Ratings agency S&P has revised its outlook for Malta to 'stable' from 'positive' while confirming the 'A-/A-2' sovereign credit rating.

“We revised the outlook on the 'A-' long-term rating to stable from positive because of a likely sharp economic slowdown emanating from the spread of COVID-19, which we expect will have a negative effect on external demand from Malta's key economic partners,” the agency explained.

“For example, we now anticipate eurozone GDP growth of 0.5% in 2020, versus our previous forecast of 1.0%, due to the effects of the coronavirus spread. We believe that a sharper-than-expected economic slowdown in the eurozone will negatively affect the Maltese economy, given its small and open nature and that it is dominated by export-oriented services sectors such as tourism. This in turn will likely affect the country's budgetary and external performance,”

The agency said it had also revised the outlook to stable because “the country’s reputational risks related to weaknesses in regulatory financial and anti-money-laundering supervision represent an increasing risk to its macro-financial stability. This is, in our view, particularly relevant given the importance of the Maltese financial sector to its economy.”

It observed that several international institutions had identified significant shortcomings in the investigation and prosecution of money laundering-related activities in Malta's financial system.

S&P said that while it understood that the Maltese authorities were committed to strengthening supervisory standards, “we believe that persistent and insufficiently addressed perceptions of poor transparency at some banks have increased operational risks for the entire banking sector. This has resulted in heightened pressures on correspondent banking relationships with financial institutions in Malta, particularly in the context of much increased international scrutiny over the past decade.”

“Although policymaking in recent years has promoted reduced fiscal imbalances, we believe weaknesses in the transparency and accountability of Maltese institutions remain significant.”

The agency said it expects GDP growth to decelerate substantially this year--to about 2% (from 4.4%) --given the negative effects of the COVID-19 pandemic on the small and open Maltese economy. Growth next year, however, is projected to be 3.7%.

Furthermore, despite some progress, weaknesses in the transparency and accountability of Maltese institutions were still significant and could undermine the country's macro-financial stability.

“We understand that the Maltese authorities are committed to strengthening supervisory standards. Both the FIAU and MFSA have started to increase their budget and invest in human resources and information technology solutions, and have adopted strategic plans to improve data gathering and risk-assessment tools. Although we consider these measures positive, we believe they are long overdue,” the agency commented.

It also warned that further downside risk could come via international and European anti-tax-avoidance initiatives, including the ongoing implementation of the agreement regarding the erosion of the tax base and profit shifting, possible establishment of a common consolidated tax base, and digital taxation reforms. “Nevertheless, while we believe Malta has benefitted from its status as a low-tax environment, eventual changes in international tax rules and their effects are not likely to be felt in the near term,” it said.

The agency commented positively about economic growth over the past few years, noting that the government had improved its budgetary position, reduced general government debt relative to GDP, and undertaken several structural reforms, notably to reduce the country's energy bill and increase female participation in the labour market. It said it expects macroeconomic policymaking will remain geared toward further fiscal consolidation. It also expects additional efforts to further reduce skill mismatches, and improve the long-term sustainability of public finances in the context of an aging population, alongside public investment to plug infrastructure gaps.

“Structural shifts in the economy have created new employment opportunities, leading unemployment to reach its lowest level in two decades in 2019, at 3.4%. Malta has been successful in attracting labour from abroad across a wide range of industries and skill levels. The country's population increased by about 2.6% on average in 2013-2019, up from 0.7% over 2008-2012. However, this makes Malta the most urbanized and densely populated country in the EU and particularly vulnerable to climate risks. Malta is for now off track in relation to its 2020 and 2030 targets,” it notes.

Despite its warnings, the agency said it expects general government surpluses slightly below 1% of GDP in 2020-2023. Favourable cyclical developments, with their positive effect on tax revenue, and proceeds from the Individual Investor Programme should continue to support the government's fiscal position, but less so than previously.

“An important risk (in either direction) to our projections remains the size of future inflows related to the citizenship programme given its nature and increasing scrutiny from European institutions, as well as the aforementioned international and European anti-tax-avoidance initiatives. At the same time, we expect relatively large government spending on the back of social pressure and infrastructure needs, given the rapid population growth in recent years,” it said.

The Malta government in a statement welcomed the economic projection for next year, which is well above that of the EU average. It noted that the outlook for Malta had been lowered because of coronavirus concerns, but it made no S&Ps reference to the concerns about reputational risks. (See statement in full in Maltese on pdf below.)