Morningstar DBRS Confirms Republic of Malta at A (high), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Republic of Malta's (Malta) Long-Term Foreign and Local Currency--Issuer Ratings at A (high). At the same time, Morningstar DBRS confirmed Malta's Short-Term Foreign and Local Currency--Issuer Ratings at R-1 (middle). The trend on all ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS' view that the risks to Malta's credit ratings remain balanced. The Maltese economy is likely to continue to grow at a comparatively strong, albeit decelerating, pace. The Central Bank of Malta (CBM) forecasts real GDP growth to ease to 4.0% in 2025 from 6.0% in 2024, driven by a moderation of domestic employment growth and less buoyant external demand for key service exports such as tourism. Similar to other countries, the economic outlook is exposed to important downside risks such as an escalation of global trade or geopolitical tensions. At the same time, the economic repercussions of higher US tariffs are likely to impact Malta's service-driven economy to a lesser extent than is the case for most other EU economies. Fiscal pressures are still large and projected to subside only gradually. While comparatively strong economic growth dynamics are likely to continue to bolster government revenues, the pace of fiscal consolidation is attenuated by the recent adoption of new fiscal support measures of households. CBM forecasts the general government budget deficit to narrow under the 3% threshold by 2026.

Malta's A (high) rating is supported by its Euro area membership, solid external position, and the banking sector's strong capital and liquidity buffers. Moreover, public debt is still moderate and compares favourably with most other Euro area countries. On the other hand, the small and open nature of the Maltese economy renders it vulnerable to external shocks. Furthermore, Malta faces the challenge of changing its labour-intensive growth model given the country's already high population density. In terms of governance, Morningstar DBRS views a further strong commitment by authorities to improve the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) framework as crucial for protecting the international reputation of the banking sector.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade Malta's ratings if one or a combination of the following occurs: (1) a material improvement in the public debt trajectory driven by a prudent fiscal approach and strong economic performance; or (2) further evidence of increased economic and fiscal resiliency to external shocks. Morningstar DBRS could downgrade Malta's ratings if one or a combination of the following occurs: (1) a significant deterioration in the public debt trajectory, potentially driven by a prolonged period of fiscal underperformance or weak economic growth; or (2) a reversal of improvements in Malta's financial crimes and institutional quality reforms.

CREDIT RATING RATIONALE

Economic Growth Is Projected to Moderate but to Remain Comparatively Strong

Growth dynamics in the Maltese economy remain comparatively strong notwithstanding the recent deceleration of economic growth. On an annual basis, real GDP expanded by 6.0% in 2024 on the back of strong external and domestic demand compared to a growth rate of 0.9% for the entire Euro area. Economic growth in Malta was bolstered by rising service sector exports particularly from tourism, professional services and financial services. The number of inbound tourists rose by 19.5% in 2024. Furthermore, private consumption continued to grow at a robust pace, aided by strong, albeit decelerating, employment growth particularly of non-EU nationals. Moreover, households' purchasing power was bolstered by high wage growth particularly in the public sector.

Looking ahead, economic growth is projected to decelerate but to remain much stronger than in most other Euro area countries. CBM forecasts real GDP growth to ease to 4.0% in 2025 and to 3.6% in 2026 as the growth rates both of domestic employment growth and external demand for service sector exports are projected to moderate. At the same time, private consumption is likely to be bolstered by recently adopted new fiscal support measures for households (e.g. adjustment of income tax brackets). Similar to other EU countries, the economic outlook is exposed to downside risks such as an escalation of geopolitical or global trade tensions. That said, Morningstar DBRS takes the view that the adverse direct and indirect impacts of higher US tariffs are likely to be smaller for Malta than for most other EU countries due to the service-driven nature of the Maltese economy. In general, the ratings of Malta continue to be constrained by the small size of the economy, which renders it vulnerable to external shocks. Furthermore, Malta faces the challenge of changing its labour-intensive growth model as continued strong population growth would likely strain the country's infrastructure given an already high degree of population density.

The Still Large Fiscal Deficit is Projected to Narrow Gradually

Although fiscal accounts are supported by favourable economic developments, budgetary pressures are still large. CBM estimates the general government budget deficit at 3.7% of GDP in 2024, down from 4.6% in 2023. The narrowing of the budget deficit in 2024 was driven by rising revenues from income taxes and VAT on the back of strong economic growth and recent administrative reforms which aimed at strengthening the efficiency of tax revenue collection. At the same time, fiscal accounts were adversely affected by the continuation of energy subsidies, the fiscal cost of which is estimated at 0.8% of GDP in 2024 and a one-off increase in the public wage bill on the back of a new collective agreement with the teachers' union.

Over the next years, the government plans to further reduce the fiscal deficit in line with the requirements of the EU's excessive deficit procedure which had been launched by the European Council against Malta in July 2024. While public revenues are likely to continue to benefit from strong, albeit moderating, economic growth, the introduction of new fiscal household support measures (e.g. income tax cuts), the fiscal cost of which is estimated at 0.5% of GDP, is likely to slow down the pace of fiscal consolidation adjustment. CBM forecasts the general government budget deficit to narrow to 3.4% of GDP in 2025 and 2.9% in 2026. As the government does not plan to exit untargeted energy subsidies over the next years, higher-than-expected energy prices constitute a downside risk for fiscal accounts. Furthermore, over the medium to long term, revenues from Malta's citizenship by investment scheme and corporate taxation could come under pressure and infrastructure and climate spending pressures are likely to rise. These factors account for Morningstar DBRS' negative qualitative adjustment of the Fiscal Management and Policy building block assessment.

Public Debt Stock Is Projected to Remain Moderate

The ratings are supported by Malta's still moderate stock of public debt. CBM expects general government debt at 48.9% of GDP in 2024, up from 47.7% in 2023. The moderate increase last year was driven by a still large deficit and a positive stock-flow adjustment which largely relates to the government's capital injection into the new national airline KM Air Malta. At the same time, the increase in the debt ratio was attenuated by favourable debt dynamics on the back of strong economic growth. Looking ahead, CBM forecast modest increases in the debt ratio to 49.6% of GDP in 2025 and to 50.1% in 2026, based on the expectations of a still large, albeit narrowing, budget deficit and a moderation of growth dynamics. While debt is higher than prior to the Covid-shock in 2019, the current debt level continues to provide the government with valuable space to support the economy if under stress. The interest burden is projected to increase but to remain low. The EC forecasts general government interest expenditure to rise from 1.2% of GDP in 2024 to 1.4% in 2026. In terms of financing, the government benefits from stable funding sources. According to Eurostat, around 78% of outstanding general government debt in 2023 was held by residents (particularly domestic banks).

Domestic Banks Have Strong Capital Buffers but Are Exposed to Concentration Risks from The Housing Market

Financial stability in Malta is supported by strong capital and ample liquidity buffers of domestic banks. The regulatory Tier 1 capital ratio of domestic core banks amounted to 21.0% in December 2024. Asset quality metrics have improved in recent years on the back of a favourable economic environment and the limited pass-through of higher interest rates on domestic lending rates. The NPL ratio of domestic core banks stood at 2.1% in December 2024, down from 2.7% two years earlier. Looking ahead, pockets of vulnerability for asset quality might arise from banks' sizeable loan exposure to the housing market, a large part of which relates to residential real estate. Loans related to housing purchases or other real estate activities accounted for a large 66% of total resident bank loans to the private sector in February 2025. While the increase of the sectoral systemic risk buffer for residential mortgages in spring 2024 has raised banks' resilience to a potential shock, Morningstar DBRS notes that mortgage loan growth has so far remained strong.

In terms of the international reputation of the banking sector, Morningstar DBRS views a further strong commitment by authorities to improve the AML/CFT framework as crucial. Malta's significant progress on this front permitted the country to exit from the grey list of the Financial Action Task Force (FATF) in June 2022, just one year after being added to the list of jurisdictions under enhanced monitoring. Malta's role as a small financial hub has resulted in the development of a large banking system relative to its domestic economy, including international banks, and domestic noncore banks which have few or no linkages to the domestic economy. Morningstar DBRS applies a negative qualitative adjustment to the Monetary Policy and Financial Stability building block assessment to reflect its view on Malta's relative positioning compared with other larger and more sophisticated financial systems in this building block

External Finances are Impacted by the Operations of Special Purpose Entities and Multinational Companies

Recent revisions of Malta's balance of payments show a much stronger external performance. The current account surplus for 2023 was revised to 6.4% of GDP from 0.9% as the utilization of new administrative data sources led to a large upward revision in the services and the primary income balance. In 2024, the current account surplus amounted to 5.7% of GDP. Malta's current account balance includes a very large surplus in the services balance (30.7% of GDP in 2024) and chronic deficits in the goods balance (-11.2%) and the primary income balance (-13.3%). The latter results from dividend payments by special purpose vehicles and multinational companies operating in Malta. The operations of special purpose entities and multinational companies are also the main reason for the very large stocks of gross external assets and liabilities in the economy's international investment position (IIP). Total gross external assets and liabilities of residents in December 2024 exceed the economy's nominal GDP by factors of 31 and 30, respectively. On a net basis, the economy has maintained a large external creditor position over the past decade. Recently revised figures from the CBM show a NIIP of around 82% of GDP in December 2024. High gross external debt of 852% of GDP in December 2024 mainly reflects Malta's role as an international financial centre and the presence of very large levels of intercompany lending. Therefore, Morningstar DBRS considers its risk to the domestic economy to be limited.

Malta Benefits from a Stable Policy Environment but There Is Scope to Strengthen Governance

Malta's institutional quality benefits from strong national and EU policy frameworks. The Worldwide Governance Indicators for Malta are relatively strong and broadly in line with EU averages but compare weakly in terms of control of corruption. Malta has made significant progress in improving its governance and its institutional framework in recent years, including implementing reforms to the justice system. However, Morningstar DBRS considers that there is room for further convergence toward other sovereigns with very strong assessments on the Political Environment building block, including more tangible evidence of enhanced efficiency, and effectiveness in the country's judiciary and control of corruption. Policy continuity is high and Morningstar DBRS expects Prime Minister Robert Abela (Labour Party) to remain committed to improving the country's institutional and governance framework during the current legislature.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a significant effect on the credit analysis.

Social (S) Factors

The following Social factor had a significant effect on the credit analysis: Human Capital and Human Rights. Malta's GDP per capita has caught up to the EU's average on the back of broad-based economic growth in various sectors over the past years. In general, Malta's GDP per capita also reflects its economic role as an offshore center for multinational companies. Labour productivity levels in key sectors of the economy such as the tourism sector are relatively low. Respect for human rights is high, and there is widespread access to quality healthcare and other basic services. Malta ranks 27th among the 170 countries assessed in the 2025 AlTi Global Social Progress Index.

Governance (G) Factors

The following Governance factor had a significant effect on the credit analysis: Institutional Strength, Governance and Transparency. The country ranks broadly in line with the EU average in the Worldwide Governance Indicators for Voice and Accountability (77.0 percentile rank) and Rule of Law (75.5 percentile rank) but compares weakly in terms of Government Effectiveness (65.6 percentile rank) and Control of Corruption (61.8 percentile rank). Furthermore, Malta's ranking for Voice and Accountability, Government Effectiveness, Control of Corruption, and Rule of Law have been deteriorating in recent years. While the EC commended Malta for its progress on reforms, the EC also noted that there is room for further improvement in the government's efforts to strengthen the judiciary's independence and to ensure effective criminal prosecution.

There were no Environmental factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/451826.

EURO AREA RISK CATEGORY: LOW

Notes:
All figures are in euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include the Ministry for Finance (Draft Budgetary Plan 2025, October 2024; Medium-Term Fiscal Structural Plan, September 2024), Central Bank of Malta (Outlook for the Maltese Economy 2025:1, March 2025; Interim Financial Stability Report, November 2024; Statistics), Government of Malta (Malta's National Energy and Climate Plan, December 2024), Malta National Statistical Office (Labour Force Survey; Statistics), European Commission (European Economic Forecast, Autumn 2024, November 2024; Analysis of the Recovery and Resilience Plan of Malta, July 2023; Rule of Law Report 2024, July 2024), European Central Bank, European Banking Authority, ESRB (Risk Dashboard, March 2025), Eurostat, European Environment Agency, Social Progress Imperative (2025 AlTi Global Social Progress Index), OECD, IMF (Malta: 2024 Article IV Consultation, January 2025; World Economic Outlook October 2024; International Financial Statistics), World Bank, BIS, International Energy Agency and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/451833.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Yesenn El-Radhi, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: 3 April 2015
Last Rating Date: 11 October 2024

DBRS Ratings GmbH
Neue Mainzer Straße 75
D-60311 Frankfurt am Main
Tel. +49 (69) 8088 3500
Geschäftsführung: Detlef Scholz, Marta Zurita Bermejo
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit dbrs.morningstar.com.