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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Malta’s long-term issuer and senior unsecured debt ratings at A+ in both local and foreign currency and maintained the Stable Outlook. The short-term issuer rating has been affirmed at S-1+ in both local and foreign currency with Stable Outlook.

Summary and Outlook

The affirmation of Malta’s A+ rating reflects the country’s: i) strong growth potential; ii) effective and prudent fiscal management, supported by strong growth and reflected in its good record of fiscal consolidation; iii) robust external position, with a large net international creditor position, further bolstered by euro area membership. The rating is constrained by: i) an externally dependent and resource constrained economy which poses some long-term risks to the stability and sustainability of Malta’s growth model; ii) fiscal risks related to increasing age-related cost pressures, high reliance on corporate income taxes and elevated government guarantees; iii) lingering, albeit improving, institutional and administrative challenges.

The Stable Outlook reflects Scope’s view that the risks Malta faces over the next 12 to 18 months are well balanced.

The ratings/Outlooks could be upgraded if, individually or collectively: i) the continued implementation of structural reforms supports greater diversification into higher-value added activities, bolstering the sustainability of Malta’s growth model and resilience to shocks and/or; ii) fiscal discipline is maintained, returning the public debt-to-GDP ratio to a firm downward trajectory.

Conversely, the rating/Outlook could be downgraded if, individually or collectively: i) a structural deterioration in the country’s growth outlook occurs; ii) the fiscal outlook weakens substantially, leading to a firm upward trend in public debt; and/or iii) institutional fragilities re-emerge and threaten Malta’s economic attractiveness and competitiveness.

Rating rationale

The first rating driver supporting Malta’s A+ ratings relates to the country’s strong growth potential. Malta experienced a solid economic performance in the years pre-Covid, with growth rates averaging 7.2% over 2015-19. This was driven by a shift from manufacturing towards faster-growing export-oriented sectors such as e-gaming, finance and tourism, and inflows of highly skilled workers which supported a substantial increase in productivity growth. Malta also achieved notable success in implementing reforms and strategic policy programmes including the National Employment Policy to increase female labour market participation and reduce the gender employment gap, measures to strengthen the social protection system and to improve the independence and effectiveness of governance frameworks¹. Structural shifts in the Maltese economy and successful reform implementation also contributed to Malta’s solid growth potential, estimated at around 3.5%, the highest among its peers.

The Covid-19 crisis caused a 8.3% drop in GDP in 2020, due to a significant drop in domestic demand and disruptions to international tourism, which severely impacted the country’s economic performance. Still, Malta has been recovering swiftly, with growth of 10.3% in 2021, supported by improved business activities and private consumption, higher investments and reopening of tourism. Despite limited direct exposure to Russia and Ukraine, the ongoing conflict is likely to weigh on growth indirectly via trade disruptions, supply chain bottlenecks and higher inflation. Malta’s high import dependence makes the country vulnerable to the volatility in global commodity prices but forceful government intervention has helped shield households and businesses from rising energy prices. Inflation has increased significantly from 0.7% in 2021to an elevated 6% on average in the six months tol August though it is the lowest in the EU.

Overall, Malta’s economy has demonstrated remarkable resilience despite recent headwinds. The growth outlook is strong, supported by elevated public investments under the National Recovery and Resilience Plan, buoyant domestic demand and sustained recovery in important sectors such as tourism. Scope projects the Maltese economy to grow by 4.8% in 2022 followed by a gradual convergence to its medium-run potential of 3.5%. Growth should average around 3.8% over 2022-27 with Malta ranking as one of the top performing EU economies.

The second rating driver to affirm Malta’s A+ rating reflects its prudent fiscal management, supported by strong economic performance and reflected in its good record of fiscal consolidation. Public finance conditions considerably improved in the years prior to the pandemic, with a record of budget surpluses over 2016-2019 averaging 1.6% of GDP leading to a declining debt-to-GDP ratio, from 55.8% in 2015 to 40.7% in 2019. This provided the government with fiscal space needed for the unprecedented support to households and businesses during the Covid-19 crisis including wage supplements, additional unemployment benefits, tax deferrals and liquidity facilities for corporates. Total fiscal support amounted to 6.5% and 5% of GDP in 2020 and 2021 respectively and played a crucial role in shielding Malta’s economy from structural damage.

As a result, the budget balance turned to a deficit of 9.5% of GDP and debt-to-GDP increased from 40.7% to 53.4% in 2020. Malta’s budgetary performance has been gradually recovering from the Covid-19 crisis. Even though the fiscal stance remains supportive in the near term, the government has outperformed its fiscal targets. The deficit narrowed to 7.9% of GDP and debt only rose to 57% of GDP in 2021, versus 12% of GDP and 65% of GDP respectively in Malta’s 2021-24 Stability Programme². The better-than-expected fiscal outcomes have been underpinned by strong economic growth, raising tax revenues.

The government’s fiscal strategy is geared towards providing near-term support to the economy whilst maintaining fiscal discipline over the medium-term to consolidate its public finances once economic conditions allow³. Scope estimates that Malta will spend around 2.5%-3.0% of GDP to contain the rise in living costs, cushioning the increase in energy prices via a gas stabilisation fund and lower excise duties on petroleum. The cost of Covid-related measures are expected to be significant lower this year, at around 1.7% of GDP and will mainly consist of the extension of the wage supplement scheme. Scope projects the budget deficit to continue declining to 5.9% of GDP in 2022 and return to below 3% by 2025, driven by buoyant growth and the gradual unwinding of crisis measures. Debt should increase to 63% of GDP by 2024 and return to a declining trajectory thereafter. Malta’s fiscal discipline is reflected in the prudent management of resources used to keep energy prices stable and pro-active efforts to cut down on costs with tangible gains estimated at around 2.5% of GDP in current and capital spending achieved thus far without jeopardising the implementation of programmes under the national recovery programme.

The third driver underpinning Malta’s A+ rating is its robust external position. The country enjoyed sizeable current account surpluses in recent years, averaging 4% of GDP over 2015-2019, driven by a strong performance in personal, cultural and recreational services and a constant tourism net exports balance. This trend halted in 2020, when global disruptions in trade and tourism flows led to a current account deficit of 2.9% of GDP, widening to 5.9% in 2021 due to a persistent worsening in service and good balances. Still, the country preserves its net creditor position, with a net international investment position of around 61.4% of GDP as of March 2022, the highest among peers. The composition of external debt is also favourable, with a long maturity and almost 90% of liabilities related to financial institutions, typically matched by assets. Malta’s export competitiveness has improved, supported by a weakening of the euro, productivity gains and government efforts to protect corporate balance sheets from ongoing shocks. The trade balance should gradually improve in the medium term thanks to recovery in exports, in particular in tourism-related activities, though gains will be mitigated by significant import price pressures in H2-2022 and H1-2023.

Despite these key credit strengths, Malta’s ratings remain constrained by the following challenges:

First, Malta is an externally dependent and resource constrained economy, which can pose some long-term risks to the stability and sustainability of the country’s growth model. Being a small, open economy, with exports representing 154% of GDP in 2021, and strongly interconnected with international financial markets, Malta remains vulnerable to external economic shocks, including changes in the international tax regime and investor sentiment. The strong economic performance in recent years was supported by fast-growing strategic sectors such as e-gaming, finance and tourism. Importantly, this structural shift was achieved thanks to a significant inflow of highly-skilled foreign workers which boosted labour supply and increased labour productivity. As such, Malta’s growth continues to be dependent on sectors reliant on external demand and investments such as tourism, which accounted for above 10% of GDP in 2019. In addition, the country’s significant labour market shortages and skill mismatches imply that it will continue to rely on possibly volatile and uncertain migration flows. Moreover, large inflows of foreign workers, and a rapidly expanding economy pose long-term sustainability challenges in a country with scarce resources, in terms of land, water and energy, complicating efforts to reduce emissions. These factors have posed some challenges for the sustainability of the country’s growth model. Malta is now trying to address these challenges through different recovery and resilience plan projects aimed at supporting environmental sustainability, improving educational outcomes and the quality of worker skills and enhancing social inclusion and mobility.

Second, Malta’s fiscal position is subject to rising pressures due to age-related costs and a high stock of government guarantees. The European Commission estimates that Malta’s old age dependency ratio will increase by around 33pps over 2019-70, versus an EU average of 25pps⁴. This will translate into a substantial increase in the total fiscal cost of ageing, estimated at 8pps of GDP, versus an EU average of 1.9pps. Additional risks for public finances stem from the elevated stock of government guarantees, mainly related to Covid support measures and additional support for state-owned enterprises. As stated in the 2022-25 Stability programme, the maximum amount of contingent liabilities related to government guarantees represented 12.8% of GDP at the end of 2021. Such support instruments are likely to be maintained in a context of rising energy prices and other input costs. Finally, Malta is highly reliant on corporate income taxes, representing 15.6% of total tax revenue in 2020, resulting in vulnerability to economic shocks. In addition, the favourable tax rules the country provides for companies, allowing them to reduce the effective tax rate from 35% to between 0% and 10%⁵, may no longer be sustainable. The recently agreed OECD minimum corporate tax, setting a minimum tax for large corporations at 15%, may lead to an erosion of Malta’s economic attractiveness and may induce large corporates to leave the territory, with associated fiscal losses. There remain substantial uncertainties regarding the impact of the agreement as discussions are still ongoing for a uniform implementation of the directive across EU countries.

A third constraint to Malta’s A+ rating relate to the lingering, albeit improving, institutional and administrative challenges. Institutional shortcomings have been identified by international institutions, including the EC, IMF and Council of Europe. Improvements in judiciary independence, judicial proceedings, control of corruption, fraud and financial irregularities are being pursued. Steps to enhance governance and the rule of law were taken in 2020, while crucial reforms included in the National Recovery and Resilience Plan are expected to be implemented in the coming years. These include reforms targeting the Permanent Commission against Corruption, the Asset Recovery Bureau and the implementation of a national anti-fraud and corruption strategy. Important results have already been achieved with the removal of Malta from the Financial Action Task Force’s greylist, given effective actions taken by the authorities to strengthen supervisory frameworks and enforce oversight of the financial sector, tackling money laundering and the financing of terrorism. The FATF decision represents an important recognition of the progress achieved in improving transparency of governance frameworks and restoring trust in the Maltese jurisdiction. Still, these efforts need to be sustained as highlighted by the Council of Europe⁶ and envisaged under Malta’s National Reform Programme⁷. The ongoing infringement procedure with EU institutions regarding the application of “citizenship by investment” programme, which is still active in Malta and only temporarily suspended for Russian and Belarussian citizens since March 2022, underscores the need to continue pursuing efforts to enhance institutional frameworks in the country.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative credit rating of ‘a’ as regards Malta. The ‘a’ indicative rating is further supported by the methodology’s reserve currency adjustment which provides a one notch uplift to the CVS indicative. The ‘a+’ indicative ratings can thereafter be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against a peer group of countries.

For Malta, the following relative credit strengths have been identified: i) growth potential of the economy; and ii) fiscal policy framework. Malta’s relative credit weaknesses are: i) macro-economic stability and sustainability; ii) current account resilience; and iii) institutional and political risks.

The combined relative credit weaknesses and strengths identified in the QS generate no notch adjustment to the ratings and indicate a sovereign credit rating of A+ for Malta.

A rating committee has discussed and confirmed these results.

Factoring of environment, social and governance (ESG)

Scope explicitly factors in ESG sustainability issues during its rating process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 20% weighting under the quantitative model (CVS) as well as in the methodology’s qualitative overlay (QS).

Environmental factors are explicitly considered in the rating process via the environment sub-category under the ESG risk pillar. Malta has achieved one of the greatest reductions in its greenhouse gas emissions intensity, going from above EU average levels in 2005 to one of the lowest levels across the EU in 2019. Oil and natural gas have the highest shares in the country’s energy mix (44% and 48%, respectively). Renewables continue to play a small role in the country’s energy mix, as also outlined in the National Energy and Climate Plan (NECP), where renewables are expected to represent only 11.5% share of energy consumption by 2030, a target assessed as unambitious by the European Commission⁸. The country’s service-based economy, as well as its geography, demographics and expanding GDP, make further gains in emissions reductions more challenging. In addition, Malta has by far the highest expected relative distance of any EU country to its 2030 effort sharing target. The country’s recovery and resilience plan is expected to contribute substantially to its green transition, with 54% of the plan supporting climate and environmental objective. In addition, the country is exposed to resource risks as a small island-state that imports many of its goods and much of its energy needs. Malta is vulnerable to floods, hail, soil and coastal erosion, and droughts. Still, natural risks are low as reported in the World Risk Report⁹, with Malta ranking as the second safest country when it comes to the prospect of a natural disaster.

Malta presents a mixed performance on social risk factors captured under the CVS. The country has a high and increasing employment rate, at 78.6% in 2021, with long-term and youth unemployment rates at 1% and 9.6%, respectively, well below EU averages (2.8% and 16.6%). Although heterogeneous among different social groups, the rate of population at risk of poverty or social exclusion is also lower than the average European share (19.9% versus 21.6% as of 2020). Nevertheless, educational outcomes are poor, with the highest share of low-skilled workers in the EU (36% versus 24.9% in 2021), a limited participation of low-skilled adults in learning and a high share of early school leavers (11%). 2018 PISA results show a poorer performance in all the disciplines compared to most of the peers. Weak educational outcome are also reflected in the country’s substantial labour shortages and skill mismatches in different sectors such as ICT, tourism, health and long-term care. Finally, Malta faces important demographic challenges, ranking as one of the EU countries that will see its old age dependency ratio increase the most in coming decades. The European Commission estimates that Malta’s old age dependency ratio will increase by around 33pps over 2019-70, versus an EU average of 25pps.

Under governance-related factors in the CVS, Malta’s performance is below the EU average as assessed under the World Bank’s Worldwide Governance Indicators. Governance metrics have deteriorated over 2015-20, mainly driven by a worsening performance in control of corruption (-13.9 percentile ranks), political stability, violence and terrorism (-6.0) and rule of law (-4.8). Malta is currently implementing a series of structural reforms to address its institutional and governance issues, but further action needs to be taken, in line with the country’s reform agenda. Reforms included in Malta’s recovery and resilience plan aim at strengthening the independence and effectiveness of the judiciary, as well as the country’s capacity to tackle corruption and money laundering. On 26 March 2022, Malta held legislative elections where the incumbent Labour party secured a 55% majority, with the next general elections planned for in 2027. Scope therefore expects broad policy continuity over the coming years.

Rating Committee
The main points discussed by the rating committee were: i) Reform progress and Malta’s Recovery and Resilience Plan; ii) Growth outlook and fallout of the Ukraine crisis; iii) fiscal developments; and iv) institutional developments.

Rating driver references
1. Maltese Ministry for Finance and Employment (2022), Malta National Reform Programme
2. Maltese Ministry for Finance and Employment (2021), Update of Stability Programme: 2021-24
3. Maltese Ministry for Finance and Employment (2022), Update of Stability Programme: 2022-25
4. European Commission (2021), The 2021 Ageing Report 
5. European Commission (2022), Malta Country Report
6. Parliamentary Assembly of the Council of Europe (2021), Malta: monitors welcome progress, but call for further systemic reforms to strengthen checks and balances, including profound reform of the Parliament
7. Maltese Ministry for Finance and Employment (2022), National Reform Programme
8. European Commission (2020), Assessment of the final national energy and climate plan of Malta
9. RUB & IFHV (2022), WorldRiskReport 2021

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Sovereign Ratings, 8 October 2021), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation    YES
With Access to Internal Documents                                  NO
With Access to Management                                           YES
The following substantially material sources of information were used to prepare the Credit Ratings: the rated Entity, public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thibault Vasse, Associate Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 9 November 2018. The Credit Ratings/Outlooks were last updated on 23 April 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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