Global credit rating agency Fitch expects Malta’s economy to shrink by a greater margin in 2020 than it expected in July, it said on Friday as it affirmed the country’s A+ long-term rating with a stable outlook.

Fitch said that a worse-than-expected tourist season, coupled with a continued drop in demand in the final quarter of the year meant that it was now predicting a -7.7 per cent drop in GDP for Malta this year, instead of the -6.9 per cent it had forecast previously.

It is the second consecutive time that Fitch has revised its GDP forecast for Malta downwards: the agency had predicted a -5.9 per cent contraction in a report published in April, towards the start of the COVID-19 pandemic.

The -7.7 per cent shrinkage predicted by Fitch is marginally higher than the European Commission’s -7.3 per cent GDP forecast for Malta this year. The euro area economy is predicted to contract by -7.8 per cent. 

Fitch, however, expects Malta’s economy to bounce back strongly in 2021, growing by 5.4 per cent in 2021 and 3.9 per cent in 2022. Those figures are higher than its previous forecasts of 4.1 per cent and 3.6 per cent respectively.

Tourism pain, ICT gain

The agency noted that Malta had suffered the second-largest decline across the EU in the number of nights spent at hotels and other tourist accommodation (-68 per cent) between January and September.

While Malta’s tourism operators suffered, its ICT sector thrived: that sector posted 3.7 per cent growth in the year’s second quarter and grew by a massive 9.9 per cent between July and September.

The wage subsidy scheme would continue to support employment while EU coronavirus aid money and money from the EU’s new multi-annual budget would bolster the economy once disbursed, Fitch said.

€350 million in guarantees issued through the Malta Development Bank, capital spending amounting to 5 per cent of GDP and tax deferrals worth 1.5 per cent of GDP would offer further support, it predicted.

Spending on such measures would lead to the deficit – the gap between’s a government’s income and spending in any given year – to widen to 9.6 per cent of GDP this year, before narrowing to 6.1 per cent and 3.4 per cent in 2021 and 2022.

Those figures are marginally more pessimistic than those shared by the government, which forecast a 9.4 per cent deficit this year and 5.9 per cent one in 2021.

IIP risks, Air Malta money

Fitch expects national airline Air Malta to be recapitalised to the tune of €200 million and notes that EU action to stop Malta’s golden passports scheme, the IIP, could slash revenues by €100 million (0.8 per cent of GDP).

Nevertheless, the country’s debt metrics remain in line with those of A-ranked countries and Fitch considers government debt structure to be “favourable”.

The agency is similarly bullish about the country’s banking and real estate sectors. Maltese banks are well-positioned to absorb higher loan losses caused by the pandemic, it said, although their profitability faces pressure due to moratoria on loan repayments and low interest rates.

Property prices are in line with fundamental factors and household debt is low, it added. Rental prices have declined by 11 per cent, as owners of Airbnb rentals have switched to offering long-term rentals, adding supply into that market.

AML, governance concerns

There are more areas of concern when it comes to sorting out anti-money laundering concerns and governance issues, the rating agency noted.

Despite “substantial progress” in improving its supervisory framework, several correspondent banks had ended their relationships with Maltese banks and indicators showed Malta sliding down the governance and press freedom rankings in 2019-2020. The country, however, remains at par with the ‘A’ -ranked median.

Fitch acknowledged that reform momentum had picked up the pace under Robert Abela’s government but noted that “unfolding corruption allegations in the context of the public inquiry into the murder of journalist Daphne Caruana Galizia could further affect Malta's governance scores.”

Fitch’s analysis of Malta is based on its assumptions that COVID-19 vaccines will help the global economy will recover in 2021 and 2022 and that EU member states will reach a compromise on coronavirus aid money and a new multi-annual financial framework.

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