Moody’s affirms A2 rating for Malta with swift FATF greylist exit

21st November 2022 • News

Credit rating agency Moody’s has affirmed Malta’s long-term ratings at A2, changing its outlook from negative to stable.

Moody’s said Malta’s swift exit from the FATF greylist reflected a firm and steady commitment from the local authorities to comply with international standards and enhance the country’s institutional setup. “The exit is likely to improve the business climate by significantly reducing the reputational risk attached to the grey listing, shifting the focus towards Malta’s traditional strengths such as a competitive tax environment, an existing entrepreneurial ecosystem and the widespread use of English.”

Moody’s said Malta had a wealthy, fast-growing economy and solid debt affordability that placed it at par with peers on institutions and governance strength and fiscal strength.

Malta’s real GDP is expected to expand by 6% in 2022, with a rebound in tourism, jobs and investment growth supporting domestic demand.

Moody’s said record-high labour shortages reflected a strong labour market, mainly in construction, transportation and professional services.

In the context of the military conflict in Ukraine, high gas and oil prices, rising food, non-energy industrial goods and services inflation, are negatively affecting household incomes and corporate margins, albeit to a lesser extent than in most other European countries.

Moody’s forecasts Malta’s average inflation to reach 5.9% this year, mainly driven by services prices as governmental measures neutralise the rise in energy prices on the price index.

To date, public measures have been instrumental in keeping Malta’s inflation (7.4% in October) the third lowest in the euro area.

For 2023 and 2024, Moody’s expects Malta’s real GDP growth to reach 3.0% and 3.5%, respectively, below the economy’s potential of 3.5% to 4%. In parallel, average inflation is expected to reach 3.8% and 2.7% in 2023 and 2024, respectively.

Investment will benefit from the European Recovery and Resilience Facility (RRF): under the RRF, Malta is set to benefit from €258.3 million (1.8% of GDP in 2021) of grants, which should support the economy’s decarbonization and enhance electrical connectivity with the rest of the EU, amongst others. Moreover, Malta is allocated €838 million (5.7% of GDP in 2021) of Cohesion Funds.

Malta had built fiscal buffers in the runup to the coronavirus pandemic, with three years of fiscal surpluses between 2016 and 2019 which led the debt-to-GDP ratio to drop significantly, from 66.4% of GDP in 2013 to 40.7% of GDP in 2019.

However, the large deficits recorded in 2020 (9.4% of GDP) and 2021 (7.8% of GDP) brought the debt-to-GDP ratio to 56.3% at the end of 2021. Malta’s general government deficit could continue to narrow over the two years and reach 5.8% of GDP in 2022, 5.6% of GDP in 2023 and 4.7% of GDP in 2024 under its baseline scenario.

However, Moody’s believes that there is a risk of higher budget deficits considering the elevated uncertainty and the government’s comprehensive policy approach to smooth the impact of the military conflict in Ukraine on energy prices for consumers and businesses.