Credit rating agency Moody’s has upgraded Malta’s rating from A3 to A2 while moderating its outlook for the country from ‘positive’ to ‘stable’. 

The upgrade is Malta's first in 11 years. 

Moody's said the changes were based on the “continued improvement of Malta's fiscal strength, on the back of a prudent fiscal stance and an enhanced fiscal policy framework” and Malta's strong medium-term growth prospects. 

“The stable outlook on the rating reflects our expectation that government debt levels will continue to decline in coming years, although at a gradually slower pace as we also expect the growth rate of the Maltese economy to decelerate from the exceptionally high rates registered in recent years,” Moody’s said. 

“It is also based on our expectation that current efforts to address institutional challenges will be maintained and that systemic risks emanating from the financial sector will be contained.”

Government debt expected to decline further

Moody’s noted that Malta’s debt-to-GDP ratio had been a declining trend since 2011, dropping from 70.2 per cent at the end of that year to 46 per cent at the end of 2018. It predicted a further drop to 40 per cent by the end of 2020. 

It said the rapid improvement had been driven by the very strong economic growth Malta had experienced in recent years and the government’s relative fiscal restraint against this backdrop of a booming economy, as a result of which fiscal surpluses had been registered since 2016. 

Moody’s said that given the institutional improvements to the fiscal policy making framework, such as the introduction of a structural budget balance rule in 2014 and a fiscal council in 2015, and the recurring conduct of spending reviews of specific policy areas, it expected the government's commitment to fiscal prudence will be maintained even in the face of the likely slowdown in growth in coming years. 

The agency also noted the improved financial health of previously troubled entities such as Enemalta and Air Malta, both of which had now returned to profitability. 

Economic growth likely to slow

Moody’s said the change in outlook from a “positive” to “stable” outlook was based on the expectation that the current rate of growth - 7.2% of GDP from 2013 to 2018 - was likely to slow “as the economy is running up against capacity constraints, and the pace of expansion will slow for the rapidly expanding sectors that have been driving growth in recent years”. 

Capacity constraints, it said, included infrastructure bottlenecks and the availability of labour and housing. 

Moody’s said the growth of labour input from immigration and increased employment of female and older workers was also likely to slow but was expected to remain positive, due in part to reforms to gradually increase the pension age and to encourage female labour force participation, such as the provision of free childcare for working and student parents. 

“While these factors will alleviate pressures on the Maltese economy related to population ageing, Malta nonetheless faces a significant increase in its old-age dependency ratio over the coming decade and beyond,” it said. 

In a statement, the government said it was committed to working further to achieve better results and to ensure the wealth generated by the country reached everyone.

"This upgrade for Malta follows closely on the heels of Fitch’s outlook upgrade," said Finance Minister Edward Scicluna.

"They both confirm that Malta’s economic growth model is indeed sustainable. These upgrades increase our country’s attractiveness to foreign investment which in turn leads key to a further significant increase in the standard of living of families recorded in recent years.”

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