Economic Analysis
Malta

Malta

Population 0.5 million
GDP per capita 27,327 US$
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 5.2 6.7 5.4 5.0
Inflation (yearly average, %) 0.9 1.3 1.8 1.9
Budget balance (% GDP) 0.9 3.5 1.3 1.2
Current account balance (% GDP) 7.0 13.8 12.0 11.0
Public debt (% GDP) 56.3 50.9 48.0 45.0

(e): Estimate. (f): Forecast.

STRENGTHS

  • Crossroads between the eastern and western Mediterranean
  • Eurozone member
  • Public and external accounts in surplus; public debt held by residents
  • Tourism (two million annual visitors for 430,000 inhabitants) and port activities
  • Productive, English-speaking, growing and high-income workforce; low taxation

WEAKNESSES

  • Small island nation, leading to close ties between public authorities and business
  • Sizeable incoming/outgoing financial flows (offshore finance, online gambling industry, nationality acquisition programme against investment)
  • Inadequate road infrastructure
  • Inadequate higher education; shortage of highly skilled labour, R&D and innovation
  • Slow legal process; favouritism and corruption

RISK ASSESSMENT

Growth still high, but decelerating to its potential

As in 2018, growth in 2019 will be driven by domestic demand. Investment (21% of GDP) will be the most dynamic element. Its private component is expected to benefit from the start of operations at the Maltese Development Bank, which will finance major infrastructure and SMEs. Health, tourism, and real estate remain the preferred sectors, thanks in particular to foreign funds channelled through the Individual Investor Programme (IIP), which allows foreigners with more than one year of residence to claim Maltese nationality by contributing €675,000 and owing a residence worth €350,000 for five years. Public investment will continue in road works, the construction of tourist and educational facilities, and social housing. Private consumption (45% of GDP) will benefit from the strong performance of the labour market, but also from wage increases resulting from the labour shortage, despite the growing participation of women and the increased presence of foreign workers. Household income will benefit from wage indexation to inflation through the Cost Of Living Allowance (COLA). Exports of electronic, electrical, and optical components (Malta’s main manufacturing products), but also of generic medicines and seafood products could slow down with the European economy. Tourism (12% of exports, 16.6% of value added, 27% of GDP and jobs in 2017, with related activities) will continue to benefit from Maltese competitiveness compared with other Mediterranean destinations, but could suffer from a decline in the number of British visitors (24% of spending). Revenues from online electronic gaming (1/4 of exports and 14% of value added) and database management are growing. Port activity is taking full advantage of the country’s optimal position at the crossroads of the Mediterranean routes, and especially its location halfway between the Suez Canal and Gibraltar. However, with imports growing faster, reflecting sharply increasing investment, the growth contribution of trade in goods and services (250% of GDP) may be zero at best.

 

Consolidated public accounts are benefiting from economic conditions

Fiscal consolidation had not been a top priority for the Labour Party, back in power under Prime Minister Joseph Muscat since 2013 (re-elected with 37 out of 67 seats in the early elections of June 2017, triggered by allegations of corruption against Mr Muscat) after 15 years of rule by the centre-right National Party. However, a fiscal responsibility law was passed in 2014, and the public accounts posted a surplus as early as 2016. The improvement is largely down to strong growth, although progress has been made in tax collection and the management of state-owned enterprises. Despite a possible drop in IIP revenues (2% of GDP and 5.4% of revenue in 2017), the primary balance, i.e. excluding interest, is expected to be 3% of GDP in 2019. The primary surplus, low interest rates and high growth should help to bring down the considerable level of public debt (to which must be added government guarantees for the debt of state-owned companies representing 10% of GDP), which is held by residents, including local banks.

 

The trade deficit is largely offset by the services surplus

Despite a huge deficit in the trade in goods (12% of GDP in 2017), due to the lack of energy resources, poorly diversified manufacturing production and the high import content of consumption and investment, Malta runs a massive current account surplus. This is due to the surplus in services related to tourism, online gambling, and the duty-free port of Marsaxlokk. This port is used to tranship cargo from high-tonnage ships to vessels suited to smaller-capacity Mediterranean ports and vice versa.

 

Decrease in bank credit to companies but still a thriving offshore financial centre

The banking sector managed assets equivalent to 430% of GDP at the end of 2017, down from 468% a year earlier. The truly local banks, mainly Bank of Valletta, HSBC and Mediterranean Bank, look after assets representing 226% of GDP. They hold one third of sovereign debt and are heavily involved in mortgage credit to households (60% of their outstanding amounts) to the detriment of corporate credit, which now represents only 31% of GDP and 35% of banks’ outstanding loans, forcing businesses to concentrate on inter-company credit. Weak competition is good for profitability, even if non-performing loans still account for 9% of banks’ exposures. The remaining assets (205% of GDP and falling) are held by subsidiaries of foreign groups, especially British, German and Turkish groups seeking advantageous tax treatment. They operate with non-resident resources, invest only abroad and employ few local staff. Their services, along with online gaming, data management and the citizenship acquisition programme, have been subject to closer European monitoring since the murder of journalist Caruana Galizia (2017) and the closure of Pilatus Bank (2018).

 

Last update : February 2019

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