Malta finances get Fitch’s ‘A’ but governance issues overshadow economy

The Maltese economy has secured an A+ rating by the credit rating agency Fitch, thanks to high incomes and healthy debt levels.

And while Fitch has noted substantial progress in the supervisory framework, Malta’s risk perception on money laundering compliance is affecting banking relationships and corruption allegations keep tarnishing the image of Malta in the eyes of external investors.

Fitch said it expects Malta’s GDP to recover from its pandemic levels with budget deficits narrowing in 2021 and 2022, even through risks continue from the effects of the COVID-19 pandemic on the tourism sector and public finances. 

Fitch revised down its GDP growth forecast to -7.7% in 2020, from -6.9% previously, in anticipation of a further fall in domestic and external economic activity in the last quarter of 2020, and worse-than-expected tourist season this summer. 

“We expect a stronger recovery, with GDP growth at 5.4% in 2021 and 3.9% in 2022, previously 4.1% and 3.6%, respectively, driven by strengthening consumption, return of foreign tourists and several large-scale investment projects that have been delayed from 2020,” FItch said. 

The limited rise in the unemployment rate and only moderate repatriation of foreign workers will also support the recovery, with the former edging up to only 3.9% in October from 3.7% in January. 

GDP growth will be boosted by €347 million (2.8% of 2020 GDP) over 2021-2026 in grants under the Next Generation EU (NGEU) fund. 

Together with the new multi-annual financial framework (MFF) 2021-2027, Malta will be entitled to an overall allocation equivalent to about €2.7 billion or 21.7% of 2020 GDP on a gross basis, which is more than double the €1.1 billion it received during 2014-2020. 

The economy is supported by a sizable fiscal stimulus equal to around €1 billion in direct support measures, mainly the wage subsidy scheme. 

Fitch forecasts government debt to rise to 56.4% of GDP and peaking at 60.9% in 2022.  

Malta has one of the largest positive net international investment positions in the EU at 54.3% at end-2019 and a track record of sizable current account surpluses. And the Maltese banking sector remains well-positioned to absorb higher loan losses caused by the pandemic. 

Fitch said the risks related to the real estate sector are limited, as the price levels are in line with fundamental factors and household debt is low (49.4% of GDP as of end-2019). “The residential property market remained relatively stable throughout the lockdown months, with the prices recovering to their 2019 levels by 2Q20. Rents have recorded a steep fall in 2Q20, by 11% year-on-year, which is explained by a substantial increase in supply as the Airbnb owners opt for more secure long-term rentals given the collapse in tourist arrivals.” 

Fitch noted substantial progress in the supervisory framework, but Malta’s risk perception on money laundering compliance has led several correspondent banks to terminate their relationships with entities in Malta. “Further pressure on correspondent banking could diminish the attractiveness of Malta's financial sector and affect its wider economy. While still at par with the ‘A’ median, Malta's governance quality continued to deteriorate in 2019/2020 according to the World Bank Governance Indicators (WBGI). Particularly, the Control of Corruption and Regulatory Quality pillars experienced one of the sharpest drops in our rated universe, declining by 10.2 and 10.6 places in percentile rankings over the last year.” 

Fitch noted that the reform momentum on the judiciary and rule of law had accelerated under the new prime minister Robert Abela. “However, we believe that 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.”