Moody's warns Malta's strong growth capped by spending, rule-of-law gaps

Moody's has affirmed Malta's A2 credit rating with a stable outlook, but the agency's latest assessment carries a clear warning for businesses and investors: persistent government spending and rule-of-law shortcomings are holding back an otherwise strong economy.

The rating agency forecast a rising fiscal deficit despite sustained economic growth, pointing to continued energy subsidies, increased social security spending, and institutional weaknesses as the main drags.

Malta's economy has consistently demonstrated resilience through international shocks, supported by strong domestic demand and a diversified services sector. Moody's highlighted tourism, financial services, remote gaming, and information technology as major contributors.

Real GDP growth is forecast at 4.1% in 2026 and 3.7% in 2027, following 4.7% in 2025. But the fiscal picture is less rosy.

The deficit narrowed from 3.5% of GDP in 2024 to 2.1% in 2025, allowing Malta to exit the EU's excessive deficit procedure by June 2026. Moody's expects the deficit to widen to 2.8% of GDP in 2026 before declining slightly to 2.7% in 2027.

Energy subsidies alone are expected to cost around €400 million in 2027, equivalent to 1.4% of GDP. While the measures have shielded households and businesses from volatile international energy prices, they transfer financial risks onto the government.

Measures announced in the 2027 Budget, including increased tourist contributions and higher work permit fees, could partially offset the additional spending.

Government debt is forecast to increase from 46.3% of GDP in 2025 to 46.8% in 2026 and remain at that level through 2027. Moody's noted that Malta benefits from strong debt affordability and a reliable domestic funding base, with approximately 79% of government debt held by residents, mainly domestic banks.

Beyond public finances, Moody's called attention to persistent institutional weaknesses as a tight belt around Malta's overall creditworthiness. The agency referenced the European Commission's 2026 Rule of Law Report, which highlighted limited or no progress in judicial independence, court efficiency, high-level corruption cases, access to information, and formal public participation.

Moody's also noted that Malta's small public administration lacks the capacity to manage increasingly complex policy and regulatory requirements.

Improvements to Malta's institutional framework, particularly in the rule of law and control of corruption, were identified as factors that could support a future credit rating upgrade. Conversely, a structural deterioration in public finances, especially if accompanied by weaker economic growth, could lead to a downgrade.

Prime Minister Robert Abela welcomed the report, noting that it praised the 2027 Budget measures. “The Moody’s report serves as further validation of our economic management, confirming that we are on the right track despite everything happening around us,”

For Malta's business community, the message is clear: strong growth is real, but the combination of rising public spending and institutional gaps creates a ceiling on the country's credit profile. Any future downgrade would raise borrowing costs for both government and businesses, directly affecting investment decisions.