Malta

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Slowdown ahead, but fiscal spending protects against energy crisis          

Though Malta is weathering the energy crisis better than other European economies, it will nonetheless suffer a slowdown in 2023. Malta does not depend on Russia and Ukraine for significant tourism revenue or the supply of key imports. As one of the few eurozone states that complies with the Stability and Growth Pact’s debt ratio rule, Malta has used its fiscal headroom to strongly insulate households and businesses from the effects of the energy shock. Its  flagship measure was to freeze retail energy prices at 2014 levels, for which the state has subsidised the losses of public utility Enemalta. As a result, Malta boasts the eurozone’s lowest inflation rate. At the same time, the labour market, which was already tight before the pandemic, is running even hotter, with an unemployment rate under 3%, resulting in continued upward wage pressures. The effects of inflation on private consumption is being partially cushioned as a result. The tourism sector is expected to continue growing and will recover or surpass pre-pandemic levels. Growth robust growth in the IT and tech sector – virtual poker, casino games, sports betting and database management – is likely to decline sharply amid the industry’s global readjustment, but will continue supporting service exports, along with the financial and shipping industries. Despite the inflated imported energy bill, net exports will post a positive contribution. Investment will be encouraged somewhat by the relatively small NextGenerationEU (NGEU) fund allocation (1.7% of GDP) and the country’s efforts to build a business-friendly environment, particularly for the tech sector. However, the persistent background risk of criminal sanctions related to suspected money laundering and other illicit activities is likely to limit this potential. 

Threat of shrinking budget revenues

Thanks in large part to the citizenship by investment scheme (“Individual Investor Programme”, IIP), Malta has achieved a relatively low-risk fiscal position that has degraded somewhat in recent years by the deficits necessary to combat the pandemic and energy crisis. This last element is expected to continue inflating the expenditure bill by around 3% of GDP in 2023 and 2% in 2024. Moreover, Malta’s investor citizenship scheme was referred to the European Court of Justice for infringement proceedings, raising the material prospect of the scheme being scrapped, as was the case in Cyprus. It is estimated that this would amount to losses of around 0.5% of GDP per year. But amid high nominal GDP growth and the growth of social contributions related to the very high employment rate, tax revenue growth will remain robust. The phasing out of pandemic-related measures will also play a favourable effect. All of this will result in a durably high, but moderating deficit. However, in the event of higher than expected global energy prices, the cost of maintaining such generous subsidies could quickly escalate.

Beyond being an investment disincentive, risks related to the rule of law and money laundering suspicions also concern the country’s outsized financial sector (assets accounting for 200% of GDP). Should the jurisdiction be sanctioned in any significant way, it would lose one of its most competitive industries. Furthermore, banks have significant real estate exposure and real estate would be strongly impacted by the scrapping of the IIP given the associated decrease in foreign demand for domestic housing. Malta’s structural external position has been fundamentally strong, but has suffered in recent years from the pandemic-induced tourism recession, as well as the unfavourable value effect on energy imports. It is expected to progressively converge back to surplus, but energy uncertainty again poses a downside risk.

Stable political outlook, but vigilance on corruption still warranted

In May 2022, Prime Minister Robert Abela’s Labour Party (LP) won their third consecutive election, securing 55% of the vote and 44 seats out of 67 in the unicameral legislature. Despite the LP’s alleged links to the 2017 murder of investigative journalist Daphne Caruana Galizia through associates of former Prime Minister Joseph Muscat, it gained 8 seats. Barring any new developments, Abela’s government is expected to serve its full term of office which is due to end in 2027. Threats to political stability stem from the risk of renewed corruption allegations, and the public’s diminishing trust in the governing class. For the moment, these threats are latent and not imminent. The country’s removal from the Financial Action Task Force grey list signals improvement in the fight against money laundering, but the country will remain in the European Commission’s cross-hairs on issues of transparency, corruption, tax evasion and the rule of law. In particular, the government’s reluctance to abandon the IIP even after the Commission’s formal request does not bode well for the country’s relationship with Brussels. Furthermore, Malta’s geographic location places it at the frontline of migration flows from Africa and Asia. Along with other gateway states like Greece and Italy, it will be a key voice in foreign policy debates on this topic.

Last updated: April 2023