Moody’s forecasts robust economic growth, national debt ratio to sink to 60%

Credit rating agency Moody’s has delivered a clean bill of health to the Maltese economy, re-affirming the country’s ‘A3’ rating and forecasting continued economic growth and further declines in the budget deficit.

In its latest statement, Moody’s said that the economy should continue to grow at a robust rate of around 3.7% over the next two years, a decline from the 6.4% growth registered in 2015.

The government toasted this latest report, arguing that international experts have shown faith in its plans to reduce the debt ratio, introduce structural reforms, and reduce the country’s reliance on oil as an energy source.

“This trust is expected to attract more interest amongst foreign investors that will lead to further economic growth,” it said in a statement.

In its report, Moody’s said that Malta’s economy is competitive and that it exhibits elevated wealth levels, despite its relatively narrow base.

“Recent economic reforms have sought to counter structural challenges, enhancing the economy’s resilience to future shocks. For example, reforms aimed at alleviating constraints in the labour market have led to significant improvements in the female participation rate, which rose by around 13 percentage points between 2008 and 2015,” Moody’s said. “Furthermore, progress has been made in reducing Malta’s reliance on oil imports as a primary energy source, notably through the recent electricity connection with Italy, which is already playing an important role in energy supply, supported by additional large-scale energy investments.”

However, it said that its assessment of Malta’s economic strength has been constrained by its labour market rates which remains below the EU average, barriers to investment as flagged by its low ranking on the World Bank’s Ease of Doing Business report, and the small size of the domestic market with a population of just over 400,000. In addition, risks to sustaining cost competitiveness are rising, reflecting the challenges to labour productivity from the shift in the economy to more labour-intensive services.

Moody’s also predicted that Malta’s government debt to GDP ratio will decline to just below 60% in 2017, after averaging 68% between 2010 and 2014 and dropping to 63.7% in 2015.

“The decline reflected faster-than-expected nominal GDP growth and fiscal consolidation efforts, that were supported by the strengthening of Malta’s fiscal framework, including the introduction of the Fiscal Responsibility Act and the operationalization of the independent Fiscal Advisory Council in 2015.”

However, Malta's sizeable contingent liabilities, which are among the highest in the EU and above the median of similarly rated peers, weighed on Moody's assessment of fiscal strength. The credit rating agency noted that Malta's track record of support to public corporations has fiscal implications and that the debt guaranteed by Malta's government remains significant at €1.4 billion or around 16% of 2015 GDP.

While recent private investment in the energy sector has led to a decline in guarantees provided to Enemalta plc, total government guarantees related to the entity are sizeable, and the uncertainties that surround the firm's longer-term financial sustainability will remain a source of risk for the government's financial position. Furthermore, Moody's noted that the restructuring of Air Malta, which has resulted in previous capital injections by the government, has yet to place the airline on a secure financial footing.