Malta’s economy is showing more signs of strenght! Fitch Ratings has affirmed Malta’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A+’ with a Stable Outlook, highlighting both the country’s economic strengths and areas of concern.

Key Drivers of Malta’s Rating
Economic Strengths and Weaknesses
Malta benefits from high per capita income, robust growth rates, and its membership in both the EU and the eurozone. However, these positives are offset by the small size of its economy, a large banking sector, and vulnerability to external shocks. Recent fiscal challenges, such as significant budget deficits, have led to a moderate increase in public debt.

Strong Economic Momentum
Malta’s economy has demonstrated resilience, with Fitch projecting real GDP growth to average 5.7% in 2024—far above the 2.0% and 0.8% growth forecasts for the ‘A’ median and the eurozone, respectively. The growth has been fueled by key sectors such as services, finance, and tourism. Notably, tourist arrivals in the first half of 2024 exceeded pre-pandemic levels by 32%.

This strong economic performance has led Fitch to revise its growth forecasts for Malta in 2025 and 2026 to 4.3% and 4.1%, respectively, due to higher-than-expected potential growth and stronger carryover. A revision in Malta’s national accounts further boosted nominal GDP by 6.3% by the end of 2023, positively influencing metrics like GDP per capita, which now stands at 91% of the eurozone average.

Potential Growth Outlook
Malta’s potential growth rates are estimated by the IMF and European Commission to be between 4% and 5% for the next few years, driven by a dynamic population increase. However, these rates are expected to gradually decline as net migration moderates and the effects of an aging population take hold.

Labour Market Strength
The Maltese labor market continues to show strong participation and employment growth, with low unemployment rates. Fitch projects unemployment to average 3.2%, well below the eurozone forecast of 6.5%. Despite these positives, Malta faces structural challenges, including low labor productivity and skill shortages. The reliance on foreign workers has helped, but issues persist.

Fiscal Position and Challenges
Narrowing Fiscal Deficits
Fitch’s updated fiscal projections are aligned with Malta’s government medium-term fiscal targets. The 2024 deficit is expected to be 4.0% of GDP, decreasing to 3.5% by 2025 and 3.0% by 2026. These projections account for lower energy prices and Malta’s higher nominal GDP. A recently introduced income tax reduction for the middle class is also included. The government remains committed to maintaining public debt below 60% of GDP, with plans to bring the deficit back to 3% over the next two years.

Fiscal Uncertainties and Risks
Fitch has identified several fiscal risks for Malta. One notable concern is the implementation of the EU’s Minimum Tax Directive. Malta has opted for a six-year transition period, which could impact corporate tax revenues—a critical source of government income. Malta’s Citizenship for Direct Investment program, expected to generate revenues of 0.6% of GDP this year.

Public Debt Outlook
Improved Debt Trajectory
Due to the revision in national accounts, Malta’s public debt ratio fell to 47.3% of GDP by the end of 2023. However, with nominal GDP growth expected to slow and fiscal deficits remaining moderate, Fitch forecasts the debt ratio will rise slightly to 49.6% by the end of 2024. This is still below the ‘A’ median of 53.3%. Despite large deficits, financing risks remain low, thanks to ample liquidity in the domestic banking sector and a strong local investor base. Only 18% of government debt is held by non-residents.

External Finances
Malta’s external accounts have undergone significant revisions. The country’s net external creditor position reached over 1,300% of GDP by the end of 2023, one of the highest levels globally. However, this figure is inflated by the activities of multinationals in sectors like finance, maritime, and aviation. Many of these firms use Malta for tax reduction strategies, which inflate external assets but have limited ties to the domestic economy.

Despite this, Malta’s net international investment position (IIP) remains strong, and Fitch forecasts it will exceed 80% of GDP by the end of 2024. The current account is expected to post modest surpluses, averaging 1.4% of GDP between 2024 and 2026.

Environmental, Social, and Governance (ESG) Factors
Governance Strengths
Malta’s strong governance indicators are a key factor in its rating. The country has an ESG Relevance Score of 5 for both Political Stability and Rights, and for Rule of Law, Institutional and Regulatory Quality, and Control of Corruption. Malta’s high ranking in the World Bank Governance Indicators (WBGI) reflects its long-standing tradition of stable political transitions, respect for political participation rights, and low corruption.

This article is based on the recent rating outlook published by Fitch. Written by: Prasad Koswattage – Head of Marketing