Fitch affirms Malta at A+, outlook stable

Fitch Ratings has affirmed Malta’s Long-Term ForeignCurrency 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 prepandemic record of strong growth and sizeable debt reduction, the agency said. 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.

Strong economic recovery but outlook weakens: The Maltese economy rebounded strongly in 2021, following a severe contraction in 2020. Real GDP rose by 9.4% in 2021, significantly exceeding our November forecast of 5.7%. Fitch has lowered its growth forecast to 4.2% from 6.1% for 2022 due to the stronger-thanexpected 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.

Government intervention limits price increases: Fitch projects that inflation will reach 4.1% in 2022, largely reflecting partial adjustments in HICP weights and higher services and food prices. Maltese households have so far remained largely unaffected by a sharp increase in international wholesale gas and electricity prices due to fixed-price purchase agreements, protecting real disposable incomes and private consumption. Government remains committed to limit the increase in energy prices. Government measures to control them include sizeable subsidies to the public utility company to cover the loss from keeping electricity prices stable and a reduction in excise duties for petrol and diesel. Government is also intervening in the food market to cap the increase in wheat prices.

Sizeable fiscal deficits:

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 our November forecast of 6.1% and 4.1%, respectively. 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 in our baseline scenario. Pandemic-related measures will amount to €245m (1.6% of GDP) in 2022 while another €210m (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. Continued fiscal deficits are partially offset by strong nominal GDP growth and negative stockflow adjustments.

Economic policy continuity, institutional reforms: Following the re-election of Malta’s governing Labour party on 26 March, the centre-left party continues to govern alone under Malta’s two-party political system. As part of the Resilience and Recovery Plan, government has committed to strengthen the institutional framework, including the judicial and anti-moneylaundering 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 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.

FATF greylisting: The Financial Action Task Force’s (FATF) decision in June 2021 to place Malta on its so-called grey list 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.

Resilient Financial Sector: 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. The Central Bank of Malta introduced borrower-based measures to strengthen the resilience of lenders and borrowers against financial vulnerabilities back in 2019, including limits to the loanto-value ratio and mandatory stress-testing of borrowers against an interest rate increase of 150bp.

ESG – Governance: Malta has an ESG Relevance Score (RS) of ‘5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Malta has a high WBGI 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.