A Canada-based credit ratings agency has assigned an A rating to Malta, reflecting “strong” growth performance.
However, DBRS noted that Malta’s weak productivity growth combined with high and rising costs pose a challenge for competitiveness.
It also points out that participation in the formal labour force limits fiscal flexibility and raises additional social challenges.
In the first credit rating given to Malta by DBRS (Dominion Bond Rating Service), the trend on all ratings is stable.
Malta did not generate the financial imbalances that have plagued other eurozone periphery countries. Malta has benefited by strengthening fiscal, monetary and financial policy institutions in line with EU and eurozone rules, it said.
Output per worker underperformed most other southern EU countries
DBRS said successful implementation of reforms to improve public sector efficiency, boost private sector investment and increase formal labour force participation could have a positive effect. On the other hand, the emergence of additional contingent liabilities, particularly from the energy or financial sector, could have adverse implications for Malta’s ratings.
The expansion of trade and travel links with Europe has provided a significant boost to Malta’s growth prospects. Rising employment generated by trade and tourism have increased national income and contributed to rising property values.
Maltese households enjoy high levels of savings and limited leverage, DBRS said. Real estate values rose dramatically in the decade before the global financial crisis, but without an excessively large increase in household financial liabilities. Although Malta’s small market displays a low level of financial “sophistication” and its predominantly family-owned businesses have limited access to capital, this has also prevented the emergence of financial imbalances. Domestic consumption growth is consequently quite “resilient”.
Though the credit ratings agency applauds the flexible labour force and favourable tax climate, it said educational outcomes are relatively poor, showing weak basic skills attainment and a high rate of early school leaving. Nonetheless, with a considerable amount of seasonal employment and open immigration policies, the labour force adjusts quickly.
Since 2007, growth in Malta’s output per worker has underperformed most other southern EU countries, while labour costs have risen in excess of 25 per cent (compared to roughly 10 per cent in France, Italy and Spain).
Rising real wages and government policies to encourage employment, particularly among women and older workers, have had positive but largely transitory effects on growth.
Finally, Malta’s reliance on tourism and other industries catering to foreign demand expose the economy to external shocks.
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 a serious impact on household finances and financial stability, DBRS warned.
The government welcomed the positive rating and noted the credit ratings agency’s comment that while Malta exhibited weak fiscal management in the past, a number of improvements were under way.
In a statement, the Nationalist Party said it was ironic that the Labour Party, which opposed both European Union membership and the adoption of the euro, is now seeking to take credit for the positive effects of Malta’s accession to the EU and the eurozone.