Economy passes Fitch test

The first test of investors’ perception of the Maltese economy following the political crisis that erupted at the end of 2019 was rating agency Fitch’s report on Malta.

Malta’s A+ rating with a positive outlook has been confirmed mainly as a result of Malta’s euro area membership and institutions stronger than the majority of ‘A’ rated peers.

In its latest report, Fitch explained the backdrop to this year’s rating by updating readers on the resignation of Joseph Muscat as prime minister following the developments in the investigation on the assassination of journalist Daphne Caruana Galizia. These developments came at the end of its review process for this year’s rating.

The Maltese economy has continued to perform well with economic growth reaching 4.9 per cent in 2019, which is significantly better than the three per cent median for ‘A’ rated countries. Growth is expected to remain strong in 2020 and 2021.

The state of public finances also attracts positive comments from Fitch that forecasts a budgetary surplus of 1.1 per cent of GDP in 2019 and a debt to GDP ratio of 43 per cent.

So far, this healthy economic growth has not led to significant overheating with nominal wages growth increasing by 3.1 per cent in 2019 while unemployment was at a low 3.3 per cent.

Fitch discourages complacency by the local authorities as it highlights the negative assessment of Moneyval that underlined the need for Malta to improve the execution of its newly revamped money-laundering framework.

While the banking sector’s financial soundness indicators remain strong, Fitch advises caution in the distribution of dividends in the context of a raising of risk weighting of certain assets by international regulators.

The rating agency singles out BOV as an example of the need for improvement in the banking sector.

Rating agencies’ assessments are based on immediate past performance, evolving economic and fiscal trends, and short-term forecasts on the possible evolution of these trends.

For longer-term outlooks, one needs to take into consideration other factors like the sustainability of certain economic activities, likely changes in international regulation and legislation, and the evolving political dynamics in international trade. These are the areas where the policy makers need to focus to ensure that Malta’s open economy is buffered from external shocks.

Fitch argues that as long as fiscal prudence prevails and the national debt continues to decline, Malta’s A+ rating will be confirmed.

Improvements in banking supervision leading to stronger performance in this sector will also support Malta’s investment-grade rating. Malta’s significant banking sector, while being an essential source of growth, could affect the economy negatively in case the government is forced to provide fiscal support to a domestic bank. Hence, the importance of de-risking of banks’ business models even if this may affect the services that these banks offer to individual economic operators like i-gaming.

The new prime minister will undoubtedly ask to be briefed in detail about the strengths and weaknesses of the current economic model that was so tenaciously supported by the previous prime minister. The economic strategy review will go beyond what rating agencies say in their annual reports.

The views of other institutions like the IMF and the European Commission should give a more comprehensive view of the medium and long term sustainability of Malta’s economic strategy.