Ratings agency DBRS has confirmed Malta’s long-term foreign and local currency issuer ratings at A and its short-term foreign and local currency issuer ratings at low.
The trend on all ratings remains stable.
The A rating reflects Malta’s eurozone membership, which ensures reliable access to European markets, fosters strong and credible macroeconomic policies and makes available financial support from European institutions.
The country’s solid external position also supports Malta’s ratings, together with a favourable public debt structure and the robust financial position of households.
However, Malta’s public finances remain a source of vulnerability, and its economy is exposed to external shocks, particularly those emanating from within the EU. Furthermore, pressures from ageing costs pose a concern for the pensions system, DBRS said.
The stable trends reflect DBRS’s assessment that risks to the ratings are broadly balanced. The ongoing improvement in the fiscal position counterbalances some of Malta’s fiscal and economic vulnerabilities.
Continued progress on fiscal consolidation and a meaningful reduction in public indebtedness could put upward pressure on the ratings. Successful implementation of reforms to improve the efficiency of the public sector, boost private sector investment and increase labour force participation could also have a positive effect. On the other hand, the emergence of additional contingent liabilities, from the energy sector or financial sector, could have adverse implications for Malta’s ratings. Large or prolonged external shocks could also pose downside risks.
Malta’s reliance on tourism and other industries catering to foreign demand also exposes the economy to unfavourable external developments
DBRS said that prudent lending practices prevented Malta from building up the financial imbalances that have afflicted other Eurozone countries. Private consumption growth is consequently quite resilient and overall economic performance has been strong.
Some of Malta’s credit challenges are associated with the exposure of its public sector and the still high level of public debt.
Malta’s reliance on tourism and other industries catering to foreign demand also exposes the economy to unfavourable external developments. Although tourism benefits from a market of wealthy European economies, it could be adversely affected by an economic downturn in the region.
"If a sustained erosion in tourist arrivals or other shocks in external demand were to have an impact on domestic real estate prices, this could have serious implications for household finances and financial stability. Similarly, the financial and gaming industries could be adversely impacted by competition from other markets."
Finally, pressures from age-related costs present another challenge for Malta.
Healthcare costs and pension liabilities have increased rapidly in recent years and demographic trends appear unfavourable. Although net migration inflows have supported population growth, the working age population is forecast to decline in the longer term.
Labour market participation remains among the lowest in the EU, particularly among women and older workers, despite major improvements from recent reform efforts. Pension reform measures are being implemented, but additional measures might be needed to secure the long-term sustainability of the system.
In a statement, Finance Minister Edward Scicluna said: “It is quite encouraging to note that another independent renowned credit rating agency is acknowledging the policy efforts by this government directed towards ensuring economic and public finance sustainability.”