DBRS Ratings GmbH (Morningstar DBRS) on Friday confirmed Malta's Long-Term Foreign and Local Currency--Issuer Ratings at A (high). At the same time, Morningstar DBRS confirmed Malta's Short-Term Foreign and Local Currency--Issuer Ratings at R-1 (middle). The trend on all ratings is stable.
KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS' view that the risks to Malta's credit ratings remain balanced, the agency said in a statement. The Maltese economy is likely to continue to grow at a comparatively strong, albeit decelerating, pace. The Central Bank of Malta (CBM) forecasts real GDP growth to ease to 4.0% in 2025 from 6.0% in 2024, driven by a moderation of domestic employment growth and less buoyant external demand for key service exports such as tourism. Similar to other countries, the economic outlook is exposed to important downside risks such as an escalation of global trade or geopolitical tensions.
At the same time, the economic repercussions of higher US tariffs are likely to impact Malta's service-driven economy to a lesser extent than is the case for most other EU economies. Fiscal pressures are still large and projected to subside only gradually. While comparatively strong economic growth dynamics are likely to continue to bolster government revenues, the pace of fiscal consolidation is attenuated by the recent adoption of new fiscal support measures of households. CBM forecasts the general government budget deficit to narrow under the 3% threshold by 2026, the agency said.
CREDIT RATING DRIVERS
Morningstar DBRS could upgrade Malta's ratings if one or a combination of the following occurs: (1) a material improvement in the public debt trajectory driven by a prudent fiscal approach and strong economic performance; or (2) further evidence of increased economic and fiscal resiliency to external shocks. Morningstar DBRS could downgrade Malta's ratings if one or a combination of the following occurs: (1) a significant deterioration in the public debt trajectory, potentially driven by a prolonged period of fiscal underperformance or weak economic growth; or (2) a reversal of improvements in Malta's financial crimes and institutional quality reforms.
CREDIT RATING RATIONALE
Growth dynamics in the Maltese economy remain comparatively strong notwithstanding the recent deceleration of economic growth. On an annual basis, real GDP expanded by 6.0% in 2024 on the back of strong external and domestic demand compared to a growth rate of 0.9% for the entire Euro area. Economic growth in Malta was bolstered by rising service sector exports particularly from tourism, professional services and financial services, the agency said. The number of inbound tourists rose by 19.5% in 2024. Furthermore, private consumption continued to grow at a robust pace, aided by strong, albeit decelerating, employment growth particularly of non-EU nationals. Moreover, households' purchasing power was bolstered by high wage growth particularly in the public sector.
Looking ahead, economic growth is projected to decelerate but to remain much stronger than in most other Euro area countries. CBM forecasts real GDP growth to ease to 4.0% in 2025 and to 3.6% in 2026 as the growth rates both of domestic employment growth and external demand for service sector exports are projected to moderate. At the same time, private consumption is likely to be bolstered by recently adopted new fiscal support measures for households (e.g. adjustment of income tax brackets). Similar to other EU countries, the economic outlook is exposed to downside risks such as an escalation of geopolitical or global trade tensions, the agency said.
Morningstar DBRS takes the view that the adverse direct and indirect impacts of higher US tariffs are likely to be smaller for Malta than for most other EU countries due to the service-driven nature of the Maltese economy. In general, the ratings of Malta continue to be constrained by the small size of the economy, which renders it vulnerable to external shocks. Furthermore, Malta faces the challenge of changing its labour-intensive growth model as continued strong population growth would likely strain the country's infrastructure given an already high degree of population density.
The Still Large Fiscal Deficit is Projected to Narrow Gradually
Although fiscal accounts are supported by favourable economic developments, budgetary pressures are still large. CBM estimates the general government budget deficit at 3.7% of GDP in 2024, down from 4.6% in 2023. The narrowing of the budget deficit in 2024 was driven by rising revenues from income taxes and VAT on the back of strong economic growth and recent administrative reforms which aimed at strengthening the efficiency of tax revenue collection. At the same time, fiscal accounts were adversely affected by the continuation of energy subsidies, the fiscal cost of which is estimated at 0.8% of GDP in 2024 and a one-off increase in the public wage bill on the back of a new collective agreement with the teachers' union.
Over the next years, the government plans to further reduce the fiscal deficit in line with the requirements of the EU's excessive deficit procedure which had been launched by the European Council against Malta in July 2024. While public revenues are likely to continue to benefit from strong, albeit moderating, economic growth, the introduction of new fiscal household support measures (e.g. income tax cuts), the fiscal cost of which is estimated at 0.5% of GDP, is likely to slow down the pace of fiscal consolidation adjustment. CBM forecasts the general government budget deficit to narrow to 3.4% of GDP in 2025 and 2.9% in 2026.
As the government does not plan to exit untargeted energy subsidies over the next years, higher-than-expected energy prices constitute a downside risk for fiscal accounts. Furthermore, over the medium to long term, revenues from Malta's citizenship by investment scheme and corporate taxation could come under pressure and infrastructure and climate spending pressures are likely to rise. These factors account for Morningstar DBRS' negative qualitative adjustment of the Fiscal Management and Policy building block assessment, the agency said.
Public Debt Stock Is Projected to Remain Moderate
The ratings are supported by Malta's still moderate stock of public debt. CBM expects general government debt at 48.9% of GDP in 2024, up from 47.7% in 2023. The moderate increase last year was driven by a still large deficit and a positive stock-flow adjustment which largely relates to the government's capital injection into the new national airline KM Air Malta. At the same time, the increase in the debt ratio was attenuated by favourable debt dynamics on the back of strong economic growth. Looking ahead, CBM forecast modest increases in the debt ratio to 49.6% of GDP in 2025 and to 50.1% in 2026, based on the expectations of a still large, albeit narrowing, budget deficit and a moderation of growth dynamics. While debt is higher than prior to the Covid-shock in 2019, the current debt level continues to provide the government with valuable space to support the economy if under stress. The interest burden is projected to increase but to remain low. The EC forecasts general government interest expenditure to rise from 1.2% of GDP in 2024 to 1.4% in 2026. In terms of financing, the government benefits from stable funding sources. According to Eurostat, around 78% of outstanding general government debt in 2023 was held by residents (particularly domestic banks).
Malta Benefits from a Stable Policy Environment but There Is Scope to Strengthen Governance
Malta's institutional quality benefits from strong national and EU policy frameworks. The Worldwide Governance Indicators for Malta are relatively strong and broadly in line with EU averages but compare weakly in terms of control of corruption. Malta has made significant progress in improving its governance and its institutional framework in recent years, including implementing reforms to the justice system. However, Morningstar DBRS considers that there is room for further convergence toward other sovereigns with very strong assessments on the Political Environment building block, including more tangible evidence of enhanced efficiency, and effectiveness in the country's judiciary and control of corruption. Policy continuity is high and Morningstar DBRS expects Prime Minister Robert Abela to remain committed to improving the country's institutional and governance framework during the current legislature.