Maltese banks do not appear to be at any immediate risk from recent international turmoil in the sector, credit rating agency Fitch has said.
In a rating report released on Friday, the agency described liquidity levels in Malta’s banking as “exceptionally strong”, noting that Malta had the highest liquidity coverage ratio across the entire at the end of the third quarter of 2022.
The ratio measures what share of assets held by financial institutions can be sold quickly with little or no loss to their value. It is intended to ensure banks can remain solvent if they face significant cash outflows over a 30-day period.
Internationally active banks must maintain that ratio at a minimum of 100%. According to European Banking Authority data, Maltese banks had a ratio of 391% as of 3Q22.
Fitch confirmed Malta’s A+ credit score with a stable outlook, saying the country’s high per-capita income and track record of growth and debt reduction stand it in good stead.
It said that Malta will be well positioned to reduce public debt in the medium- to long-term without slashing expenditure or hiking taxes, if it can grow the economy at a steady 3-4% per year.
Fitch noted that the economy grew by 6.9% in real terms last year. However, the main contribution to that headline figure came from investments that were impacted by the importation of aircraft material.
The agency said it does not expect aircraft imports to continue at the same level this year.
Online gaming, information and technology and professional services were key sectors driving economic growth in 2022, it said. By contrast, the construction sector contracted quite sharply.
Private consumption remained sound in 2022, supported by the accumulation of past savings and favourable labour market conditions. Inflation levels remained relatively contained relative to other EU countries while unemployment “reached a new record low of 2.9%”.
Fitch believes the Maltese economy will grow by a more moderate 3.5% this year, rising to 3.7% in 2024.
While Malta has been cushioned from the impact of energy inflation due to government subisidies on electricity and fuel prices, Fitch noted that as an island that relies on imports, it has been disproportionally affected by higher food and construction prices.
The agency however noted with some concern that the lack of a “clear exit strategy” for the government to wind down energy and fuel subsidies creates fiscal risks for the government, as it is at the mercy of international energy prices.
Still, Fitch believes the government achieved a 5.8% deficit in 2022, down from 7.5% the previous year, and expects the government to close 2023 with a 5.4% deficit.
That is slightly lower than the 5.5% deficit the government originally projected, but higher than the 4.1% average deficit recorded by median ‘A’-rated countries.
Debt has risen by around 15 percentage points since 2019 – a much higher increase than in most of Malta’s peers – and Fitch expects it to peak at just below 60% of GDP by 2024.
Fitch said that it would consider downgrading Malta if government debt continued on a clear upward trend or if it found evidence of further deterioration in governance or banking supervision, or concerns of a lack of transparency across the broader financial sector.
It would consider upgrading Malta’s rating if debt trends down over the medium term or if further progress is registered in addressing key weaknesses in governance, banking supervision and the business environment.
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