Malta salaries edging close to EU average as DBRS confirms A rating

The credit rating agency DBRS has confirmed Malta’s credit rating at A (high) with a stable trend.

The agency said Malta was outperforming EU average growth rates, but warned of bottlenecks. Recent economic performance at 7.2% annual average GDP growth from 2013 to 2018 was well above the 2.1% average rate between 2004 and 2012. Malta’s GDP per capita (€25,556) continued to converge to average EU levels of €30,935.

Yet in the short term, major risks exist from an escalation of protectionist trade measures in global trade and the impact on tourism from Brexit. In the medium term, changes in international corporate taxation or slow progress in enhancing its governance framework could reduce Malta’s attractiveness as a financial and business location, the agency warned.

DBRS said Malta’s is expected to drop to 1.0% of GDP in 2019 from 2.0% in 2018, principally driven by increased spending on roads, waste management, health and education, and less dynamic revenues from taxes on production and imports and property income.

“Encouragingly, the government is allocating more resources to investment to addressing infrastructure bottlenecks whilst projecting fiscal surpluses hovering around 1% of GDP during 2020-2022,” DBRS said.

Malta’s proceeds from the sale of citizenship are expected to be 3.7% of GDP at end-2018.

DBRS warned Malta’s tax base could be eroded if international tax changes were to reduce significantly the attractiveness to multinationals to locate in Malta relative to other jurisdictions. Malta’s corporate taxation proceeds represented 16.6% of total revenues in 2017, with around 50% from foreign-owned companies according to IMF.

In the long-term, age-related costs are projected to increase by 6.8 percentage points over 2016-2070, according to the 2018 Ageing Report. “Government initiatives, such as gradual lengthening of retirement ages, longer contribution periods, and incentives to deter retirement, appear to have contributed to longer working lives. Nevertheless, additional measures may be required to improve long-term sustainability of the healthcare and pension system,” DBRS said.

Malta’s debt-to-GDP ratio stood at 46.0% of GDP in 2018, one of the lowest in the EU and this steep downward trend is projected to continue in coming years, thanks to solid primary surpluses. “Malta’s current public finance position and debt dynamics provide the government valuable room to support the economy in the event of a negative shock without materially jeopardising debt sustainability,” DBRS said.

Core banks, who enjoy high levels of capitalisation and liquidity, remain highly exposed to the real estate market and rapid housing price growth since 2014 is a source of risk. “While valuation in the housing market is becoming stretched, strong demand has largely been driven by fundamental factors such as rising disposable income, substantial net migration and low interest rates. An increasingly responsive housing supply, households’ high levels of financial wealth and liquid assets, and banks’ conservative lending practices mitigate the risks to the banks´ mortgage loan book.”

DBRS said government had to address concerns in the IMF’s Financial Sector Assessment Program on anti-money laundering, to contain reputational risks that may pose a risk to the Maltese financial system. “On this front, the government is pursuing strategic action to be implemented by 2020 to enhance its AML/CFT framework, including the creation of national coordinating mechanisms, increasing resources and staffing in the Malta Financial Services Authority and Financial Intelligence Analysis Unit, and the creation of a new financial crime unit, among other initiatives.”

“Malta has relatively sound public institutions. The adoption of European procedures has resulted in a stable macroeconomic, fiscal and monetary policy framework. Malta has recently been facing greater scrutiny over allegations of corruption, rule of law, and accountability. In response, the government has implemented several measures to reinforce governance, including measures to curtail corrupt practices and a comprehensive action plan to improve enforcement and effectiveness of its AML/CFT framework. Moreover, the government is working on a plan to improve the separation of powers and the independence of the judiciary,” DBRS said.