Fiscal consolidation amid more buoyant economic conditions will continue to support Malta's public finances in 2016, Moody's Investors Service said in a new report today.

"We estimate that real GDP will increase by 4.3% in 2015, supported by domestic factors including private consumption and capital formation. We also expect exports to gradually recover in 2016, consistent with a more broad-based recovery in growth, as demand increases from Malta's main trading partners in the EU," said Thorsten Nestmann, Vice President, Senior Analyst at Moody's.

While Malta's government expenditures are high, Moody's said it estimates that Malta's solid economic growth will translate into higher tax revenues.

"Furthermore, Moody's considers that the government's latest draft budget should put fiscal consolidation on a good footing in 2016. Combined with low funding costs this will likely allow the fiscal deficit to drop to 1.7% of GDP in 2015 and to 1.2% in 2016."

The rating agency noted that that government debt remains high relative to similarly rated peers, at 68.3% in 2014, which is a key credit challenge.

"However, the repayment of tax arrears related to the island's loss-making energy service provider Enemalta (unrated), together with improved economic growth will support a reduction in the debt ratio to 65.9% of GDP in 2015."

The longer-term financial sustainability of the energy supplier will remain a key source of uncertainty for the government, guarantor of Enemalta's debt, the agency said.

In addition, the agency cited the banking system as a potential risk given its large size and because the sovereign's access to its traditional funding source depends on the health of this sector. However, the sector's compartmentalised nature, on-shore focus and adequate capitalisation limit the risks it poses to the sovereign.

The government in a statement welcomed the report, saying it was a certificate that Malta has a healthy economy. It particularly noted that Moody's had declared that “fiscal consolidation is on a good footing” and that “the budget targets appear to be realistic as they are built on reasonable macroeconomic assumptions and measures that appear socially acceptable for key stakeholders”.

Such confidence, the government said, was expected to attract more foreign investors and further boost the economy.