Malta: Risk Assessment
Country Risk Rating
|A2||The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.|
Business Climate Rating
|A2||The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.|
Comfortable rate of growth
Despite the sharp slowdown in investment associated with the completion of the electricity supply infrastructure, growth is expected to remain at a satisfactory level in 2016. Household consumption will be boosted by strong employment and higher wages driven by labor shortages. On top of this, wages benefit from an inflation indexing (Cost of Living Allowance or COLA). Public investment will be sustained by the start of road construction and ongoing work on drainage and water supplies. Industrial investments are likely to remain strong insofar as electronic, electrical and optical components, by far the archipelago’s leading manufactured exports, alongside generic drugs and seafood, are benefiting from excellent control over production costs (reduced electricity prices as part of recent investments) and a weak euro. The tourist sector (25% of GDP and 9% of jobs) will continue to benefit from Maltese competitiveness (quality-price ratio, safety, healthcare) against other Mediterranean destinations for European tourists, especially British. Revenues from electronic gaming (e. g. poker) using the Internet and digital television, which the country was the first to legislate for, will continue to grow. Finally, the port sector will enjoy the benefits of its ideal location at the crossroads of Mediterranean routes and in particular halfway between the Suez Canal and Gibraltar.
Social policy and consolidation of public accounts
Budgetary consolidation was not a priority for the Labour Party, back in power under the leadership of Prime Minister Joseph Muscat since 2013, after fifteen years of the center-right Nationalist Party. A budget responsibility law was, however, approved in 2014. Despite a reduction in income tax for lower income households, an increase in pensions and in support for home care for the elderly, the deficit is going to continue shrinking in 2016: Revenues are benefiting from the vitality of consumption and the sale of Maltese citizenship for 650,000 euros to any foreigner with over one year of residency (estimated income: 0.9% of GDP). Expenditure will be reduced with the ending of capital injections into Air Malta, the national airline, and the reform of the energy sector which has included the 33% privatized national electricity utility, ENEMALTA, paying its back taxes. The achievement of a small primary structural surplus (i. e. excluding debt interest and adjusted for the effects of the economic situation), is going to make possible a reduction in the large public debt (to which should be added State guarantees on the debts of public sector companies worth 17% of GDP), which is nonetheless held by residents, specifically the local banks. This approach is currently being eased by the favorable context.
The trade deficit is largely offset by the services surplus
Despite a large deficit in the trade in goods (expected at around 13.5% of GDP in 2016, down 1.5% because of reduced investment) resulting from its lack of energy resources, limited diversification in its manufacturing output and the high level of consumer goods imports, the country has a current account surplus. This is due to its surplus in services (20% of GDP) linked with tourism, remote electronic gaming, as well as the duty-free port located in Marsaxlokk. Its transshipment, logistics and warehousing activities for containers, oil and petrol products have been contracted by the public company Malta Freeport Corp. Ltd to private operators. The port is used for transshipping cargoes from very large ships to smaller vessels suited for smaller capacity Mediterranean ports, and vice versa. The port of Valetta retains the other port operations.
A sizable offshore financial center
The financial sector manages assets equal to 643% of GDP and contributes 18% of public revenues. The largest share however (377% of GDP) is held by subsidiaries of foreign groups, namely British, German and Turkish, and subject to special tax treatments. These operate using the resources of their parent companies and non-residents, only invest abroad and employ few local staff. The true local banks, essentially the Bank of Valletta and HSBC, handle residents’ deposits, manage assets, and report commitments amounting to 239% of GDP. These hold one-third of the sovereign debt and are heavily involved in household mortgage finance. The lack of competition ensures they have a good level of profitability even if non-performing loans account for more than 9% of their portfolios. There is a third category of bank, dominated by Mediterranean Bank, mainly operating abroad, but offering services for local companies, namely in the form of commercial credit and forfeit financing, with assets representing 27% of GDP. Overall, the banking system is assessed as being solid.