Maltese economy will grow by nearly 4% on average over 2017-2020 in real terms, allowing for a further reduction in general government debt to GDP.

  • We project that the Maltese economy will grow by nearly 4% on average over 2017-2020 in real terms, allowing for a further reduction in general government debt to GDP.
  • We are therefore revising the outlook on our long-term sovereign credit ratings on Malta to positive from stable, and affirming the 'A-/A-2' long- and short-term ratings.
  • The positive outlook reflects that we could raise the ratings on Malta over the next 24 months if economic growth remains in line with our expectations and is not derailed by factors such as external risks, and if budgetary consolidation and the reform of state-owned enterprises continues.

The outlook revision reflects our expectation that Malta's economy will 
continue its strong cyclical expansion, growing by nearly 4% on average over 
2017-2020 in real terms, enabling a further consolidation of public finances.

We could raise the ratings if:

  • Economic growth is in line with our expectations and is not derailed by factors such as external risks (for example, the effects of Brexit or increasing international regulation of key sectors such as financial services and e-gaming); and
  • Budgetary consolidation proceeds and contingent liabilities are reduced through the ongoing reform of state-owned enterprises.

We could lower the ratings if we see substantial slippage in Malta's fiscal 
performance, increasing risks to the performance of key service sectors, or 
overheating in the financial sector driven by the domestic savings glut.


Our ratings on Malta are supported by its strong growth performance coupled 
with consistent current account surpluses, as well as by narrowing general 
government deficits and improved fiscal management. The ratings are 
constrained by Malta's relative vulnerability to changing international 
financial and political conditions; its small, open economy; the fact that the
resilience of its new economic sectors remains untested by external shocks; 
and its limited monetary flexibility. The ratings are also constrained by the 
frequent revisions in some sections of Malta's macroeconomic data, and our 
limited visibility on external risks given the presence of large flows into 
and out of Malta, particularly in the financial sector, which also inflate the
country's external liquidity metrics.

Institutional and Economic Profile: The proliferation of new sectors is 
fueling Malta's strong economic growth
  • We project the economy will grow by an average of 4% over 2017-2020, decelerating as new sectors start to mature.
  • Risks to our growth expectations emanate from the structure of Malta's small, open economy, and from evolving global tax regulation.
  • We anticipate gradual reform implementation through 2020.

Malta continues to enjoy one of the strongest macroeconomic expansions in the 
eurozone. Real GDP growth averaged 4.7% in 2010-2016 and we expect it to 
average nearly 4% over 2017-2020. The structure of Malta's economy has changed
significantly over the past half-decade, during which the growth of 
traditional manufacturing and financial service exports has moderated. 
Instead, growth has been dominated by the proliferation of new services 
exports such as logistics and e-gaming. In 2014-2016, significant investments 
in energy and logistics also made important contributions to growth.

Going forward, we expect the pace of growth to decelerate somewhat as the new 
sectors that have so far been in expansionary mode start to mature. 
Furthermore, several projects--particularly in the energy sector--that have 
contributed positively to growth have reached completion. Nevertheless, we 
anticipate that Malta's growth will continue to exceed that of peers at 
similar income levels and stages of development.

That said, there are several risks to our growth projections, not least those 
stemming from Malta's small, open economy, which is exposed to various 
potential external shocks, such as Brexit. Tourists from the U.K. generate 30%
of tourism receipts; in 2017, receipts from British tourists declined owing to
the depreciation of sterling. However, tourists from other European countries 
have more than compensated for this shortfall. The Ministry of Finance 
estimates that while tourism contributes about 5% to GDP directly, the figure 
rises to nearly 20% when indirect and induced effects are considered. 
U.K.-exposed segments of Malta's very large financial sector could also 
experience disruption. Nonetheless, we believe that Malta is generally 
well-placed to withstand Brexit shocks, as it has a diversified export base 
and a flexible economy.

Another risk is evolving global tax regulation. Malta's tax regime, an 
important factor for investors in certain sectors, will be tested by several 
measures that have been adopted or proposed at European and global levels. For
example, the Anti-Tax Avoidance Directive (ATAD) requires Malta to reform some
aspects of its corporate taxation by 2019. Other proposals, such as the Common
Consolidated Corporate Tax Base (CCCTB) may put further pressure on Malta, 
especially as the political balance within the EU may change after the U.K.'s 
departure. Any future regulatory pressures on the e-gaming sector could also 
have negative implications for Malta's economy, given that this industry has 
contributed increasingly to the country's growth in recent years.

Snap elections were held in June 2017, a fallout from the Panama Papers 
scandal. The incumbent Labour Party, led by Prime Minister Joseph Muscat, 
secured a four-seat majority. In recent years, amid a high-growth environment,
the government has consolidated public finances, reduced the general 
government debt-to-GDP ratio, and undertaken several structural reforms, 
notably to increase the participation rate in the labor market and to reduce 
the country's energy bill. We anticipate that macroeconomic policymaking will 
remain geared toward further fiscal consolidation. Efforts to reform 
state-owned enterprises further, reduce skill mismatches, and improve the 
long-term sustainability of public finances in the context of an aging 
population will be implemented gradually.

Flexibility and Performance Profile: Malta's high gross external debt does not
fund its domestic growth
  • We anticipate further fiscal consolidation over the forecast horizon, with general government debt-to-GDP on a declining trajectory.
  • Credit growth has been driven by household borrowing, particularly mortgages; meanwhile, corporate deleveraging has continued.
  • We project that Malta's current account will remain in surplus over 2017-2020, driven by robust service exports.

The corporate tax regime is one of the factors that encourages companies to 
create subsidiaries in Malta and book some of their activities through it. 
Such activity contributes to an inflated gross international investment 
position of about 20x GDP--even though on a net basis, it is an external 
creditor--and to considerable gross flows on the financial account of the 
balance of payments, which considerably inflate Malta's external liquidity 
metrics. Those flows are mostly pass-through and do not fund the domestic 
economy, but the reduction of their volume could reduce service exports by 
noticeable amounts.

The current account has been in surplus since 2012, though its magnitude has 
been revised several times. Malta's external data is subject to frequent 
revisions, which constrains our analysis. Most of the external debt inflows 
result in matching outflows and do not generally fund domestic growth.

Malta's banking sector is split into three well-identified subsectors: core 
domestic banks; noncore domestic banks; and international banks. The two 
biggest core domestic banks are overwhelmingly focused on activities in Malta,
although some smaller core banks undertake some international activities, such
as participating in syndicated loans. The international banks, as of 2016, had
an estimated balance sheet of about 220% of GDP (out of 465% of the total 
banking sector). They operate a variety of business models, including 
onlending their parents' funds abroad and attracting nonresident deposits to 
fund parents. Although this subsector has been shrinking for several years, it
still has a considerable effect on external accounts. That said, it generates 
limited employment and does not have close links with the domestic economy. 
Dislocations in the funding for international banks could still affect the 
island's reputation as a financial center.

The bulk of the government's contingent liabilities comes from guarantees to 
government-related entities. Overall fiscal management has improved, but 
guarantees still constitute over 12% of GDP. Malta has made considerable 
progress in fiscal consolidation; we expect net debt to fall to below 40% of 
GDP by 2020, though this projection is highly sensitive to the evolution of 
nominal GDP. The government's budgetary position moved into a surplus of 1% of
GDP in 2016. We expect small surpluses over the forecast horizon arising from 
additional public savings from further spending reviews and reforms to improve
tax administration.

Credit growth has been weak as corporates continue to deleverage. New loan 
growth has been driven entirely by households, particularly via demand for 
mortgages. The government intends to capitalize a development bank with €200 
million (about 2% of GDP) to provide credit to small and midsize enterprises 
and for infrastructure projects where funding is not easily forthcoming. The 
details regarding the timing and financing of the capitalization have not yet 
been made available. We anticipate that, regardless of the means of financing 
the initial injection, the impact will increase net general government debt. 
We have therefore added €30 million (0.3% of GDP) to our calculation of 
government debt. We understand this is the likely size of the initial 
injection; we will increase the amount we add to government debt as and when 
further injections are made to raise the bank's capital.

Household savings remain high (net financial assets of households are about 
180% of GDP), with the local financial market offering limited options to 
place them. Therefore, most of them are deposited with banks, contributing to 
loan-to-deposit ratios averaging less than 60% and an overall domestic savings
glut. There is some evidence that households are increasing their appetite for
higher-yielding investments, such as real estate and local corporate bonds. 
Although the growth in real estate prices is mainly driven by structural 
factors such as population growth, the domestic recycling of savings could 
eventually contribute to the overheating of the property market and trigger 
financial stability concerns.

Membership of the eurozone anchors Malta's monetary policy and provides its 
banks with access to funding at low nominal interest rates. Nevertheless, we 
consider that membership in a monetary union increases the onus on member 
governments to support competitiveness through fluid labour, product, and 
services markets, and to build up fiscal buffers against future shocks. 
Malta's inflation patterns diverge from eurozone averages, although the 
variation has reduced because energy markets have integrated; nonetheless, the
European Central Bank is less likely to consider the economies of smaller 
members when setting monetary policy, and this remains a constraint on Malta's
monetary flexibility. Moreover, the integration of Malta's financial system 
into the eurozone appears to be insufficient to achieve efficient placement of
surplus domestic savings, even though this issue is partly caused by the 
traditional home bias of domestic savers.


Table 1

Republic of Malta Selected Indicators
Nominal GDP (bil. LC)778891011111212
Nominal GDP (bil. $)1091011101112131314
GDP per capita (000s $)22.922.024.126.424.025.327.128.729.931.4
Real GDP growth1.
Real GDP per capita growth1.
Real investment growth(16.1)
Real exports growth1.
Unemployment rate6.
Current account balance/GDP(0.2)1.72.710.
Current account balance/CARs(0.1)
Trade balance/GDP(17.7)(15.3)(14.8)(13.1)(20.2)(18.7)(17.2)(17.2)(17.3)(17.4)
Net FDI/GDP128.1125.992.181.496.184.785.
Net portfolio equity inflow/GDP(171.2)(131.7)(119.6)(156.1)(52.9)(48.6)(90.0)(90.0)(90.0)(90.0)
Gross external financing needs/CARs plus usable reserves231.7234.1234.2291.7328.4274.5243.0233.0224.0215.5
Narrow net external debt/CARs(26.9)(32.4)63.665.472.657.557.755.853.950.5
Net external liabilities/CARs(1.9)(7.1)(6.8)(13.7)(18.6)(18.0)(21.0)(23.3)(25.6)(27.7)
Short-term external debt by remaining maturity/CARs135.8138.7140.5200.7237.9183.0151.8141.2131.8122.7
Usable reserves/CAPs (months)
Usable reserves (mil. $)516705597619572677677677677677
FISCAL INDICATORS (%, General government)
Change in debt/GDP4.
Primary balance/GDP0.7(0.7)
Interest /revenues8.
Net debt/GDP59.361.361.958.
Liquid assets/GDP10.
CPI growth2.
GDP deflator growth2.
Exchange rate, year-end (LC/$)0.770.760.730.820.920.950.850.880.880.87
Banks' claims on resident non-gov't sector growth5.31.7(0.4)
Banks' claims on resident non-gov't sector/GDP128.4124.6116.3105.997.693.789.
Foreign currency share of claims by banks on residents4.
Foreign currency share of residents' bank deposits3.
Real effective exchange rate growth(0.3)(3.3)1.8(0.2)(4.9)2.2N/AN/AN/AN/A