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 track 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 resume a gradual downward path following the fiscal shock caused by the pandemic. At the same time, there is continued downside risk from the path of the coronavirus and its effect on the tourism sector and public finances, as well as adverse developments in governance.
Public finances have deteriorated significantly from a surplus of 0.4% of GDP in 2019 to a deficit of 10.2% of GDP in 2020. The government implemented a comprehensive fiscal stimulus package to safeguard employment and growth, including 5% of GDP in direct fiscal measures and an additional 1.5% in tax deferrals. The 2020 fiscal deterioration was the second largest in the EU and well above the EU average fiscal deficit of 6.9% of GDP. The fiscal deficit turned out to be marginally larger than projected by the government, largely due to the underperformance of tax revenues, which declined by 11% yoy.
The 2021 budget maintains an accommodative policy stance. Fitch projects a fiscal deficit of 11.5% this year, slightly below the government’s fiscal target of 12%. Our growth forecast of 4.7% is more optimistic than the 3.8% forecast presented in Malta’s Stability Programme and we believe that there may be some underspending as the economy recovers in the second half of the year. The higher 2021 budget deficit is underpinned by the extension of most economic stimulus measures from March 2021 until the end of 2021. The budget also foresees higher investment spending, amounting to 5.4% of GDP in 2021, partly supported by a number of infrastructure projects in the tourism, transportation and health sector. We expect the deficit to narrow markedly to 5.4% of GDP in 2022, driven by the cyclical recovery and the phasing-out of Covid-19-related stimulus measures.
The potential introduction of a global minimum tax and pressure on low-tax jurisdictions to raise effective tax rates may pose a downside risk to public finances and inward investment over time. Malta has established itself as an attractive low-tax destination for international companies and corporate taxes are a key source of fiscal revenue, accounting for around 17% of total tax revenues prior to the pandemic. Any potential impact will depend on the details of the agreement, which is expected to be reached during the G20 meetings this summer. The European Commission’s ongoing infringement procedure into Malta’s citizenship investment programme (replaced by the Citizenship by Direct Investment programme in 2020) and reports that conditions attached to the programme were not fulfilled represent further downside risks. The termination of the programme could reduce revenues by around EUR100 million or 0.7% of GDP.
Fitch’s debt simulations indicate that the debt-to-GDP ratio will peak at 65.5% of GDP in 2022 and gradually fall back to below 60% of GDP only by 2026. Despite the increase, debt will remain almost 5pp below the 2011 peak of 69.3% of GDP, illustrating Malta’s strong fiscal track record. Debt declined by 27.3pp of GDP between 2011 and 2019, driven by very strong nominal GDP growth and strong increases in tax receipts. Very favourable financing conditions will drive further decline in interest payments, which we expect to average 3.2% of revenue between 2020-2022 from 8.0% in 2010, lower than the ‘A’ median of 3.9%.
Fitch has revised down its GDP growth forecast to 4.7% for 2021 (from 5.4% previously). We anticipate that the economic recovery will be further shifted towards 2022, for which we have raised our growth expectation to 6.0% (from 3.9% previously). Containment measures were tightened again in spring to safeguard the important summer tourism season amid an all-time high of Covid-19 cases in mid-March. Following a full-year contraction of 7.8% in 2020, economic activity remained depressed in 1Q21 with a contraction of 1.8% yoy. Malta’s economic recovery will be underpinned by a sizeable carry-over effect, pent-up domestic consumption and extended fiscal stimulus measures. We expect the economy, which showed dynamism pre-pandemic, could return to growth of 3% in the medium term.
Malta has been a frontrunner in terms of vaccination distribution, becoming the first EU country to achieve the 70% vaccination threshold for “herd immunity” on 24 May. However, international tourism receipts, which amounted to 12.5% of GDP in 2019, will only gradually recover to pre-pandemic levels in light of international travel restrictions and quarantine requirements, with tourist arrivals 92% below their pre-pandemic levels in 1Q21. While we anticipate that international travel will rebound in 2H21, international arrivals in 2021 will remain 55% lower compared with pre-pandemic levels but the gap will substantially narrow to 15% by 2022. Uncertainty remains about when the UK will add Malta to its so-called “green list”, allowing quarantine-free travel for British tourists, which accounted for almost a quarter of all tourist arrivals in 2019.
Malta’s tourism sector has been severely affected by the pandemic, but other sectors, including the IT, financial services and construction sectors have reported continued strong growth rates. This also applies to the online gaming sector, which makes up an increasingly large share of gross value added at 8.3% by 1H20. In addition, Malta’s labour market remained remarkably resilient, with an increase in employment and an only moderate increase in the very low unemployment rate to 4.3% in 2020 from 3.6% a year earlier.
The authorities have made progress in addressing the significant deficiencies in the anti-money laundering and funding of terrorism framework. In May, Moneyval announced that Malta is now ranked largely compliant or compliant on all initial 40 recommendations to prevent money-laundering and strengthen financial supervision. Uncertainty remains about how sustained recent improvements will be. The Financial Action Task Force will use Moneyval’s technical assessment as an input to determine if Malta is re-classified as a high-risk jurisdiction, a decision expected to be taken later in June. If Malta was placed on a grey list, reputational issues could diminish the attractiveness of its financial sector.
While Malta’s World Governance Indicators (WGI) remain above the ‘A’-rated median, perceived weaknesses in the quality of Malta’s institutions and governance framework led to a sharp deterioration in last year. Control of Corruption and Regulatory Quality indicators experienced some of the largest drops in our rated universe, declining by almost 11 percentile ranks. Unfolding corruption allegations in the context of the public inquiry into the murder of journalist Daphne Caruana Galizia could further affect Malta’s governance scores.
