DBRS Morningstar confirms Malta’s A(high) rating with a stable outlook

Credit ratings agency DBRS Morningstar has confirmed Malta’s rating at A(high) with a stable outlook, in a report published on Friday.

The stable trend reflects DBRS Morningstar’s view that the risks to the country’s ratings remain balanced, despite the disruption brought about by the COVID-19.

It noted that Malta’s GDP contracted by 9.9 per cent y-o-y in Q3 2020, “more than previously anticipated, and the reintroduction of restrictions across Europe has intensified the headwinds to growth in the near-term”.

DBRS remarked that the Government’s fiscal response to mitigate the effects of the pandemic, combined with the sharp contraction in activity, “will result in a sharp deterioration in public finances this year”.

However, it observed, Malta entered the current crisis after “a prolonged period of strong economic and fiscal performance, which provided the Government valuable fiscal headroom to soften the pandemic setback”.

The evolution of the pandemic remains the main uncertainty clouding the economic and fiscal outlook, DBRS wrote.

A successful vaccination campaign in Europe could lead to a relaxation of restrictions and a partial revival in international tourism later this year.

DBRS Morningstar expects Malta to gradually return to a healthier fiscal position as the support measures are phased out and the economy recovers, 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.”

DBRS’s A(high rating for Malta is supported by the country’s membership to the euro zone, a moderate level of public debt, a “solid external position, and households’ strong financial position”.

“On the other hand, Malta’s small and open economy remains exposed to external demand or confidence shocks.”

In this sense, the tourism sector, an important source of income, employment, and investment in Malta, “presents a vulnerability as long as the adverse effects of the pandemic continue”.

Furthermore, it cautioned that similarly, 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.

“Despite Malta’s sound public finances, medium- to long-term challenges could come from its contingent liabilities, changes in international taxation affecting Malta’s attractive tax system to foreign companies, or increasing age-related spending.”

‘Financial system remains sound, but the pandemic shock and reputational risk are concerns’

DBRS commented that Malta’s role as a small financial hub has resulted in the development of a large banking system relative to its domestic economy.

Core domestic banks, it said, with assets of around 197 per cent of GDP in Q2 2020, mostly follow a traditional business model based on retail deposits for funding.

“Core banks’ main exposure is to the real estate market, which has remained relatively resilient in the face of the pandemic thus far on the back of a robust labour market and Government support measures. The international banks and domestic non-core banks have limited or no linkages to the domestic economy.”

Onto the profitability of core banks during the pandemic, DBRS highlighted that this was impacted during the fist half of the year, “mainly driven by a significant drop in non-interest income and increased provisions”.

The Moneyval/Financial Action Task Force (FATF) assessment of Malta’s framework and effectiveness in combating money laundering and terrorist financing, expected later this year, “remains a concern”.

The Maltese authorities implemented a series of ambitious reforms on this front and strengthened the human and financial resources of the financial services authorities which “resulted in a significant pick-up in terms of inspections and enforcement actions taken last year”.

Nevertheless, DBRS noted, if these international bodies deem these efforts insufficient to address identified deficiencies, this could deteriorate the reputation and confidence of the banking system and further strain Maltese banks’ correspondent banking relationships.