Malta’s Economic Outlook: A Closer Look at Challenges and Opportunities

I finally managed to go through Fitch Rating’s latest credit rating report for Malta. Beyond the superficial and brief analysis which some local media outlets provided, there is a deeper picture to explore, questions that need to be asked, and a new economic vision that needs to be crafted.

Let’s start with the good news, which is often taken for granted. The report underscores Malta’s resilience and attractiveness as an investment destination on the international stage. In fact, the agency affirmed Malta’s credit rating and revised our GDP growth forecasts upwards, with a ranking of A+ and a stable outlook. The report highlights Malta’s political, social, and economic stability, both its potential and current robust economic growth, high per capita income, and its EU and Eurozone membership.

Of course, our present and forecasted economic growth must be compared with other EU Member States. Over the last decade or so, Malta has outperformed its peers and now flies high above the Eurozone average, with real GDP growth expected to reach 5.7% by the end of this year. To put this in perspective, the average real GDP growth for Eurozone countries is expected to be a mere 0.8% and 2% for other A-rated countries. This growth is largely driven by the services sector, strong financial performance due to higher interest margins, and a buoyant tourism sector, which has now surpassed pre-pandemic levels.

Fitch has also revised Malta’s growth forecast upwards for 2025 and 2026 to 4.3% and 4.1%, respectively, with GDP per capita now standing at 91% of the Eurozone average.

Labour market indicators are also positive, with Malta enjoying an almost zero unemployment rate, expected to average 3.2% over the next few years, far below the Eurozone’s 6.5%.

And now the bad news. Some of the highlighted challenges have been with us for ages, while others are relatively new. The report points to Malta’s vulnerability to external shocks (read geopolitics), a large banking sector, and a growing public debt burden. Additionally, low labour productivity and skills shortages are variables that might hinder future economic growth.

One significant challenge is the country’s fiscal regime change for companies, which could make Malta less appealing to foreign investors. Corporate tax has historically been a key attraction for foreign direct investment, with Malta offering a 5% corporate tax rate for foreign companies compared to 35% for local businesses. The EU’s Minimum Tax Directive, to which Malta has subscribed, mandates a 15% minimum effective tax rate for companies. While Malta negotiated a six-year transition period, the question remains: What will Malta’s fiscal regime look like after this period? Will these changes happen before or after the 2027 general election? Perhaps the upcoming budget speech will provide answers.

Another challenge is the ongoing cost of energy subsidies. Although energy prices have fallen, the absence of a clear exit strategy from fixed energy pricing poses fiscal risks, especially given international energy price volatility. Many believe that the government will not alter its fixed-price energy policy before the 2027 general election.

Malta’s infrastructure is another issue. From roads to electricity and sewage services, Malta’s infrastructure was not built to accommodate a rapidly growing population. The government has acknowledged this and is investing heavily in modern infrastructure, but the transition period may be challenging for the public.

Challenges related to the labour market also persist. Despite efforts to address the skills shortage, the government’s recent actions regarding the influx of foreign workers have sent mixed signals to industries dependent on them. Additionally, Malta struggles to attract and retain a strong talent pool.

Malta’s fiscal position remains a concern for Fitch. The fiscal deficit for 2024 is projected at 4.0% of GDP, narrowing to 3.0% by 2026. Public debt, currently at 47.3% of GDP, remains below the ‘A’ median of 53.3%, but is expected to rise slightly in the coming years. The government is committed to keeping debt below 60% of GDP, adhering to the Maastricht criteria.

Finally, there are ongoing rumors about APS Bank potentially taking over HSBC Malta. The banking sector needs another major player to spread risk, especially if HSBC exits the market. This is a critical issue that requires the government’s attention.

These are the key challenges Malta faces in terms of its economic and financial performance. While hurdles remain, Fitch’s recognition of Malta’s potential for further growth underscores the country’s resilience on the global economic stage.