Fitch Ratings has affirmed Malta’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A+’ with a Stable Outlook. 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 and the small and highly open nature of its economy, which makes it vulnerable to external developments.
The Stable Outlook reflects Fitch’s expectation that GDP growth will recover and that debt will stabilise following the fiscal shock caused by the pandemic, supported by a strong revenue recovery. At the same time, there is continued downside risk from the evolution of the coronavirus and its effect on the tourism sector and public finances, as well as the risk of macroeconomic instability from the Financial Action Task Force’s (FATF) decision to greylist Malta.
Following last year’s deep contraction in real GDP of 8.3%, Fitch projects 5.7% growth in 2021, reflecting a lagging recovery relative to eurozone peers. GDP grew by 1.9% qoq in 1Q21 but dropped by 0.5% in 2Q21 as private and public consumption as well as net exports decreased slightly, more than offsetting the strong increase in investment. We forecast a recovery of 5.7% in 2021, driven by a sizeable carryover effect and improved outlook for private consumption and investment for the rest of the year. Growth will further accelerate to 6.1% in 2022 due to pent-up domestic consumption and the gradual recovery in the tourism sector. Is expected that it will take until 2H22 for GDP to revert to its pre-pandemic level.
Malta’s growth outlook is supported by the country’s successful vaccination campaign. As of 17 November, 83.5% of the population had received two doses (EU average: 66.5%) while 16.5% had already received a third ‘booster’ dose. The fast rollout of vaccines has allowed for a gradual relaxation of containment measures and travel restrictions since June. Tourist arrivals had recovered to 56% of their 2019 levels by September 2021, following a sharp drop in tourist arrivals of 76% in 2020. Remaining downside risks relate to the renewed imposition of travel restrictions, in particular by the UK as British tourists accounted for almost a quarter of all arrivals pre-pandemic.
The FATF’s decision in June to place Malta on its so-called greylist has not yet materially impacted the Maltese economy and its large banking sector (total banking assets amounted to close to 300% of GDP at end-September). However, if Malta remains on the list for a prolonged period, the reputational damage from greylisting could eventually adversely affect the country and its financial system by reducing its attractiveness for investors and corporates, ultimately leading to capital outflows and weaker-than-projected economic performance. “We are also aware of contagion risks as the exit of one or more larger companies from Malta could create spillover effects to the broader economy” analysts added.
Below are the additional considerations published by the rating agency.
“Our 2021 fiscal forecast has improved relative to the previous rating review in June 2021, given the better-than-anticipated revenue performance. We have revised our deficit to 8.4% of GDP from previously 11.5%, below the government’s current forecast of 11.1%. Following last year’s sharp drop in revenues amid a decline in corporate and indirect tax receipts, cash-based figures indicate that revenue collection had already surpassed 2019 levels by end-September, which has helped mitigate this year’s stronger-than-envisaged growth in recurrent expenditures.
Despite the improved fiscal projections for 2021, we now project a wider deficit for 2022 compared with our last review (6.1% vs. 5.4%). The 2022 budget foresees a reduction in the fiscal deficit to 5.6% of GDP, supported by the phasing out of pandemic-related measures and the government’s revised growth forecast of 6.5%. However, we assume that the government will partly make use of a 1.4%-of-GDP let-out authorised in the budget to deal with the pressure from higher energy prices.
We have incorporated additional deficit-increasing measures of 0.5% of GDP for 2022, including the already announced reduction of excise duties (reducing revenues by 0.2% of GDP) and an additional 0.3% of GDP in expenditures for subsidies and direct payments to households (similar to the support provided in other countries). Fiscal downside risks relate to a further intensification of the energy crisis, which might require greater utilisation of the fiscal buffer.
We anticipate that the fiscal balance will further narrow to 4.1% of GDP by 2023, implying that public debt will peak at 61% of GDP in 2023, slightly above the forecast ‘A’ median of 59% but below the 2011 peak of 70%, illustrating Malta’s fiscal prudence in pre-pandemic years of strong growth. Debt declined by 29.3pp of GDP between 2011 and 2019 driven by very strong nominal GDP growth and strong increases in tax receipts.”