Malta Rated A (High) with Stable Trends by Rating Agency DBRS
DBRS Ratings confirmed Malta’s Long-Term Foreign and Local Currency – Issuer Ratings at A (high) level. The trend on all ratings is Stable.
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DBRS Ratings GmbH confirmed Malta’s Long-Term Foreign and Local Currency – Issuer Ratings at A (high). At the same time, the rating agency confirmed Malta’s Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (middle). The trend on all ratings is Stable.
The COVID-19 Impact
This is welcome news given that 2020 was taken over by the Covid-19 pandemic. In this case the Ratings agency has declared that Malta entered pandemic with 'valuable headroom'.
Before the pandemic, Malta’s fiscal performance had improved significantly over the past two decades. Furthermore, Malta recorded annual average fiscal surpluses of 1.7% of GDP between 2016 and 2019. Key factors underpinning this trend have been its strong economic performance, improved spending efficiency, lower interest payments, and the proceeds from the Individual Investor Programme (IIP) since its introduction in 2014.
In its report published on 8 January 2020, DBRS said that while Malta’s GDP contracted by 9.9% y-o-y in Q3 2020, more than previously anticipated, and since trials resulting from the COVID-19 pandemic continued to present difficulties, yet Malta had entered the current crisis after a prolonged period of strong economic and fiscal performance and had some “valuable headroom” with which to assuage the financial setback.
Governance
The Agency added that it was vital that the administration managed to introduce effective institutional reform that would proceed with “strengthening the country’s governance framework … to avoid reputational risks that could spill over to the broader economy”.
The agency said that it expected Malta to revert to a better economic position once the pandemic eased off.
Malta’s anti-money laundering framework was pending Moneyval/FATF inspection. The agency noted that Malta had launched a succession of “ambitious reforms” in the segment and had gained momentum in terms of enforcement and inspections. Having said that, a negative evaluation by the Council of Europe body would weaken the country’s reputation and further burden its banking system.
Even though in the last few years, Malta’s governance ratings had declined, DBRS remarked that though new laws to reform institutions have been applauded by the Venice Commission, the body also highlighted that more needs to be carried out in order to achieve a satisfactory system of checks and balances.
Revenue Drivers
DBRS expressed some concern about several economic drivers in the country, since these seem susceptible to external changes, such as the passport scheme and the corporate taxation regime even though it took comfort in Malta’s “prudent management of revenue windfalls” from the passports scheme.
Malta also faces risks due to the open nature of its economy and dependence on tourism. DBRS also pointed out that there were risks emanating from the frightening effect institutional governance weaknesses could have on foreign investment. The agency said that the country’s rating could be downgraded if economic metrics worsened significantly, if the pandemic’s financial shocks led to “substantial deterioration” of Malta’s GDP increase or if investors lost considerable confidence in Malta due to governance weaknesses.
Banking
Malta’s position as a small financial centre has developed a large banking system relative to its domestic economy. Core domestic banks, with assets of around 197% of GDP in Q2 2020, mostly follow a conventional business model based on retail deposits for funding. Core banks’ main exposure is to the property market, which has endured and is comparatively resilient during pandemic times till now riding on the back of a strong labour market and government support measures. The international banks and domestic non-core banks have limited or no linkages to the domestic economy.
While the pandemic had hurt banks’ profitability, their share of non-performing loans stood at a “moderate” 3.5 per cent in the second quarter of 2020. NPLs are expected to increase once the loan moratoria granted by banks come to an end as some households and firms could have difficulties in repaying their debts. As of end-October 2020, 11.7% of total outstanding loans (including new loans extended by the Malta Development Bank since the onset of the pandemic) were subject to the moratoria, which in the case of food and accommodation activities rises to 51.6%. However, Maltese core banks’ capital ratio (CET1 ratio at 20.0%) and liquidity (LCR ratios 329.7%) buffers remain sound on average and are expected to withstand losses without breaching their regulatory requirements in an adverse scenario, as reflected by recent stress tests conducted by the Central Bank of Malta.
Credit Rating
DBRS stated that Malta’s high credit rating was supported by the country’s eurozone membership, modest fiscal metrics, its robust external position and a solid financial stance for households. The country’s rating could get better if public debt were brought down in a constant manner, if governance reforms were efficiently enacted or if there was additional evidence of increased resilience to exterior shocks.
Overall the agency pointed out that the progression of the pandemic continues the main uncertainty clouding the economic and fiscal outlook. A successful vaccination campaign in Europe could lead to a relaxation of restrictions and a partial revival in international tourism later this year. The agency expects Malta to steadily return to a healthier fiscal position as the support measures are phased out and the economy recuperates, helping to stabilise the public debt ratio. The success of the Maltese authorities in strengthening the country’s governance framework will remain central to avoid reputational risks that could spill over to the broader economy.