Wage supplement protected jobs during pandemic’s economic contraction – rating agency

The German credit rating agency DBRS has confirmed Malta’s rating at A (high) with stabled trend its latest economic outlook for the island.

Malta’s gross domestic product contracted by 9.9% year-on-year by the third  quarter of 2020, more than previously anticipated, due to disruption from COVID-19.

Public finance deterioration is expected with the government’s fiscal response to mitigate the effects of the pandemic. However, DBRS said Malta entered the crisis after a prolonged period of strong economic and fiscal performance, which provided the government valuable fiscal headroom to soften the pandemic setback.

“A successful vaccination campaign in Europe could lead to a relaxation of restrictions and a partial revival in international tourism later this year. DBRS Morningstar expects Malta to gradually return to a healthier fiscal position as the support measures are phased out and the economy recovers, helping to stabilise the public debt ratio. The success of the Maltese authorities in strengthening the country’s governance framework will remain central to avoid reputational risks that could spill over to the broader economy,” the agency said.

It warned that Malta’s attractiveness to foreign investment could suffer if measures to address the financial integrity risks and institutional governance weaknesses noted by international bodies are deemed insufficient.

The pandemic shock abruptly halted a period of remarkable economic performance in Malta. As expected, the restrictive COVID-19 measures had an uneven impact on the economy, impacting more heavily the tourism-related sectors that are more vulnerable to the curbs.

While trade, transport, food and accommodation experienced a massive decline (-33.9% y-o-y), sectors such as information and communications (+9.9% y-o-y), arts and entertainment (+7.0% y-o-y), and financial and insurance activities (+3.9% y-o-y) have managed to grow over this period. Industry also registered positive growth of 1.5% y-o-y, after a significant contraction in the second quarter.

On the other hand, the labour market withstood the shock relatively well, with the unemployment rate broadly in line with pre-pandemic levels at 3.9% in October 2020. “The wage supplement scheme has played a key role in protecting employment, raising uncertainty over potential job losses when the scheme is eventually phased out.”