Malta: Risk Assessment
Country Risk Rating
Business Climate Rating
- At the crossroads between the Suez Canal and Gibraltar, important Mediterranean transshipment hub
- Public debt held by residents
- Emerging tech hub (online gambling, Blockchain, A.I.)
- Productive, English-speaking, growing and high-income workforce, low taxation
- Tourism dependence
- Sizeable incoming/outgoing financial flows (offshore finance, online gambling industry, citizenship-by-investment program)
- Poor road infrastructure
- Inadequate higher education; shortage of highly skilled labor
- Slow legal process; cronyism and corruption
Tourism and immigration shift from comparative advantage to Achilles’ heel
On top of the closure of businesses, Malta opted for a limited form of lockdown that concerned only vulnerable populations. In recent years, Malta had emerged as a success story of buoyant growth and structural transformation, capitalizing on its built-in advantage as a tourist destination and developing a nascent tech hub. Since both these pillars of growth depend on the mobility of persons (air transport for tourist visitors, qualified immigration for tech services), international health restrictions will have a strong depressive impact on growth in 2020 and 2021. The impact is particularly hard on tourism (15% of 2019 GDP). The booming tech sector remains operational thanks to remote working, but as the inflow of qualified migration has been interrupted, demand for new dwellings is slowing down. This will generate spillovers that will disrupt the real estate and construction sectors, already hit by lockdown effects. All components of aggregate demand, except public spending, contracted, net exports in particular. However, the combination of strong pre-existing household savings continued income support for households affected by health measures, and a tight labor market should strongly insulate households from the shock and set private consumption for a quick rebound in 2021. In the long-term, Malta will continue to attract investment and qualified labor, as it offers favorable fundamentals for the tech industry. Malta has been one of the world’s leading jurisdictions in building a specialized legal framework for i-Gaming (virtual poker, casino games, and sports betting) and database management. The government is following a similar strategy in the fields of Blockchain technology-activities related to virtual financial assets (crypto-assets in particular) and A.I.
EU crackdown on the “golden passport” scheme could entail a structural shock to tax revenue
Like most European countries, Malta is deploying an unprecedented amount of financial support to insulate the private sector from the pandemic’s economic fallout. Measures include the subsidized income for workers and the self-employed, rent subsidies and increased stipends for the unemployed, a cash voucher program meant to stimulate consumption for hotels and restaurants, utility subsidies and tax deferrals for firms, and additional healthcare spending, the whole amounting to around 6% of GDP. On top of materialized spending, a loan guarantee fund for SMEs worth 3% of GDP has been made available through the Malta Development Bank, providing crucial liquidity support for firms, but substantially increasing contingent liabilities. On the revenue side, the bulk of the losses will be accounted for by indirect taxes on consumption, a reduction of taxes on property transactions, and falling corporate taxes. While the pandemic-related shock to tax receipts is acute but transitory, a more permanent loss will probably result from the EU’s challenges on the citizenship-by-investment scheme (“individual investor program”, IIP). The IIP has been instrumental in reducing the country’s public debt burden, raising between 1% and 2% of GDP annually since 2013. Any watering-down or scrapping of the IIP would therefore require fiscal reforms. Because of the acute degradation of net exports (as tourism receipts contracted by more than imports of goods), the current account surplus shrank strongly and will remain subdued. While the financial sector is important in size (400% of GDP), most of it is offshore banking related to foreign groups, and its exposure to the corporate sector is relatively small.
Scandal-ridden governing party tries to clean its image
Although it can still count on a comfortable majority in the legislature (37 out of 67 seats), the governing Labor Party faces the challenge of distancing itself from the scandal-ridden administration of its former leader, Joseph Muscat. After members of his cabinet were linked to the assassination of investigative journalist Daphne Caruana Galizia in 2017, Muscat resigned in January 2020 and was replaced by the newly elected party leader, Robert Abela. While Abela has sought to distance his administration from Muscat’s, the Caruana inquiry has continued to raise transparency and governance concerns involving the LP elite. This has led to a cabinet reshuffle in November, only 10 months into Abela’s tenure. While the likeliest outcome is that the Abela administration serves a full mandate culminating in 2022, the LP is likely to remain under pressure from within and outside the country. The European Commission has filed infringement proceedings against the citizenship-by-investment program as part of its broader crackdown on money laundering. The IIP is likely to be replaced by a residency-by-investment program and the implementation of substantially stricter transparency standards. Overall, Malta’s standing in the EU has deteriorated, the country is now viewed as a member state with a rather questionable rule of law.