Malta has had its A+ sovereign credit rating confirmed by German agency Creditreform Rating, which said the country’s outlook remained stable.
The credit rating agency said Malta’s low levels of public debt meant it was well-placed to recover economically from the COVID-19 pandemic and said that while there was “room for improvement” in Malta’s institutional framework, the government “seems committed to deliver” on rule of law and anti-money laundering reforms.
It said the rating report was unsolicited.
Creditreform noted that the pandemic had caused widespread damage to the local economy, with GDP falling by 11.6 per cent between March and May when compared to the previous quarter. Malta’s high reliance on tourism makes it vulnerable, the agency found. It cited OECD statistics which attribute 12.8 per cent of Malta’s GDP and 14.9 per cent of employment to the tourism sector.
But Creditreform also noted that fallout from the coronavirus crisis had been “limited” thanks to wage subsidy schemes given to help prop up businesses.
The agency also noted that there were signs of economic diversification, with Malta’s gaming sector proving resilient throughout the pandemic. Gross value added by the art, entertainment and recreation sector and ICT services sector both increased markedly on previous years, it found.
It said it expects Malta’s economy to grow by 4.5 per cent next year, although it tempered that forecast by highlighting the uncertainty surrounding the COVID-19 pandemic and said its predictions were based on the assumption that vaccines would ease the pandemic in 2021.
When setting aside considerations related to the pandemic, Creditreform analysts’ major concern regarding Malta was with red tape for investors. The country has slipped down the World Bank’s Ease of Doing Business index – it is now 88th out of 190 countries – and stands at 38th in the World Economic Forum’s most recent Global Competitiveness Report.
Public finances
The credit rating agency said that Malta’s low levels of public debt placed it in a “comparatively favourable position” when compared to its peers which should set it on a sound footing when recovering from the pandemic’s economic effects.
It said it expected the government to post a 9.7 per cent deficit this year – marginally higher than the 9.4 per cent forecast by the government last October - with the deficit declining to 6.1 per cent next year.
The deficit might be lower than forecast if Malta were to receive emergency pandemic funding from the EU, it said.
Increased spending coupled with declining revenues will bump government debt up to 56 per cent of GDP this year and 60 per cent in 2020, Creditreform said, before taking a more positive turn.
The agency also noted that Malta’s revenue streams are highly reliant on a volatile tax base , with 17.8 per cent of tax revenues coming from corporate income tax. The country’s income from its golden passport scheme was also under question, given EU pressure to cancel the scheme.
However, it noted that debt remained affordable, somewhat mitigating fiscal risks.
Institutional concerns
Analysts noted that Malta lags behind the euro area average when it comes to perceived freedom of speech and free media and is even further behind when it comes to perceptions of corruption, where it ranks 81st out of 209 on a World Bank index. The euro area median is 42. The country has also fallen behind its peers when it comes to government effectiveness and rule of law, the report said.
It however tempered that criticism.
“We favourably assess Maltese authorities’ strong and intensified reform efforts to combat money laundering and financing of terrorism and enhance its justice system, in a bid to align the institutional set-up with European and international standards,” analysts said, adding that they believed the government was firmly committed to satisfying key anti-money laundering provisions set by Council of Europe assessment body Moneyval.
The rating agency cautioned that all its forecasts were extremely volatile as they were reliant on how the COVID-19 pandemic progressed.