DBRS confirms Malta’s A credit rating

The German credit rating agency DBRS has confirmed Malta’s long-term foreign and local currency-issuer ratings at A (high).

In a statement, the agency said that Malta’s economic momentum remained strong, with GDP growth reaching 7.5% growth over the previous year in the third quarter of 2018.

DBRS said it expected GDP growth to decelerate gradually but to remain high in the years to come, especially when compared to other EU member states.

Benefitting from “tax-rich economic growth, fuelled by domestic demand, strong job creation, and the impulse from its International Investment Programme (IIP)”, DBRS said it expected Malta’s debt-to-GDP ratio to continue to decline given the government’s primary surplus and favourable “debt snowball effect”.

“The rating confirmation reflects DBRS’s view that despite the upward pressure from improving economic and public finance metrics, Malta’s structural challenges continue to constrain the ratings. Given the size and openness of the economy, external developments, including international corporate taxation or regulatory changes, could negatively affect economic and fiscal variables,” the agency said.

Explaining the rationale for its assessment, DBRS said that recent economic performance was remarkable, noting that the 7.2% annual average GDP growth from 2013 to 2017 was well above the 2.1% average rate between 2004 and 2012.

“In this context, Malta’s GDP per capita (EUR 24,984) continued to converge to EU average levels (EUR 30,946) in 2018, as per EC estimates. Growth has been broad-based with outward-facing sectors such as tourism, gaming, financial and business services being key contributors to Malta’s outperformance,” DBRS said.

“A highly elastic foreign labour supply, increased labour participation rates, and a rising share of less capital-intensive service sectors have prevented overheating pressures.”

DBRS also noted that the International Monetary Fund projected an annual average GDP growth rate of 3.8% between 2019 and 2022, supported by strong domestic demand and supply factors.  

“Higher investment, increased labour supply, and enduring benefits from the energy reform will continue to buttress potential output,” it said, adding however that addressing “infrastructural bottlenecks and labour shortages”, would weigh on growth and present a continued challenge.

The agency added that in the short term, major risks stem from an escalation of protectionist trade measures hurting global trade, as well as the impact on tourism of Brexit. In the medium term, it said that changes in corporate taxation systems could diminish Malta’s attractiveness for multinational companies, while Malta’s gaming industry could also be affected by regulatory changes at the EU level.

On the country’s contingent liability risks, DBRS noted that the improvement in Malta’s public finances had allowed it to become fully compliant with the EU’s Stability and Growth Pact. It noted that despite Air Malta’s progress, strong airline sector competition could put further pressure on the company. It also noted that “age-related costs are also expected to increase rapidly and may require additional measures to improve long-term sustainability of the healthcare and pension system.”

“Malta’s fiscal surplus and low debt ratio provide a buffer to face adverse shocks and mitigate the risks from an ageing population,” DBRS said, adding that it expected debt-to-GDP ration to continue falling rapidly to 34.9% by 2021.  

The agency also said that Malta’s financial system remained sound, underpinned by its “conservative core banks’ healthy levels of capitalisation, liquidity and profitability”.  Banks’ high level of liquidity and a healthy Tier 1 capital to risk-weighted ratio enhances core banks’ ability to weather adversity, DBRS said.

It noted however, that banks’ loan portfolio is concentrated in the property market, adding that “while pressures are mounting in the housing market, strong demand has largely been driven by fundamental factors such as rising disposable income, substantial net migration and low interest rates”.

“DBRS does not see any immediate risks given favourable labour market conditions and an increasingly responsive housing supply. This view is reinforced by Maltese households’ high levels of financial wealth and liquid assets, high levels of home ownership outright, and banks’ conservative lending practices and prudent haircuts on collateral values.”

Turning to the country’s institutional framework to support policy continuity, DBRS observed that Malta has “relatively sound public institutions” with its politics dominated by two centrist parties.

“In the recent past, Malta has been facing greater scrutiny over allegations of corruption, rule of law, and accountability. In response, the government has implemented several measures to reinforce governance, including measures to curtail corrupt practices and a comprehensive action plan to improve enforcement and effectiveness of its AML/CFT framework. Moreover, the government is working on a plan to improve the separation of powers and the independence of the judiciary.”