COVID-19 impacts will deliver sharp recession in Malta, say Standard & Poor’s

S&P says government’s emergency measures will accelerate Maltese economic rebound 

Global travel restrictions kneecapped the Maltese economy
Global travel restrictions kneecapped the Maltese economy

The COVID-19 pandemic will contract the Maltese economy by 8% in 2020, Standard & Poor’s said in a credit rating that affirmed Malta’s A-, A-2 status and a stable outlook. 

Thanks to its declining debt, Malta will be able to mount a robust recovery in 2021-2022, according to S&P. 

High income levels, recurrent current account surpluses, and reduced fiscal imbalances will aid Malta’s recovery, but S&P has highlighted regulatory oversight of the financial sector and its anti-money-laundering framework. 

But S&P said Malta will experience a sharp recession with an 8% contraction in 2020, despite the government’s comprehensive package of emergency measures. “As a small economy dominated by export-oriented services, Malta is particularly sensitive to global developments like this year’s COVID-19-induced recession.” 

The COVID-19 pandemic will drive large fiscal deficits, likely reaching 8.7% of GDP in 2020 and 4.5% in 2021. The reduction of government debt to 43% of GDP in 2019, well below the Stability and Growth Pact benchmark, from 69% in 2011, gives Malta fiscal headroom to withstand the economic shock associated with the COVID-19 pandemic. 

Malta is the second most open economy in the euro area, with exports totaling more than 140% of GDP. But real GDP dropped by 16.2% year-on-year in second-quarter 2020, following 1.4% growth in the first quarter. 

The global travel restrictions kneecapped Malta’s tourism sector. “Because tourism activity will likely be depressed for some time, we expect it will take until 2022 for tourist arrivals and hotel occupancies to return to 2019 levels. The pandemic may also hurt the arts, entertainment, and recreation sectors, which increased its share in Malta’s GDP to 7.6% in 2019 from 2.5% in 2000.” 

COVID-19 containment measures however have significantly constrained consumer spending and investment. “Without this comprehensive fiscal response, we think the Maltese GDP would have fallen considerably lower, unemployment would have surged faster, and solvent businesses would be forced to liquidate, eroding the economy’s productive base, perhaps permanently. We believe that minimizing the economic disruption now could accelerate a rebound.” 

S&P forecasts real GDP growth will resume gradually (5.5% in 2021-2022), on the back of loosening restrictions and a slow pick-up in global tourism. 

Climate and money laundering 

S&P has noted that Malta’s rising population has made it the most urbanized and densely populated country in the EU and particularly vulnerable to climate risks. The country is currently off track in relation to its 2020 and 2030 climate and energy targets. 

Perceived weaknesses in the effectiveness of some Maltese institutions could also gnaw at the country’s reputation due to deficiencies in anti-money-laundering-related investigation and subsequent prosecution, concerns regarding the use of suspicious transaction reports from the remote gambling sector, and lack of adequate human and technical resources in the Financial Intelligence Analysis Unit (FIAU) and Malta Financial Services Authority (MFSA). “Increasing international scrutiny of Malta’s financial system and reports of persistent weaknesses in regulatory oversight have tainted the local banking sector’s reputation, straining relationships with correspondent banks that have pursued de-risking strategies,” S&P said. 

“We understand that the Maltese authorities have committed to strengthening supervisory standards. Both the FIAU and MFSA have increased their budgets and investments in human resources and information technology solutions, and have adopted strategies to improve data gathering and risk-assessment tools.” 

MONEYVAL has extended the deadline to October 2020 for Malta to tackle the identified deficiencies. Failure to address these weaknesses will further pressure the financial sector and overall business climate in Malta, considering the heightened international scrutiny of financial systems worldwide. 

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