Higher domestic consumption after last year’s good export performance in the services sector is likely to boost Malta’s (A3, stable) economy going forward, says Moody’s Investors Service in its annual update on the country published today.
Moody’s said that Malta’s real GDP grew by 3.2% over the first half of 2014, and the rating agency projects that it could increase by 2.8% in 2015. Stronger capital formation should also support growth as the government-led energy sector reform will likely boost investment in this area.
“In addition, the government continues to enjoy strong domestic demand for its debt, minimising exposure to external shocks.”
“Around 96% of the government’s debt is owned by residents, which gives the Maltese government a very stable funding base.”
The rating agency’s report is an update to the markets and does not constitute a rating action.
“Malta’s economy will continue to grow in 2015 as healthy household balance sheets and government reforms in the energy sector and in the labour market will support domestic demand,” says Lucie Villa, a Moody’s Assistant Vice President and Analyst.
Moody’s also expects that Malta’s economy will continue to be shielded from potential external shocks given its wealth and its high level of competitiveness that makes it relatively adaptable to changes in global trade and growth patterns.
Malta’s popularity as a tourist destination is set to increase due to improved airline connectivity, the restructuring of the sector to meet new customer demand, and reduced attractiveness of competing tourism destinations in the Mediterranean, says Moody’s.
“Malta’s tourism also benefits from the island’s central location in the Mediterranean sea and its English-speaking population. Tourists arrivals increased by 8.9% during the first half of 2014 compared to the same period in 2013, supporting the rating agency’s view that the industry will keep growing in the medium term.”
In addition, the government’s 2015 draft budgetary plan shows progress in fiscal consolidation. Moody’s expects Malta’s fiscal deficit to decline to 1.7% of GDP in 2015, and the debt will begin falling after having peaked at 70% of GDP in 2013-14.
However, the rating agency notes that the country continues to have high debt relative to similarly rated peers (representing 70% of GDP). The government’s financial strength is also burdened by contingent liability risks stemming from the island’s loss-making energy firm, Enemalta, which carries government-guaranteed debt equivalent to around 10% of GDP.
Moody’s notes the policy initiatives targeting the energy sector and labour market, which are both hindered by inefficiencies, are aimed at improving the country’s productivity and capital formation, although it is too early to determine whether they have reached the government’s objectives.