Malta’s rating is supported by high per-capita income levels, a large net external creditor position and a pre-pandemic record of strong growth and sizeable debt reduction. These strengths are balanced against its large banking sector and the small and highly open nature of its economy, which makes it vulnerable to external developments.
The Stable Outlook reflects Fitch’s expectation that GDP growth will recover and that debt will stabilise following the fiscal shock caused by the pandemic, supported by a strong revenue recovery. At the same time, there is continued downside risk from the evolution of the coronavirus and its effect on the tourism sector and public finances, as well as the risk of macroeconomic instability from the Financial Action Task Force’s (FATF) decision to greylist Malta.
Following last year’s deep contraction in real GDP of 8.3%, Fitch projects 5.7% growth in 2021, reflecting a lagging recovery relative to eurozone peers. GDP grew by 1.9% qoq in 1Q21 but dropped by 0.5% in 2Q21 as private and public consumption as well as net exports decreased slightly, more than offsetting the strong increase in investment. We forecast a recovery of 5.7% in 2021, driven by a sizeable carryover effect and improved outlook for private consumption and investment for the rest of the year. Growth will further accelerate to 6.1% in 2022 due to pent-up domestic consumption and the gradual recovery in the tourism sector. We expect that it will take until 2H22 for GDP to revert to its pre-pandemic level.
Malta’s growth outlook is supported by the country’s successful vaccination campaign. As of 17 November, 83.5% of the population had received two doses (EU average: 66.5%) while 16.5% had already received a third ‘booster’ dose. The fast rollout of vaccines has allowed for a gradual relaxation of containment measures and travel restrictions since June. Tourist arrivals had recovered to 56% of their 2019 levels by September 2021, following a sharp drop in tourist arrivals of 76% in 2020. Remaining downside risks relate to the renewed imposition of travel restrictions, in particular by the UK as British tourists accounted for almost a quarter of all arrivals pre-pandemic.
The FATF’s decision in June to place Malta on its so-called greylist has not yet materially impacted the Maltese economy and its large banking sector (total banking assets amounted to close to 300% of GDP at end-September). However, if Malta remains on the list for a prolonged period, the reputational damage from greylisting could eventually adversely affect the country and its financial system by reducing its attractiveness for investors and corporates, ultimately leading to capital outflows and weaker-than-projected economic performance. We are also aware of contagion risks as the exit of one or more larger companies from Malta could create spillover effects to the broader economy.