Updated | Moody's forecast 4.1% economic growth in 2016

Malta will likely see economic growth of 4.1% in 2016, on the back of solid consumer spending and investment, says Moody's Investors Service in a new report.

Moody's report, entitled ‘Government of Malta - A3 Stable: Annual Credit Analysis’, also confirms the decline in the manufacturing sector but highlights a diversified services-based economy. The share of manufacturing in the total gross value added declined to around 10% in 2015 from 24% in 2000.

"While we expect economic growth to moderate this year, our forecast remains strong compared to its peers in Europe. Key drivers of Malta's economy are domestic consumer demand and investment, with tourism rising 6% in 2015," Evan Wohlmann, an analyst at Moody's, said.

While there are potential upsides that could boost Moody's 2016 forecast for Malta, various factors will continue to constrain economic growth, including challenges related to resource allocation and the small size of the domestic market with a population of just over 400,000.

In Moody's view, Malta's government has also made significant progress on reforms in the energy sector and the labour market, in line with recommendations from the IMF and the European Commission. However, it is too early to conclude that these policy initiatives have met their intended objectives.

Moody's notes that while a credit challenge is Malta's relatively high general government debt burden, fiscal consolidation is progressing. Moody's expects debt-to-GDP to fall below 60% by 2017, based on the fall in Malta's fiscal deficit to 1.5% of GDP in 2015 and a likely further decline in the deficit in 2016-17.

Another key credit constraint is Malta's reliance on domestic sources of funding, which makes it vulnerable to the health of the banking system. However, the rating agency assesses risk emanating from the banking sector as 'low', balancing the system's significant size against the low contagion risk between constituent segments, with international banking activities largely insulated from the domestic system.

In addition, Malta's energy sector reform has moved ahead, which should allow the government's material contingent liability risks to public utilities to decline in the coming years.

The island's previously loss-making energy service provider, Enemalta, is the most prominent source of contingent liability risk, although the firm's ongoing restructuring and the progress achieved as part of the broader energy reform should allow the company to become financially viable.

Welcoming the report, Finance Minister Edward Scicluna said he was pleased that more foreign institutions expect Malta’s economic growth to remain robust.

“This is thanks to various reforms and initiatives undertaken by this Government to boost private consumption and investment," Scicluna said.

Worldwide Governance Indicators point to ‘very high’ Institutional Strength

Malta has a very high ranking in the WGIs, and outperforms its rating peers. According to the WGI 2014 Survey, Malta reached 73rd, 81st and 74th percentile among all sovereigns rated by Moody’s for government effectiveness, rule of law and control of corruption, respectively. This positions Malta above the median for Moody’s A-rated sovereigns and significantly above its rating peers – Poland (A2 stable), Latvia (A3 stable) and Slovakia (A2 stable).

Malta’s justice system has suffered from a number of shortcomings which have been the target of a major reform programme started in 2014 aiming to improve the quality and efficiency of the judicial system. Efforts to reform the quality of the system have included measures to reduce bureaucracy and delays in the civil courts, while the parliamentary bill in early 2016 focuses on simplifying
civil procedures to improve judicial efficiency. This has led to notable improvements, including an increase in the rate of resolving administrative cases, although the EC notes that Malta still lags behind all other EU countries in this regard.

Furthermore, Malta continues to suffer from more inefficient insolvency procedures than the rest of the EU (it takes three years to resolve an insolvency case compared to the EU average of two years) which is being addressed as part of a working group to improve Malta’s legislation on insolvency and bankruptcy. Improvements to the insolvency framework would also help to alleviate the high share of non-performing loans in the banking sector, which mostly reflects legacy problem loans.