Malta: Risk Assessment
Country Risk Rating
Business Climate Rating
- At the crossroads between the Suez Canal and Gibraltar, major Mediterranean transshipment hub
- Public debt held by residents
- Emerging tech hub (online gambling, Blockchain, AI)
- Productive, English-speaking, growing and high-income workforce, low taxation
- Dependence on tourism
- 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
- The country has been placed on the grey list by the FATF, which may affect the competitiveness of its financial sector if this status is maintained
Continued economic rebound in 2022
In 2022, Malta will continue the economic recovery that began in 2021. The pandemic significantly impacted the country, and its economy contracted in 2020 with the drop in tourism. Without the support of online services (betting, IT, finance) and the pharmaceuticals and electronics industries, the decline would have been even more significant. Nevertheless, Malta continues to suffer from the effects of the pandemic, and its 2019 GDP level is not expected to be reached until late 2022. The tourism sector, in particular (16% of GDP and 22% of employment in 2019), remained sluggish due to the low mobility of people and continued international restrictions. Nevertheless, the rapid progress of the vaccination campaign (82% of the population covered in December 2021), with an unlikely recourse to local limits on mobility, favors expanding consumption and private investment, predominantly residential. Furthermore, the low unemployment rate (3.6%) tends to its expansion. Finally, inflation remains well below the European average despite the growth return.
While the country is suffering from a partial and temporary halt in the inflow of skilled foreign labor, Malta will continue to attract skilled foreign labor and investment in the long term, as it has favorable fundamentals for the technology industry. Malta was one of the first jurisdictions in the world to establish a specialized legal framework for online gaming (virtual poker, casino games, sports betting) and database management. The government is following a similar strategy in activities related to Blockchain technology applied to virtual financial assets (crypto assets, in particular) and artificial intelligence. With the return, albeit timid, of tourists and the undiminished dynamism of services, foreign trade is expected to contribute significantly to growth in 2022.
The threat of declining budget revenues
Like most European countries, Malta has deployed unprecedented fiscal support measures (4.5% of GDP in 2021) to protect the private sector from the economic fallout of the pandemic. Phasing out these measures and normalizing the fiscal policy will reduce the deficit by 2022. However, the country may see a future tax revenue decline for several reasons. On the one hand, the government depends on corporate tax revenues, although introducing a global minimum tax rate (15%) could deteriorate the country’s competitiveness in this area. On the other hand, the EU’s rethinking of the citizenship by investment program (“Malta Individual Investor Program,” MIIP) is also a concern. The MIIP has helped reduce the country’s public debt burden, increasing GDP by 1 to 2% annually between 2013 and 2020. These developments underscore the country’s need for fiscal reforms. Due to the deterioration of the budgetary balance because of the crisis, public debt has increased, but it is expected to decrease in the medium term.
The current account, traditionally in substantial surplus, has shrunk considerably due to the pandemic, which has reduced tourism revenues. As a result, revenues have struggled to offset the merchandise trade deficit, which rising energy and food prices and the repatriation of earnings by foreign investors have widened. Nevertheless, the gradual normalization of tourism should allow it to recover in 2022.
The ruling party, shaken by scandals, is trying to restore its image
Although it still has a comfortable majority in the legislature (37 seats out of 67), the Labor Party, in power since 2013, faces the challenge of distancing itself from the scandal-ridden government of its former leader, Joseph Muscat. With members of his cabinet implicated in the 2017 murder of investigative journalist Daphne Caruana Galizia, Muscat resigned in January 2020 and was replaced by newly elected party leader Robert Abela. While Abela has worked to distinguish his government from Muscat’s, the Caruana investigation has continued to raise transparency and governance issues involving the LP elite. This led to a cabinet reshuffle in November 2020.
The next parliamentary elections will be held in May 2022, and the Labor Party still appears to be leading in voting intentions ahead of the opposition Nationalist Party (NP).
The European Commission has launched an infringement procedure against the Citizenship by Investment Program as part of its fight against money laundering. A residency will likely replace the MIIP as an investment program with much higher transparency standards. Incidentally, the country was placed on the Commission’s grey list in June 2021 by the Financial Action Task Force due to the lack of transparency in ownership and collaboration in the fight against tax evasion.