Fitch affirms Malta's A+ credit rating with 'stable' outlook

Fitch has affirmed Malta’s A+ credit rating with a ‘stable’ outlook.

The American credit rating agency said that Malta’s rating is supported by high per-capita income and a pre-pandemic record of strong growth and sizeable debt reduction.

It added that the “strengths” are balanced against the large banking sector, the small size of the economy - which is highly vulnerable to external developments, and a recent deterioration in public finances with large fiscal deficits, which have led to an increase in the moderate public debt burden.

Fitch forecasted the real Gross Domestic Product (GDP) growth to slow to 3.5% in 2023 from 6.9% in 2022. It stated that Malta still “significantly outperformed” its projections for the eurozone of 0.6% and the 'A' median of 1.6%.

Fitch said that the real GDP expanded by 3.9% between the second quarter of 2022 and 2023, supported by positive contributions from private consumption and net exports, as a deep contraction in investments was partly offset by a reduction in imports (reflecting a normalisation following last year's extraordinary acquisition of imported aircraft equipment).

Real disposable income growth has slowed but remains positive, supported by robust wage growth and stable energy prices.

It said that employment grew by 6.0%, supported by the continued return of foreign workers, while unemployment remained at a record low of 2.5% in July.

“We anticipate that the Maltese economy will grow close to potential growth in 2024 and 2025, reaching 3.7% in each year,” Fitch said.

The agency said that after peaking at 7.4% in October 2022, headline inflation fell to 5.0% in August this year, and projected that inflation will average 5.8% in 2023 (broadly in line with the 5.7% projected for the eurozone) as food prices only gradually normalise and service price inflation remains elevated amid strong wage growth.

“Wage growth has been fuelled by labour market shortages and an increase in the cost-of-living adjustment, which is a key component of the wage bill for all employees,” Fitch said.

It noted that the pace of monetary transmission in Malta has been much slower than other eurozone economies, reflecting the banking sector's “exceptionally strong” liquidity levels and the lack of competition in the market.

Annual house price growth (actual transactions) remained high at 6.6% in the first half of 2023, driven by the weaker monetary transmission but also by the continued existence of government support schemes.

Fitch projects that the fiscal deficit will remain sizeable at 5.0% of GDP in 2023 and 4.8% in 2024, exceeding the 'A' medians of 4.0% and 2.6%, respectively. The fiscal forecast also includes 0.5% of GDP in restructuring costs for Air Malta.

It said that since the government has no plans to phase out energy subsidies at present, this represents a concern for the evolution of public finances over the medium term.

Fitch forecasted that public debt will remain relatively stable at 52.0% of GDP this year, and it expects that general government debt will reach 56.0% of GDP by end-2027.

Labour Party, Prime Minister say report validates government’s policies

The Labour Party said that the report is, “yet another confirmation of the wisdom in the economic leadership of a Labour government.”

It said that the Fitch experts acknowledged that public debt will remain relatively stable and moderate, despite their prediction that the Government would have sharply increased the social cost to help families.

Prime Minister Robert Abela said that the government’s stable energy policy is, “improving firms' competitiveness and is supporting household consumption.”

Abela said that in the next budget, the government will continue furthering the common good.