Moody's affirms Malta's A2 ratings, but highlights population, corruption challenges

Moody's Ratings (Moody's) has Malta's long-term issuer ratings at A2. The outlook remains stable, the credit rating agency said Friday.

The affirmation of Malta's A2 ratings is supported by the country's strong economic performance, which is expected to continue, reflecting the island's ability to grow significantly faster than rating peers, with a relatively diversified economic base despite the economy's small size.

Longer term, Moody's assessment of economic strength also balances Malta's rapidly ageing native population, which is more than offset by positive net migration inflows. While supporting the country's fluid labour market, the latter also poses challenges to Malta's infrastructure due to the island's physical capacity constraints, the agency said.

The affirmation also considers Malta's solid fiscal strength, with strong affordability metrics and moderate public debt levels despite higher ratios relative to GDP when compared to 2019 levels.

Finally, the affirmation also reflects remaining challenges on the institutional front, in particular related to control of corruption, rule of law and the supervision of money laundering-related risks, although policy effectiveness is high.

The stable outlook reflects balanced risks at the A2 rating level. Malta's fiscal metrics could improve at a faster pace, resulting in lower public deficits and debt. This would happen, for instance, if real GDP growth were to outperform the baseline scenario thanks to stronger performance in the services sector, or if fiscal consolidation proceeded more rapidly than we currently anticipate due to higher revenue intake.

Conversely, Malta's economy could underperform expectations, which would put upward pressure on the country's deficit and debt.

Similarly, larger than expected economic support measures, in particular those related to energy subsidies, would negatively affect Malta's public finances, the agency said.

The third positive certificate for Malta's economy in just 8 days. Moody’s note how despite a succession of major international shocks we still managed to grow strongly. Moreover they forecast that between 2019 and 2028 we will grow at twice the rate of our economic peers. - RA

Economy

Malta's economic strength is underpinned by a wealthy, fast-growing and relatively diversified economy, despite the country's small size. Over the recent years, the succession of shocks hasn't affected Malta's ability to grow strongly, as reflected in the country's rapid recovery from the pandemic amid an uncertain geopolitical environment, the agency said.

As of the second quarter of 2024, Malta's real GDP stood 25.4% above its pre-pandemic level (fourth quarter of 2019), the strongest performance in the euro area.

Malta's real GDP will grow by 4.7% in 2024, 3.8% in 2025 and 3.5% in 2026. Domestic demand will benefit from a robust labour market and net migration inflows, while net exports will balance continued strong performances in the services sector (professional and digital services, financial industry, tourism) and solid import growth, in line with our forecast for private consumption.

Compared to the A2 median, Malta's economy is significantly smaller and more volatile, but also both much wealthier and faster-growing (4.5% on average between 2019 and 2028 against 2.3%).

Malta's potential GDP growth of around 4.0% is mainly driven by labour, with the country actively benefitting from net inward migration and high employment rates.

Population

Since 2017 (excluding 2020-21), Malta has received on average around 20,000 new migrants per year, around 4% of total population, more than offsetting the decline in native population. This increase in population growth is supporting employment and consumption, alleviating labour shortages.

However, demographic change is also placing increased pressure on domestic infrastructure, which will likely result in tightening measures in the coming years.

Given the island's capacity constraints, the authorities' ambition is to rebalance Malta's growth profile towards more capital and knowledge-intensive industries, such as IT and consultancy, although this is likely to materialize only gradually, the agency said.

Public finances

While Malta's debt-to-GDP ratio is above its pre-pandemic level, the country's public finances remain a key credit strength, reflecting moderate levels of public debt of 47.4% of GDP in 2023, and strong debt affordability. Moreover, despite spending pressures and exposure to fluctuations in commodity prices stemming primarily from energy subsidies, we expect Malta's public finances to remain strong over the next three years as the country complies with its budgetary targets against the backdrop of the European Union's (Aaa stable) excessive deficit procedure (EDP).

Looking ahead, Moody's expect the deficit to reach 3.8% of GDP this year after 4.5% of GDP in 2023, before narrowing to 3.5% of GDP in 2025 and 3.2% of GDP in 2026.

Given the strong budgetary execution to date for 2024, the government's 4.0% of GDP target is likely to be met, with some upside risks, i.e. a lower deficit. For 2025 and beyond, the trajectory includes the measures announced in the 2025 budget, such as the continuation of the energy subsidy scheme for fuel and electricity, the cuts in the personal income tax and the increase in some social benefits. On the revenue side, public resources will continue to benefit from the growth momentum and improved tax collection.

Moody's noted the commitment from the Maltese authorities to reduce the country's primary structural deficit by 0.5 percentage points of GDP per year from 2025 to 2027 under the EDP launched by the European Commission.

Under this baseline scenario, the debt-to-GDP ratio will reach almost 50% in 2026 from 47.4% in 2023, in line with the A-rated median of 49.9% in 2026.

On debt affordability, Moody's forecast the interest-to-revenue ratio to rise from 3.3% in 2023 to 3.8% in 2026, as higher interest rates gradually filter through to the interest payments bill. Prudent debt management by the Maltese authorities largely shields the country from an abrupt rise in interest payments, considering Malta's relatively long debt average maturity (7.4 years in October 2024). Furthermore, the fact that almost all of Malta's debt is denominated in euros and a majority (around 80% in September 2024) is held by domestic investors are additional mitigation factors.

Over the medium to longer term, Moody's not expect the ageing of Malta's population to impose a significant burden on the country's public finances. According to projections from Europop, the old-age dependency ratio in Malta (share of people aged 65 and above over the population aged 20 to 64) will be roughly stable over the next two decades, at 30.7% in 2023, 31.0% in 2030 and 30.5% in 2040, with net migration inflows and higher employment rates supporting the country's active population.

Against this backdrop, the retirement age is increasing and set to reach 65 years for people born as of 1962. According to the European Commission's 2024 Ageing Report, total ageing-related spending would reach 16.0% of GDP in 2030 and stabilize at that level the following decade, slightly down from 16.7% of GDP in 2023.

ESG considerations

Malta's Credit Impact Score of 2 indicates that ESG considerations do not have a material impact on the credit rating. This reflects the island's exposure to environmental risks, in particular physical climate risk, balanced by Malta's solid governance profile.

As a small island economy, Malta is exposed to physical climate change risks, as reflected in its E-3 environmental issuer profile score. Highly limited forest areas and a low share of protected natural areas also lead to a low rank for natural capital, whereas the country also faces more elevated waste and pollution risks in part due to rapid growth in the resident population over recent years.

Malta's S-2 issuer profile score reflects generally low exposure to social risks, with a moderately negative exposure to demographics, and labour and income. The country has the lowest fertility rate in the EU (1.1 in 2022 against an EU average of almost 1.5), but the impact of Malta's population ageing on the labour market is comparatively lower, thanks to robust labour migration inflows and elevated employment rates, Moody's said.

Over the last decade, population growth has averaged 2.7% per year, well above the euro area's average of 0.2%.

Malta's G-1 governance issuer profile score reflects the country's solid policy effectiveness profile on economic and fiscal management, although concerns remain over the control of corruption in the country, and the small size of the jurisdiction can be a constraint on institutional capacity.