Fitch Ratings expects unemployment in Malta to double in 2020

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Fitch Ratings is forecasting unemployment in Malta to double throughout 2020 as a result of the coronavirus pandemic.

In its July report on Malta, in which it re-affirmed Malta’s rating at A+ with a stable outlook, Fitch said that despite the government’s fiscal measures to support the economy, it expects registered unemployment rate to increase to 7.1% in 2020, from 3.4% in 2019.

The report notes that the large share of foreign labour in the workforce supports the flexibility of the labour market and the expected outflow of foreign labour could help lower the unemployment rate through the crisis, but would have a further negative effect on private consumption.

Key rating indicators

Fitch said that Malta’s A+ rating was a result of  high income per capita, euro area membership and large net external creditor position, countered by its large banking sector, relatively high government contingent liabilities and vulnerability to shocks due to its small, open economy, and reliance on tourism.

Malta outperforms the ‘A’ median on the World Bank governance indicators, although its scores on the ‘Voice and Accountability’ and ‘Control of Corruption’ subcomponents have been slipping in recent years.

Malta’s medium-term potential growth remains strong and well above the eurozone average, at 3.0%-3.5%. Fitch forecasts growth to rebound to 4.1% in 2021, before easing to 3.6% in 2022.

Fitch estimates the general government balance will deteriorate to a deficit of 9.2% of GDP in 2020 (8.2% in April’s review), from a surplus of 0.5% in 2019, based on the operation of automatic stabilisers and the direct budget impact of government measures.

In the same report, Fitch affirmed Bank of Valletta’s Long-Term at ‘BBB’ with a Negative Outlook on 27 April 2020. We believe financial soundness indicators are strong, with a high common equity Tier 1 ratio of 17.5% at end-2019 for core domestic banks, and provide a buffer to the financial system in the event of a sharper GDP contraction than forecast.

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