta as 'stable', with a credit rating of A2.
The country will most likely register an 8.2 per cent budget deficit this year, down from an 0.8 per cent surplus in 2019, Fitch predicted. Malta will also end 2021 in the red, Fitch said, with a 5 per cent deficit predicted for that year.
Those forecasts could easily change due to lingering uncertainty over how much government borrowing will be required during the pandemic and how rapid an eventual recovery will be, Fitch noted.
But having emerged from consecutive years of budget surpluses, the agency notes, Malta is “better prepared than some of its peers to face the challenges in consolidating public finances over the medium-term”, Fitch said.
Fitch believes the country’s current account will remain in surplus (2.9%) albeit down from the 8.1 per cent registered in 2019.
Moody's analysts are expecting a budget deficit of 5 per cent this year and say the country's debt-to-GDP ratio will probably edge over the 50 per cent mark.
But they also said they expect fiscal metrics to improve as of next year, with a deficit of 1 per cent and debt-to-GDP ratio of 49.8 per cent predicted.
Travel sector and unemployment
In its report, Fitch noted that Malta’s tourism and travel industry, which accounted for 16 per cent of national GDP in 2019 (excluding indirect effects) would suffer a sharp contraction in the second quarter of this year due to the ongoing pandemic. That downturn could extend to further in the year if lockdowns in Malta and elsewhere were extended.
Fitch said it expects hotel occupancy rates to be around 50% of 2019 levels this year. In a statement reacting to the reports, the government said this would still represent 95% of occupancy rates in 2012.
Government financial aid packages would “partially soften” the economic blow of coronavirus, while unemployment is predicted to rise to 6.1 per cent this year, with a 5.1 per cent rate predicted for next year.
That rate could end up being lower if foreign labour employed in the accommodation and food service sectors emigrated, it suggested.
A 6.1 per cent unemployment rate would nevertheless still be lower than that registered at height of the 2009 global financial crisis, when unemployment hit 6.9 per cent, Fitch said.
Moody's also noted the contingent liability risk posed by Air Malta, which has been forced to ground its fleet due to the ongoing pandemic.
What could affect Malta's rating?
The country’s rating could be upgraded if there was confidence that Malta could return to high GDP growth over the medium term and if the government could return to its pre-pandemic path of shifting the debt-to-GDP ratio down. Further progress in addressing key governance weaknesses would also be a positive sign.
Conversely, Fitch said that the country’s rating could be downgraded if the pandemic’s economic shocks proved to be severe and prolonged, with the tourism sector especially vulnerable. A persistent increase in government debt would also be considered unfavourably.
Finance Minister welcomes reports
Finance Minister Edward Scicluna welcomed the Fitch and Moody's reports.
“Fitch has confirmed that Malta is able to withstand the inevitable shock to its public finances in view that it is better prepared for such an eventuality than its peers,” he said.
Moody's assessment, he said, reflected trust that international institutions "have in the country’s government and its people, who are both being proactive in the health and financial areas."
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