Malta’s economic outlook is looking less gloomy than it was a year ago, rating agency Moody’s has concluded.

In a rating report issued late on Friday, Moody’s affirmed Malta’s A2 long-term rating but changed the country’s outlook to stable, reversing a ‘negative’ Outlook it gave the country in August 2021.

It said that Malta’s economic diversification stood it in good stead and would help the economy continue to grow, despite the expected global downturn, and that removal from the FATF greylist was a positive sign of commitment to institutional reform.

And while the global energy crisis would continue to challenge public finances, Moody’s said Malta appears on track to consolidate its finances.

Overall, Moody’s sees policy effectiveness in Malta as being broadly in line with that among similarly-ranked countries, while the quality of institutions is somewhat weaker, with Malta receiving lower scores in rule of law and control of corruption indicators.

Prime Minister Robert Abela welcomed the rating report.

“Our public finances will improve even though we will continue supporting families and business,” he wrote.

Economic growth

Moody’s said it expects Malta’s economy to register 6% GDP growth this year, with inflation coming in at 5.9%.

Domestic demand, an 80% recovery in the tourism sector and export of services have all powered the economy, with a strong labour market still struggling to find workers to fill jobs in a number of key sectors.

GDP growth will moderate to 3% next year, Moody’s predicts, before rising slightly to 3.5% in 2024. It believes that inflation will drop to 3.8% next year and continue to fall to 2.7% in 2024.

Those projections are built on the assumption that Malta’s two major trading partners, the EU and UK, will both experience an economic slowdown.

While spending on travel and hospitality might be impacted as inflation hurts consumers’ pockets, there is much lower risk of travel shutdowns for health-related reasons, unlike a year ago, Moody’s said.

Malta’s financial services, gaming and information and communication sectors are all resilient and less sensitive to global developments, it added.

EU funding – in the form of €258 million in European Recovery and Resilience Facility funding and €838 million in Cohesion Funds – will also help grow Malta’s economy further in the coming years, it said.  

Public finances

Moody’s believes Malta’s public finances will gradually consolidate over the coming years, although spending on energy subsidies remains uncertain and could lead to deficits running higher than projected.

The country’s rapidly rising debt burden – debt rose from 40.7% of GDP in 2019 to 56.3% by the end of 2021 – had played a significant part in Moody’s original decision to issue a negative outlook for Malta.

But it now believes debt can be controlled and gradually brought down, with yearly deficits narrowing between now and 2024. The national debt burden is projected to peak at 61.2% of GDP in 2025 before starting to recede.

The country’s prudent debt management means Malta is by and large shielded from the shock of a sudden rise in interest payments, it said. The fact that most debt is in euros and that 76.2% is held by local investors adds further protection, it said.

Greylisting

Moody’s’ outlook for Malta was positively conditioned by the country’s quick exit from the FATF greylist, which it described as an “important achievement” for the country.

Malta was added to the list of untrustworthy jurisdictions in June 2021 but taken off the list one year later.

“In Moody's view, Malta's swift exit from the "grey list" reflects a firm and steady commitment from the local authorities to comply with international standards and enhance the country's institutional setup,” the agency said.

It said the exit would improve the local business climate and shift focus towards the country’s traditional strengths – a competitive tax environment, an existing entrepreneurial ecosystem and the widespread use of English.

There were negatives, too: the country’s ESG credit impact score is “moderately negative”, with Moody’s noting the lack of forest areas, low share of protected natural areas and elevated waste and pollution risks.

Demographics are also not favourable, with the country’s population an ageing one. And concerns about controlling corruption remain, though Moody’s believes EU and Euro membership help in that regard.