Ratings agency DBRS Ratings GmbH (DBRS) has confirmed Malta’s long-term foreign and local currency rating at A (high).
In a statement, the government said this was the best rating this agency had ever given Malta.
It also confirmed its short-term foreign and local currency R-1 (middle). The trend on all ratings is stable.
DBRS said it based its considerations on the fact that economic momentum remained strong, with gross domestic product (GDP) growth accelerating to 7.5% year over year in last year’s third quarter.
The Central Bank of Malta’s latest estimates pointed to full year growth at 5.9% in 2018.
DBRS expected GDP growth to decelerate gradually but to remain high in years to come, especially when compared with its European peers.
Benefiting from tax-rich economic growth, fuelled by domestic demand, strong job creation, and the impulse from its International Investment Programme (IIP), the CBM estimated Malta’s fiscal surplus stood at 2.1% of GDP in 2018.
Against this backdrop, the Maltese government’s debt-to-GDP ratio could drop to 45% in 2018, according to the CBM. DBRS expected the debt ratio to continue to decline related to the primary surplus and the favourable debt snowball effect.
The rating confirmation reflected DBRS’s view that despite the upward pressure from improving economic and public finance metrics, Malta’s structural challenges continued 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.
Malta’s A (high) rating was supported by its euro zone membership, strong external position, low reliance on external financing, favourable public debt structure, and households’ strong financial position.
However, Malta’s contingent liabilities, stemming from its large state-owned enterprises and concentrated financial sector, and rising age-related costs are potential sources of vulnerability for public finances. Malta’s small and open economy exposed the country to external developments.
DBRS said the Stable trend reflected its opinion that further upgrades were unlikely in the absence of:
(1) a sustained material reduction in the public debt ratio to low levels driven by sound fiscal management and economic performance; or
(2) further evidence of increased economic and fiscal resiliency to external shocks, including changes to the international tax or regulatory environment.
While DBRS’s baseline factored in a relatively positive economic and fiscal outlook, a deterioration in the trajectory for public debt in the medium term could exert downward pressure on Malta’s ratings.
This could derive from:
(1) a deterioration in growth prospects,
(2) sustained worsening of fiscal and debt indicators, or
(3) the materialisation of contingent liabilities.
Rating rationale
Malta continued to outperform EU average growth rates with broad-based expansion
Recent economic performance, DBRS said, had been remarkable, with 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 (€24,984) continued to converge to EU average levels (€30,946) in 2018, as per EC estimates.
Growth was broad-based with outward-facing sectors such as tourism, gaming, financial and business services being key contributors to Malta’s outperformance.
A highly elastic foreign labour supply, increased labour participation rates, and a rising share of less capital-intensive service sectors prevented overheating pressures. According to EC estimates, potential GDP growth jumped from 2.5% from 2004 to 2012 to 6% from 2013 to 2018.
The International Monetary Fund’s projected an annual average GDP growth rate of 3.8% between 2019 and 2022.
Strong domestic demand, as well as supply factors, would continue to support growth in Malta. Higher investment, increased labour supply, and enduring benefits from the energy reform would continue to buttress potential output.
Addressing emerging infrastructure bottlenecks and labour shortages in certain sectors, which could weigh increasingly on growth, would remain a challenge.
Malta’s open economy was the smallest in the euro area and was vulnerable to weak external demand and lower foreign direct investment.
On the other hand, the private and public-sector reliance on domestic funding reduced the risks from financial markets contagion. In the short term, major risks stemmed from an escalation of protectionist trade measures hurting global trade and growth as well as the impact on tourism from Brexit.
In the medium term, changes in international corporate taxation could to some degree diminish the attractiveness of Malta for multinational companies. Also, the gaming industry in Malta could also be affected by regulatory changes at the EU level.