S P affirms Maltas A A 2 rating but governance concerns persist

December 07 2025 08:40:00 by PCLMedia

S&P Global Ratings has reaffirmed Malta’s long- and short-term sovereign credit ratings at ‘A-/A-2’ with a stable outlook, citing a steady fiscal trajectory that offsets expectations of slowing economic growth.

S&P notes that Malta is on track to exit the EU’s excessive deficit procedure as fiscal outcomes improve, supported by strong revenue growth. Despite several years of elevated deficits driven by the government’s fixed-price energy policy, overall public finances have remained resilient. Net government debt has stayed just below 40% of GDP since 2020—a trend S&P expects to continue—thanks to robust nominal and real GDP growth. Low interest costs further support the sustainability of Malta’s debt burden.

Growth to moderate after exceptional expansion

Malta’s economy remains one of the eurozone’s stronger performers, although growth is expected to ease. Between 2021 and 2024, real GDP expanded by an average of more than 8% annually, driven largely by migration. As migration slows and policies tighten—especially toward lower-skilled, non-EU workers—growth is forecast to fall to about 3.5% in 2025 and average 3.7% through 2028. S&P says this marks a natural cooling following several years of rapid expansion and reflects the constraints of an already densely populated, infrastructure-strained island.

Even so, momentum remains solid. Employment growth continues to support consumption, tourism is expanding at an exceptional pace, and exports—particularly semiconductor-related goods to the U.S.—are benefitting from favourable tariff conditions.

These trends underpin Malta’s strong external position. S&P expects current account surpluses to average nearly 6% of GDP in the coming years, fuelled by services exports from tourism, iGaming, and other internationally oriented sectors. Although construction-driven imports and rising income outflows weigh on the balance, they are more than offset by the strength of service exports.

Fiscal consolidation continues but energy policy poses risks

S&P’s stable outlook also reflects progress in deficit reduction. After averaging above 5% of GDP from 2021 to 2024, the general government deficit is projected to fall to around 2.9% by 2026. The improvement is driven mainly by stronger-than-expected tax revenues, supported by a robust labour market and high corporate profitability, especially among foreign-oriented firms.

Expenditure, however, has also risen, partly due to new wage agreements and efforts to harmonize public-sector pay. S&P notes that Malta’s success in attracting foreign companies is a strength but also a concentration risk should these sectors face external shocks.

The largest fiscal vulnerability remains the fixed-price energy subsidy. Introduced after a long-term gas contract expired, the policy shields households and businesses from price volatility but exposes public finances to fluctuations in global energy markets. Although wholesale prices have fallen since 2022, budget projections have yet to fully reflect the potential savings, leaving some upside risk to fiscal performance in 2025 and 2026.

Governance issues weigh on Malta’s rating

S&P continues to flag weaknesses in Malta’s institutional framework. While reforms followed the 2017 public inquiry into the assassination of journalist Daphne Caruana Galizia, international assessments still rank Malta poorly relative to EU peers on corruption perception and rule of law. This undermines institutional credibility and contributes to S&P’s cautious view of governance.

Frequent and sizable revisions to national accounts further complicate economic analysis. Much of this volatility stems from difficulties measuring service-sector investment and the delay between preliminary and final corporate data. Planned statistical changes affecting aircraft leasing could result in major upward revisions to historical GDP, adding to the complexity.

Corporate tax uncertainty adds to structural challenges

Corporate taxation remains another area of uncertainty. Malta has postponed full implementation of aspects of the EU’s minimum taxation directive and is negotiating with the European Commission over incentives such as qualified refundable tax credits. Although the headline corporate tax rate is 35%, effective rates are far lower—long a key factor in attracting foreign investment. Any material change, S&P warns, could affect Malta’s economic model. At the same time, fading U.S. backing for the OECD’s global minimum tax may ease pressure for reform but leaves Malta with limited room to raise taxes without harming competitiveness.

Financial system stable but exposed

Externally, Malta remains a strong net creditor, with residents’ net claims on the rest of the world amounting to roughly 75% of GDP. However, the presence of special-purpose entities makes external data more difficult to interpret.

The banking sector is liquid, well capitalized, and profitable, but concentrated exposures to real estate and tourism—together with reputational vulnerabilities—necessitate ongoing oversight. Housing prices remain aligned with fundamentals, but future trends will depend on Malta’s ability to transition from population-driven to productivity-driven growth.

S&P also highlights the weak transmission of monetary policy. High liquidity and limited competition in the financial system dampen the pass-through of European Central Bank rate changes to lending and deposit rates, potentially increasing economic volatility.

Outlook: stable but sensitive to governance and competitiveness

Malta’s rating is supported by high income levels, strong external balances, manageable public debt, and continuing fiscal consolidation. These strengths counterbalance persistent concerns about governance, statistical transparency, energy-price exposure, and the slowdown in migration.

S&P says the outlook should remain stable if fiscal consolidation continues and structural reforms advance. However, a deterioration in governance or a loss of competitiveness in key sectors such as finance and iGaming could put downward pressure on the rating. Conversely, improvements in data reliability, stronger external balances, or sustained budget surpluses could support an upgrade.