DBRS rating: Maltese economy stable, but warns of challenges ahead

Global Credit rating agency DBRS Morningstar has rated Malta’s Long-Term Foreign and Local Currency – Issuer status as stable but warned that important drivers of economic growth such as the citizenship by investment scheme and corporate taxation structure could face challenges.

The Stable trend reflects the fact that Malta’s strong economic and fiscal performance in recent years has left the country relatively well placed to mitigate the risks posed by the COVID-19 outbreak. The partial lockdown and travel restrictions to deal with the pandemic will likely result in a deep but temporary recession in Malta this year, it said, adding that a strong rebound should follow the gradual opening of the economy although there is still high uncertainty over the evolution of the pandemic and the tourism sector. The fiscal balance and debt ratios will deteriorate sharply in 2020 because of the intense economic contraction and the fiscal support package. However, Malta’s public debt ratio is expected to remain one of the lowest in the European Union.

Looking at the World Bank’s governance indicators for 2018, Malta compares favourably with the EU average scores, except on corruption and government effectiveness said DBRS Morningstar, noting that Malta’s governance and institutional set-up has been under increasing scrutiny.

The presence of shortcomings in the system of checks and balances identified by the Venice Commission led to a negative qualitative assessment of the political environment, it said.

Malta’s per capita GDP is relatively low at USD 30,637 in 2019 compared with its euro system peers.

Malta’s high A rating is supported by its euro zone membership, moderate level of public debt, solid external position, and households’ strong financial position, said the agency. “On the other hand, Malta’s small and open economy remains exposed to external demand or confidence shocks. In this sense, the tourism sector, an important source of income, employment, and investment in Malta, will face significant headwinds in the medium-term. Similarly, Malta’s attractiveness to foreign investment could suffer if measures to address the financial integrity risks and institutional governance weaknesses noted by international bodies are deemed insufficient. Despite Malta’s sound public finances, medium to long-term challenges could come from its contingent liabilities, changes in international taxation affecting Malta’s attractive tax system to foreign companies, or increasing age-related spending.”

The restrictions needed to control the spread of the virus have abruptly halted a period of remarkable economic performance, characterised by strong output growth (averaging 7% a year during 2013-2019) and shrinking the GDP per capita gap with the EU. The latest forecast from the European Commission (EC) points to a 6.0% contraction in Malta’s GDP in 2020 followed by a relatively swift rebound of 6.3% in 2021. The main uncertainties are posed by the future evolution of the pandemic and the tourism sector. Even so, the EC expects Malta’s GDP contraction to be the smallest among the euro area member states in 2020.

The reopening of the economy and the government measures to support the tourism-related sector will help the sector to recover; however, the Maltese tourism sector is predominantly reliant on foreign tourist arrivals that could take some time to return to pre-pandemic levels, noted the agency. The confinement, physical distancing, and slump in tourism arrivals is also expected to undermine retail sales. On the other hand, sectors exempt from the lockdown –construction and manufacturing - and those with greater remote working capabilities, such as the iGaming, financial, and business services sectors are expected to suffer much less from the restrictions, it said.

While the near-term outlook remains uncertain, Malta’s potential growth rate remains strong and expected to converge to levels above 3% in the medium term. The supply of foreign workers, an important driver of potential growth in recent years, is expected to falter in 2020, but to recover over time. “Also, government support measures have prevented substantial losses of employment, although more lasting effects are still possible.

But over the medium to long-term, Malta’s attractiveness as a financial and business location could face challenges from slow progress in enhancing its governance framework, changes in international corporate taxation, or changes to the EU regulatory framework,” according to the report.