A German credit rating agency has reaffirmed Malta’s A+ credit rating and stable outlook, saying the country has strong growth potential coupled with prudent fiscal performance.
Berlin-based Scope Ratings said that in its view, the risks Malta faces over the next 12 to 18-month period are “well balanced”, with debt expected to resume its downward trajectory once the country’s economy stabilises in 2022.
It said that the rating was not solicited by Malta.
Strengths and weaknesses
In its report, the agency highlighted three strengths and three weaknesses in Malta’s economy.
Its first strength, the agency said, is its growth potential, with an economy shifting to higher value-added services and structural reforms having increased the labour supply and reduced unemployment rates.
Scope said it believes Malta can grow its GDP at 3.5 to 4 per cent per year, a rate higher than that of its peers, with real GDP projected to exceed pre-pandemic levels by 2022.
The agency said Malta’s second strength is its “strong track record of fiscal prudence and consolidation over the medium-term,” with public debt levels having declined significantly in the years before the COVID-19 pandemic.
That had changed due to financial aid introduced due to the pandemic, the agency said, but the deficit of 9 per cent should reach 0 by 2026, in part thanks to EU funding that should help boost infrastructural projects.
Malta’s third strength was its robust external position, Scope said, with its pre-pandemic net international investment position of 54% of GDP at the end of 2019 being one of the highest in the EU. While that had shifted to -1.3 per cent of GDP by September 2020, the resumption of international travel and an increase in exports should increase the current account balance to 3.5 per cent of GDP by 2026.
Scope also noted three key weaknesses that could threaten Malta’s economic prosperity. The first was that the country’s economy was very exposed to external factors, with high integration to international financial markets. Malta remains very vulnerable to external shocks and reliant on external demand, as well as highly reliant on skilled foreign labour.
Importing more workers into what is already a very densely populated country could add pressure to scarce resources, challenge social integration and threaten the sustainability of Malta's growth model, it said.
A second risk comes from the 7.3 per cent of GDP in contigent liabilities on Malta’s books. These have increased due to guarantees introduced as part of COVID-19 aid schemes, with Malta’s ageing population – and the concomitant rise in pension and healthcare spending – also weighing on public finances.
The third risk, Scope said, comes from institutional challenges and a decline in good governnance metrics, which are below the EU average. The agency however noted that the administration has implemented reforms in response to a Council of Europe Moneyval report and “made substantial progress in terms of control of corruption and rule of law through constitutional amendments and reforms to the judiciary.”
It however said such efforts had to be maintained to “avoid adverse implications on the business environment and foreign investment attractiveness”.
The government welcomed the Scope Ratings report, saying the agency had highlighted "positive reform momentum under the current administration" and praised the government's financial intervention to introduce COVID-19 aid schemes.