Fitch Affirms Maltas Credit Rating And Revises GDP Growth Forecasts Upwards

September 14 2024 10:09 by PCLMedia

Fitch Ratings has reaffirmed Malta’s 'A+' credit rating with a stable outlook, reflecting the country’s strong economic performance while noting potential fiscal risks ahead.

Malta's economy is showing significant momentum, with Fitch projecting a 5.7% GDP growth in 2024, far surpassing the Eurozone's 0.8% and other A-rated nations' 2%. This positive trend is supported by the robust services and financial sectors and a strong rebound in tourism, with tourist arrivals in the first half of 2024 exceeding pre-pandemic levels by 32%, according to Fitch.

Recent updates to Fitch’s GDP forecasts have been more optimistic. Previously, the agency anticipated a 4.1% growth for 2024 and 3.7% for 2025. The updated projections now stand at 5.7% for 2024 and 4.3% for 2025.

Despite these promising growth figures, Fitch has identified ongoing structural challenges, particularly in the labor market. While unemployment is projected to remain low at 3.2%, significantly below the Eurozone average of 6.5%, Malta faces persistent issues with skill shortages and low productivity, even with a substantial influx of foreign workers. These challenges could impact future growth potential if not addressed, Fitch warned.

Prime Minister Robert Abela emphasized the disparity between Malta’s projected growth and the Eurozone average. He suggested that the country’s robust economic performance would enable Malta to reduce taxes and maintain energy subsidies while still decreasing the deficit.

Regarding fiscal matters, Fitch expects Malta’s fiscal deficit to gradually decrease, reaching 4% of GDP this year and falling to 3% by 2026. However, the agency highlighted concerns about the government's fixed-price energy policy, which currently lacks a clear exit strategy. The cost of energy subsidies, linked to international price fluctuations, could pose fiscal risks in the future.

The government has stated it will maintain subsidies until more affordable energy solutions become available, expected with the completion of a second interconnector. Malta's current high deficit means the country is under EU excessive deficit procedures due to new rules implemented this year. The government aims to reduce the deficit to 3% within two years and keep debt below 60% of GDP.

On debt and external accounts, Malta’s debt ratio was 47.3% of GDP at the end of 2023, with Fitch forecasting an increase to 49.6% by the end of 2024, still below the 'A' median of 53.3%. Financing risks are low due to strong liquidity in the domestic banking sector and a robust domestic investor base, with only 18% of government debt held by non-residents.

Malta’s external position remains solid, as one of the largest net external creditors in Fitch's sovereign universe. The net international investment position is expected to exceed 80% of GDP by the end of 2024, with modest current account surpluses averaging 1.4% of GDP from 2024 to 2026. Fitch noted, however, that these external assets are inflated by multinational activities in finance and aviation, which have limited domestic economic ties.

Fitch also highlighted potential risks from uncertainties surrounding the EU’s Minimum Tax Directive, which could impact Malta’s public finances. Corporate tax revenues are crucial for balancing the low share of labor taxes and a significant VAT gap, one of the largest in the EU. Malta has chosen a six-year transition period to implement the 15% minimum effective tax rate for companies.

The agency acknowledged the government's efforts to improve VAT collection and address tax planning concerns as part of Malta’s Recovery and Resilience Plan. However, Fitch noted ongoing uncertainty surrounding Malta’s cash-for-passports scheme, which is projected to generate 0.6% of GDP this year. Malta is currently facing legal action from the European Commission to end the scheme.

Malta received a high score on Fitch’s ESG relevance metric, benefiting from a stable political environment, effective rule of law, and relatively low corruption levels.

Looking ahead, Fitch suggested that Malta’s credit rating could be upgraded if the government achieves sustained fiscal consolidation and a downward debt trend. Conversely, a rating downgrade could occur if government debt continues to rise, economic growth slows, or regulatory and taxation changes make Malta less attractive to foreign investors.