Fitch Ratings has affirmed Malta's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A+' with a stable outlook.

It said Malta's rating is supported by high per-capita income levels, a large net external creditor position and a pre-pandemic record of strong growth and sizeable debt reduction.

These strengths are balanced against its large banking sector, the small size of its economy, which is highly vulnerable to external developments, and a recent deterioration in public finances with large fiscal deficits, which have led to a sharp increase in the moderate public debt burden.

Ukraine war lowers economic growth projections

The agency observed that the Maltese economy rebounded strongly in 2021, following a severe contraction in 2020. Real GDP rose by 9.4% in 2021, significantly exceeding its November forecast of 5.7%. But Fitch said it has lowered its growth forecast to 4.2% from 6.1% for this year due to the stronger-than-expected 2021 recovery and (mostly) indirect effects from the invasion of Ukraine and imposed sanctions on Russia.

"Malta's direct economic and energy ties to Ukraine, Russia and Belarus are limited but, as a small and open economy, Malta is highly exposed to the weaker economic outlook in key tourism markets in the EU and the UK. However, we expect Malta's tourism sector to further recover this year as tourist arrivals remained 65% below their 2019 level in 2021. Private consumption and services exports are projected to further increase in 2022/23, albeit more moderately compared with our previous forecast."

Fitch projected that inflation will reach 4.1% in 2022, largely reflecting partial adjustments in the weights of the Harmonised Index of Consumer Prices and higher services and food prices although gas and electricity prices remain fixed and the government is intervening in the food market to cap the increase in wheat prices.

Fiscal deficits concern

Fitch noted that following a large fiscal deficit of 9.5% of GDP in 2020, Malta's general government deficit narrowed marginally to 8% of GDP in 2021 (higher than the 'A' peer and eurozone current medians of 6.3% and 5.2% of GDP, respectively), despite a strong rebound in revenues. Fitch now expects a slower improvement in public finances, forecasting a fiscal deficit of 6.4% of GDP in 2022 and 5.5% in 2023, compared with its November forecast of 6.1% and 4.1%, respectively.

It said solid nominal GDP growth and a strong labour market will continue to support government revenues but government measures to mitigate the impact from inflation and support the economic recovery will lead to continued fiscal deficits. Pandemic-related measures will amount to €245 million (1.6% of GDP) in 2022 while another €210 million (1.4% of GDP) is budgeted to mitigate the impact from inflation on households and businesses.

Higher public debt

General government debt increased to 57% of GDP, in line with the 'A' median of 56.6%. Malta has seen one of the largest increases in public debt since 2019 among 'A' rated peers with debt increasing by 16.3pp over the past two years (compared with 9.2pp for 'A' rated sovereigns).

"We expect that total general government debt will further increase to above 61% in 2023," Fitch said.

Continued fiscal deficits are partially offset by strong nominal GDP growth and negative stock-flow adjustments.

The agency notes that the government has committed to strengthening the institutional framework, including the judicial and anti-money-laundering framework, and partly address the European Commission's concerns over the availability of aggressive tax planning practices.

Malta's World Governance Indicators (WGI) continue to outperform the 'A' median, it says, but perceived weaknesses in the quality of Malta's institutions and governance framework led to a sharp deterioration in 2019/ 2020 and WGI scores only partially recovered in 2021.

Greylisting has not yet materially affected the Maltese economy- Fitch

Fitch said the decision by the Financial Action Task Force's (FATF) in June 2021 to place Malta on its so-called greylist has not yet materially affected the Maltese economy, as evidenced by the strong economic recovery and continued strong performance of the large financial sector. Following an FATF on-site visit in April this year, the FATF could vote on whether to take Malta off its greylist during its next plenary meeting in June.

The agency said the Maltese household and banking sector should be relatively resilient to an increase in the ECB's main policy rates.

Fitch now expects the ECB to raise its main refinancing operations and deposit rate to 0.5% and 0%, respectively, before end-2022. Despite a prevalence of variable mortgage rate loans (93% of the total mortgage stock), Maltese households possess ample liquidity to relatively quickly pay off their debt burdens. Vulnerabilities to the financial sector are further mitigated by banks' strong balance sheets, including solid capitalisation and low non-performing loans, it says.

Malta scores well in ESG - Governance

Fitch notes that Malta has an ESG (Environmental, Social, and Governance) Relevance Score (RS) of '5[+]' for both political stability and rghts and for the rule of Law, Institutional and regulatory quality and control of corruption.  Malta has a high WBGI ( World Bank Governance Indicators ) ranking at 79.8, reflecting its long track record of stable and peaceful political transitions, well established rights for participation in the political process, strong institutional capacity, effective rule of law 'and a low level of corruption'.

Factors to look out for

Fitch said that factors that could lead to negative rating action/downgrade include a continued upward trend in general government debt over the medium term, further deterioration in governance or banking supervision or concerns over wider financial sector transparency that could adversely impact Malta's attractiveness as an investment destination. 

Factors that could lead to positive rating action/upgrade include an improvement of the general government debt/GDP and further progress in addressing key weaknesses in governance, banking supervision and the business environment.