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.

The affirmation of the Republic of Malta’s long-term ratings with Stable Outlook is supported by the country’s robust economic outlook and strong growth potential driven by high value-added export services and the disbursement of EU funds. This economic momentum is expected to moderate the rise in general government debt resulting from wider fiscal deficits due to a more accommodative fiscal stance. Despite delays in the withdrawal of energy support measures reflecting Malta’s high dependency on energy imports and sensitivity to commodity price volatility, a record of prudent fiscal management and the Excessive Deficit Procedure launched by the European Commission underpin the projections of gradual fiscal consolidation over the coming years. However, skill mismatches, an ageing population, as well as institutional and administrative challenges could weigh on Malta’s long-term economic and fiscal prospects.

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Key rating drivers

Robust economic momentum and strong growth potential. Scope expects Malta’s real GDP to grow by 4.2% in 2024, after 5.6% in 2023, and 3.6% in 2025, significantly above the average of rating peers (1.2% real GDP growth forecasted for 2024). Economic growth is driven by net exports, among which high value-added services (such as online gaming, management and financial services, information and communication technologies) and tourism exceeding pre-Covid levels. Private consumption is supported by rising real incomes, a strong labour market with the unemployment rate at around 3%, declining inflation at 2.2% YoY in June, and energy related subsidies. A relatively favourable tax system compared with rating peers, including an overall tax burden of around 30% of GDP and low corporate tax and VAT rates, continues to support private investment. In the long run, Malta’s growth potential, estimated at more than 4.5%¹, is high relative to peers (1.9% on average), but hindered by skill mismatches, moderate investment in research and development, and constraints on energy supply². However, the economy is expected to continue benefiting from public investments and funding support from the EU, primarily through the Recovery and Resilience Facility (total allocation of EUR 328m in grants, or 1.7% of GDP, of which around half has been disbursed) and Cohesion Funds (about EUR 773m over 2021-27, or 4.0% of GDP).

Record of fiscal prudence and moderate government debt balance sizeable fiscal deficits. The general government deficit is projected to remain high at 4.2% of GDP in 2024, after 4.9% in 2023, due to energy subsidies (2% of GDP this year, after 1.7% last year³). The reduction of the deficit to 3.6% of GDP in 2025 is expected to be anchored by the Excessive Deficit Procedure launched by the European Commission in July 2024⁴ and Malta’s track record of prudent fiscal management with sizeable primary surpluses pre-Covid-19 (1.7% of GDP on average between 2010 and 2019). Still, the fiscal trajectory will depend on the government’s ability to progressively eliminate energy and food subsidies based on the medium-term fiscal plan to be released later this year. On the revenue side, Malta transposed into local legislation the EU's Minimum Tax Directive, but the implementation period of up to six-years⁵ is not expected to materially impact corporate tax income or the country’s attractiveness from a tax perspective. General government debt is moderate, at 50.4% of GDP in 2023, and projected to increase slightly, to about 52% of GDP in 2024 and around 55% of GDP by 2029, against 40% in 2019, thanks to the favourable interest-growth differential offsetting wider primary deficits. Net interest payments are projected to remain below 2% of GDP until 2029, reflecting Malta’s long average debt maturity of over eight years, although rising from 4% to about 5.5% of government revenues over the period.

Strong external position enhancing resilience to external shocks. Malta benefits from a robust external performance anchored by its export-oriented sectors, supporting the economy’s resilience to the Covid-19 pandemic and cost-of-living crisis, despite its high exposure to the tourism sector and vulnerability to the energy price shock. Export sectors are expected to drive a current account surplus of around 1% of GDP between 2024 and 2026⁶, after 0.9% in 2023, which is relatively modest compared to the pre-Covid-19 trend (1.4% of GDP on average between 2010 and 2019). Even so, sustained current account surpluses will enable the country to maintain a positive net international investment position of 71.6% of GDP in 2023, driven by the net creditor position of households and financial corporates. Although non-financial corporates and the general government have a net debtor position, private sector debt has decreased to around 120.5% of GDP as of end-2023. Moreover, Malta’s resilience to external shocks is further underpinned by its euro area and EU membership, through access to the European Central Bank’s asset purchases and refinancing operations, as well as the European fiscal framework.

Rating challenges: a resource-constrained economy; high contingent fiscal risks; institutional and administrative shortcomings

First, Malta is a small, open, externally dependent, and resource constrained economy. High dependency on exports (around 177% of GDP in Q1 2024), energy imports (in line with other EU rating peers) and highly skilled foreign workers (with about 33% of the population foreign-born) increase the sensitivity to external shocks such as a contraction in external demand from EU trading partners and commodity price volatility. Malta’s scarce resources in terms of land, water and energy, its relatively limited potential for cost-effective renewable energy and its moderate population size could pose long-term risks to the stability and sustainability of the country’s growth model.

Second, Malta faces significant fiscal risks including rising spending pressures due to age-related costs, high contingent liabilities, and relatively concentrated tax revenues. The European Commission estimates the total fiscal cost of ageing to increase by 8.6pps of GDP over 2022-70, compared to an EU average of 1.2pps⁷, reflecting high spending needs on pensions, health care and long-term care. Additional risks for public finances stem from the high stock of government guarantees, among which the liabilities of state-owned enterprises, representing about 7% of GDP. Finally, Malta is highly reliant on corporate income taxes, accounting for 33% of direct taxes, which expose public finances to potential changes in international tax regulations.

Third, Malta faces lingering, albeit improving, institutional and administrative challenges. Institutional shortcomings have been identified by the European Commission and the Council of Europe, for instance around journalism and media freedom. Nonetheless, the government is actively pursuing improvements in judiciary independence, judicial proceedings, control of corruption, fraud and financial irregularities through its National Reform Programme, its Recovery and Resilience plan and its National Anti-Fraud and Corruption Strategy. For example, Malta’s investor citizenship scheme has become increasingly stringent as the European Union strengthens anti-corruption regulations.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the coming 12 to 18 months.

The Upside scenarios for the ratings and Outlooks are (individually or collectively):

1. Continued implementation of structural reform support greater diversification into higher-value added, more sustainable economic activities, bolstering the resilience of the country’s growth model; and/or
    
2. Post-crisis fiscal consolidation returns public debt-to-GDP to a firm downward trajectory.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

1. There is a structural deterioration in the growth outlook;
    
2. The fiscal outlook weakens significantly; and/or
    
3. Institutional fragilities re-emerge and threaten Malta’s economic attractiveness and competitiveness.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘a+’ for Malta. Under Scope’s methodology, the indicative rating receives 1) a one notch positive adjustment from the methodological reserve-currency adjustment; and 2) no adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘aa-’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of Malta’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope has identified QS relative credit strengths for Malta: i) growth potential and outlook. Conversely, the following credit weaknesses have been identified in the QS: i) macro-economic stability and sustainability; ii) environmental factors; and iii) governance factors.

On aggregate, the QS generates a one-notch negative adjustment for Malta’s credit ratings and indicate long-term foreign- and local-currency ratings of A+.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

For environmental factors, Malta’s score is above the SQM average for euro area countries for carbon emission intensity, despite slow progress to reduce GHG emissions. The service-based economy, as well as its geography, demographics and expanding GDP make further gains in emission reduction more challenging. In terms of emissions per capita, natural disaster vulnerability and ecological footprint of its consumption relative to the available biocapacity Malta performs below euro area peers. Renewable sources represent 13.4% of energy production, one of the lowest shares in the EU and below the indicative 28% target for 2030 outlined in the National Energy and Climate Plan. As a small island-state, the country is vulnerable to severe storms, floods, heatwaves and coastal erosion, but it is also exposed to resource risks, generating the need for large imports of goods and energy. This drives Scope’s ‘weak’ assessment.

For social factors captured under the SQM, Malta benefits from a strong labour force participation, a below average old age dependency ratio, but a slightly above average inequality levels compared to euro area countries. Given the robust economic growth, the country maintains a high level of employment (81.7% in 2023) and low numbers of people not in employment, education or training. However, some groups face less favourable working conditions, as reflected in the gender employment gap above the EU average (14.2pps in 2023 vs 10.2pps). Moreover, the workforce suffers from skill mismatches and low levels of basic educational attainments, adding further risks for labour productivity and competitiveness. The share of people at risk of poverty or social exclusion remained stable at 20.1% in 2022, 1.5pps below the EU average, but with some heterogeneity among different groups, being higher for non-EU nationals, low-skilled, over 65 and workers with disabilities. This drives Scope’s ‘neutral’ assessment.

Under governance-related factors captured in the SQM, Malta scores below euro area countries’ average on a composite index of five World Bank Worldwide Governance Indicators. Malta is currently implementing a series of structural reforms to address its lingering institutional and governance issues, in line with the country’s reform agenda, aiming at strengthening the independence and effectiveness of the judiciary system, as well as the capacity of tackling corruption and money laundering. However, important institutional deficiencies have been regularly highlighted by the European Commission and the Council of Europe. This drives Scope’s ‘weak’ assessment.

Rating committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risk; iii) external economic risk; iv) financial stability risk; v) ESG-related risk; and vi) rating peers.

Rating driver references
1. European Commission, European Economic Forecast, Spring 2024
2. European Commission, Malta, 2024 Country Report, June 2024
3. European Commission, Excessive Deficit in Malta, July 2024
4. European Commission, Economic Forecast for Malta, May 2024
5. European Union Global Minimum Level of Taxation for Multinational Enterprise Groups and Large-Scale Domestic Groups Regulations, Guidance Note, 2024
6. Central Bank of Malta, Outlook for the Maltese Economy, 2024:2
7. European Commission, 2024 Ageing Report – Economic & Budgetary Projections for the EU Member States (2022-2070), April 2024

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), available in Scope Ratings’ list of models, published under 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   NO
With access to internal documents                                NO
With access to management                                          NO
The following material sources of information were used to prepare the Credit Ratings: 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 and/or Outlooks 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: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Eiko Sievert, Senior Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 9 November 2018. The Credit Ratings/Outlooks were last updated on 1 September 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.