The partial lockdown and travel restrictions to deal with the coronavirus pandemic will likely result in a ‘deep’ but temporary recession in Malta this year, the credit rating agency DBRS Morningstar said in its report on the country.
The credit rating agency confirmed Malta’s rating at A (High) and the trend on all ratings is ‘Stable’.
In its key rating considerations, the credit rating agency said that the Stable trend reflects the fact that Malta’s strong economic and fiscal performance in recent years has left the country relatively well placed to mitigate the risks posed by the coronavirus outbreak.
The partial lockdown and travel restrictions to deal with the pandemic will likely result in a deep but temporary recession in Malta this year.
“A strong rebound should follow the gradual opening of the economy although there is still high uncertainty over the evolution of the pandemic and the tourism sector. The fiscal balance and debt ratios will deteriorate sharply in 2020 because of the intense economic contraction and the fiscal support package. However, Malta’s public debt ratio is expected to remain one of the lowest in the European Union.”
Malta’s rating is supported by its euro zone membership, moderate level of public debt, solid external position and households’ strong financial position. The agency notes that Malta has a small and open economy which make it vulnerable to external demands or confidence shock.
The tourism sector is expected to suffer in the medium-term. The report says that Malta’s attractiveness to foreign investment could suffer if measures to address the financial integrity risks and institutional governance weaknesses noted by international bodies are deemed insufficient.
Medium to long-term challenges could come from Malta’s contingent liabilities, changes in international taxation affecting Malta’s attractive tax system to foreign companies, or increasing age-related spending.
Ratings could be upgraded or downgraded
The report notes that the ratings could be upgraded or downgraded and mentioned a number of scenarios in which these could happen. If any of the following occurs: (1) a sustained material reduction in the public debt ratio driven by sound fiscal management and economic performance; (2) effective implementation of reforms to enhance Malta´s governance framework, including the financial and judicial sector; or (3) further evidence of increased economic and fiscal resiliency to external shocks – the ratings could be upgraded.
On the other hand, the ratings could be downgraded if one or a combination of the following occur: (1) a sustained deviation from a prudent fiscal approach materially deteriorating the fiscal and public debt outlooks; (2) the pandemic shock to the economy results in substantial deterioration in Malta´s potential growth; or (3) a substantial weakening of investors’ confidence due to insufficient progress on improving its governance framework.
Finance Ministry welcomes report
The Finance Ministry welcomed the report published by DBRS Morningstar, following that of Fitch earlier this month, which affirmed Malta’s rating at A(High) with a Stable Outlook.
In a statement on Saturday, the ministry said that the re-affirmed outlook reflects Malta’s strong economic and fiscal performance exhibited in recent years which has left the country relatively well placed to mitigate the risks posed by the coronavirus outbreak.
Commenting on the report, the ministry said that DBRS notes that the European Commission expects the negative impact of the pandemic on Malta’s GDP to be the smallest among the Euro Area member states in 2020.
“DBRS expects the negative economic and fiscal impact of COVID-19 on the Maltese economy to be temporary as Malta is expected to record a strong rebound following the gradual opening of the economy and the Government’s support measures which have prevented substantial losses in employment.”
Finance Minister Edward Scicluna said: “I am pleased to note that DBRS, like the other credit rating agencies, is acknowledging that our country’s strong economic and fiscal performance exhibited in recent years has left the country relatively well placed and prepared to mitigate the risks posed by the global pandemic and in ensuring a speedy recovery. This is the result of the Government’s sound and prudent policies. The government intends to keep along this proven path.”