Fitch expects Malta deficit to be 8.2% in 2020, debt up by €2 billion

Credit rating agency Fitch has revised Malta’s outlook to stable, from positive, and affirmed its A+ credit rating.

Fitch believes Malta’s real GDP will contract by 5.9% in 2020, a more austere outlook than a recent IMF prediction, reflecting the health crisis shock to the global economy and tourism, coupled with the government’s containment measures, and a stop on consumer spending.

Government spending will provide “some limited cushion, on the back of increased spending in the healthcare sector” with growth is projected to rebound to 3.6% in 2021, but below 2019’s 4.4%.

With shuttered airports and grounded airliners, tourism will sharply contract with hotel occupancy in 2020 to be close to 50% of 2019 levels, with the remaining sectors dependent on tourism to be harshly affected as well.

All this could go further south if the pandemic’s effects linger for longer than expected and affects Malta’s trading partners.

“The government has responded swiftly to health risks associated with coronavirus. The authorities mobilised the healthcare system and implemented comprehensive containment and mitigation measures, including full suspension of inbound flights, social distancing and closure of non-essential shops and services and the lockdown of vulnerable pockets of population.”

On the positive side, the pandemic’s impact will be partially softened by government relief measures of €120 million in direct spending, €700 million in tax deferrals and loan guarantees of €900 million. Other wage subsidies will cost €61 million.

Fitch estimates the general government balance to deteriorate to a deficit of 8.2% of GDP in 2020, from a surplus of 0.8% in 2019, based on the operation of automatic stabilisers and the direct budget impact of close to €600 million (4.5% of GDP) from the government measures. Lower spending and a rebound in economic activity would partly shrink the deficit in 2021 to 5% of GDP.

Debt could increase to 55.7% of GDP in 2020, from an estimated 43.4% in 2019. The authorities estimate up to €2 billion (15.1% of 2019 GDP) will be borrowed in 2020, in line with Fitch’s expectations. Malta already has €379 million in cash buffers that will be partly used to help finance the large deficit.

“The extent of the increase in public borrowing this year, and the pace at which it will unwind, remains uncertain, and crucially depends on the time it will take for economic activity to return to pre-pandemic levels. While Malta is likely to emerge from this crisis with a higher level of public debt, its recent track record of sound fiscal performance, including consecutive fiscal surpluses between 2016 and 2019, means it is better prepared than some of its peers to face the challenges in consolidating public finances over the medium-term,” Fitch said.

“We expect the labour market will deteriorate markedly this year, with the unemployment rate set to increase to 6.1% in 2020 from 3.4% in 2019, before edging down to 5.1% in 2021. This would match the level from 2013 but would come short of the maximum registered during the global financial crisis in 2009 at 6.9%. We see upside risks to these projections given that the accommodation and food services employ a large share of foreign labour.”

In spite of the external shock, Fitch projects Malta to maintain a current account surplus of 2.9% of GDP in 2020, albeit markedly down from 2019 (8.1%), as the contraction in imports would not be sufficient to offset the weaker service exports. Nevertheless, Malta has one of the largest net international investment positions in the EU, estimated at 62.7% of GDP at end-2019 and this is expected to continue increasing in the coming years.