Moody's has confirmed an A2 Stable rating for Malta, saying it expects the Maltese economy to recover from the pandemic without significant lasting scars and public finances brought under control.
The ratings agency noted that "institutional challenges related to the rule of law, control of corruption and money laundering supervision remain," although it added that "the government has embarked on a reform process to tackle these issues."
It said that it expected those reform efforts to be maintained, with systemic risks from the financial sector, "including those related to money laundering and the financing of terrorism" to be contained.
Malta’s track record of strong economic growth, elevated wealth levels and a moderate government debt burden were listed as the island’s strengths.
However, Moody's said, Malta has to work on institutional challenges related to the rule of law and control of corruption, while the island is also susceptible to external shock due to its small size and high degree of openness.
Malta’s fiscal strength score is one notch above that of Poland (A2 stable), but one notch below that of Latvia and Lithuania (A3 positive).
The government hailed the review, saying it will continue working on enhancing the island’s economic resilience in the coming months while improving the country’s institutions.
In a tweet, Prime Minister Robert Abela said Malta’s reforms were making a difference.
The finance ministry welcomed the report and highlighted a remark in the report that noted that "on the whole, the country benefits from a strong institutional environment”.
The full quote from the rating agency was: "Although concerns remain over the control of corruption in Malta and the small size of the jurisdiction can be a constraint on institutional capacity, on the whole, the country benefits from a strong institutional environment supported by its EU and euro area membership.
The ministry made no mention of the agency's warning that institutional challenges remain.
Moody’s said it expected the Maltese economy to have contracted by 7.8 per cent in 2020, the fifth-largest decline in the euro area based on the agency’s own forecasts.
This is a much more pessimistic outlook than what Moody’s originally predicted last April, when the agency forecast a 3.8 per cent decline.
Risks posed by the pandemic
The government debt-to-GDP ratio declined rapidly from 2011 to 2019, but the outbreak of the coronavirus led to a significant deterioration of growth and fiscal metrics in 2020.
According to the report, the pandemic and measures taken to halt its spread caused the Maltese economy to contract by 9.9 per cent of GDP year-on-year in the third quarter of 2020, a somewhat better performance than the 16.1 per cent year-on-year contraction in the second quarter.
The economic contraction was largely driven by a decline in net exports, above all through a sharp decline in tourism, although private consumption and investment also decreased last year.
Although travel to and from most EU member states to Malta as well as many non-EU countries has been allowed since 1 July, leading to a slight increase in tourist arrivals during the peak summer months of July to September, total tourist arrivals in 2020 dropped by three quarters over the previous year.
The tourism-dependent trade, transport, accommodation and food sector consequently contributed by far the greatest share to the decline in total gross value added in the third quarter of 2020.
Growth rebound dependent on tourism
Moody's is predicting growth to rebound to 5.1 per cent of GDP this year, however, this relies on tourism arrivals being substantially higher in the second half of 2021 when compared to 2020, particularly during the summer peak season.
The report notes that despite the current roll-out of mass vaccination programmes across the EU and the UK - the main source countries for tourist arrivals in Malta - it remains uncertain whether vaccinations will have progressed and remain effective to the point of allowing a rapid resumption of international tourism during the summer months.
Malta has the highest vaccination rate among its European counterparts, the report noted, with 7.2 vaccination doses administered for every 100 people, against 3.35 for the EU as a whole.
Resilient ICT and arts
The professional, scientific and technical activities sector, which was a key driver of the rapid growth of the Maltese economy in the years prior to the pandemic, also contracted year-on-year.
By contrast, most other sectors of the economy proved to be relatively resilient, according to the report.
In particular, the information and communications and the arts and entertainment sector - which includes Malta's large gaming sector, another key driver of pre-pandemic growth - recorded positive year-on-year growth in the third quarter.