Uncertainty on sustained Moneyval reforms could colour FATF verdict – Fitch

Moneyval concerns and the prospects of a global minimum tax have featured in the latest Fitch rating for Malta, satisfactory though the assessment may be.

Fitch said uncertainty remains about how sustained recent improvements in addressing the significant deficiencies of Malta’s anti-money laundering and funding of terrorism framework, will be.

Moneyval announced that Malta is now ranked largely compliant or compliant on all initial 40 recommendations to prevent money-laundering and strengthen financial supervision.

But the Financial Action Task Force will use Moneyval’s technical assessment as an input to determine if Malta is reclassified 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,” Fitch said.

The potential introduction of a global minimum tax and pressure on low-tax jurisdictions to raise effective tax rates may also pose a downside risk to public finances for Malta.

Malta is an attractive low-tax destination for international companies: such tax revenue accounts for around 17% of total tax revenues. “Any potential impact will depend on the details of the agreement, which is expected to be reached during the G20 meetings this summer.”

And the European Commission’s ongoing infringement procedure into Malta’s citizenship investment programme – now replaced by the Citizenship by Direct Investment programme –  could risk it revenues of around €100 million or 0.7% of GDP.

Fitch still affirmed Malta at A+ rating with a stable outlook, despite public finances deteriorating significantly from a surplus of 0.4% of GDP in 2019 to a deficit of 10.2% of GDP in 2020.

This was down to the comprehensive fiscal stimulus package to safeguard employment and growth during COVID-19, including 5% of GDP in direct fiscal measures and an additional 1.5% in tax deferrals.

But 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% year-on-year.

Fitch projects a fiscal deficit of 11.5% this year, while growth forecast of 4.7% is more optimistic than the 3.8% forecast presented in Malta’s Stability Programme. “We believe that there may be some underspending as the economy recovers in the second half of the year... 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 stimulus measures.”

And while debt-to-GDP ratio will peak at 65.5% of GDP in 2022, it will gradually fall back to below 60% of GDP by 2026.

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. 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 World Governance Indicators (WGI) remained above the ‘A’-rated median, but perceived weaknesses in the quality of institutions and governance led to a sharp deterioration in last year.

Control of Corruption and Regulatory Quality indicators experienced some of the largest drops, declining by almost 11 percentile ranks also related to unfolding corruption allegations from a public inquiry into the murder of journalist Daphne Caruana Galizia.

World Bank Governance Indicators (WBGI) ranked Malta at 78.2, 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.