Malta: Risk Assessment
Country Risk Rating
Business Climate Rating
- At the cross-roads between the Suez Canal and Gibraltar, important Mediterranean transshipment hub
- Public and external accounts in surplus, public debt held by residents
- Thriving tourism (2 million annual visitors for 430,000 inhabitants)
- Productive, English-speaking, growing and high-income workforce, low taxation
- Sizeable incoming/outgoing financial flows (offshore finance, online gambling industry, nationality acquisition program against investment)
- Poor road infrastructure
- Inadequate higher education; shortage of highly skilled labor
- Slow legal process; clientelism and corruption
A remarkable performance underpinned by construction and a buoyant online gaming industry
Malta has been one of the world’s leading jurisdictions in building a specialized legal framework for i-gaming (virtual poker, casino games, sports betting) and database management. This has produced a significant structural rebalancing of the economy towards service exports, with i-gaming having risen to 13% of GDP and 30% of export revenue. The government is following a similar strategy in the fields of blockchain technology activities related to virtual financial assets and crypto-assets in particular- and AI. This, along with a tourism boom and a citizenship-by-investment scheme (IIP) demanding a contribution of €650,000 and investment in property worth €350,000, has resulted in a robust expansion that peaked in 2018 and will continue its gradual slowdown in 2020. The transition process towards a high-added value economy is attracting a steady inflow of foreign talent, boosting factor productivity. Still, 35% of firms cite recruitment of skilled labor as their most pressing concern, so the labor market will remain tight with an unemployment rate in the 4% range. To meet the sustained demand for new dwellings, construction will continue to feed investment, projected to grow at 6%. In 2020, domestic demand will account for 80% of growth (vs 17% in 2016) as wages, now indexed on inflation through a cost of living allowance, enter a convergence process. Nonetheless, a favorable competitiveness differential relative to other Mediterranean destinations will persist, supporting the tourism sector (15% of GDP and a third of employment). In the near term, this sector will be exposed to the slowdown in Italy and the consequences of Brexit, as these markets represent 22 and 25% of arrivals, respectively. Exports of electronic, electrical and optical components (Malta’s main manufacturing products), but also of generic medicines and seafood products are also likely to slow down with the European economy.
Authorities tighten financial regulation to curb a real estate boom in its infancy
As a by-product of immigration and the IIP scheme, there has been a recurrent housing shortage and a concomitant real estate asset price inflation. With property prices now growing around 15% per year, the Central Bank of Malta has begun implementing macroprudential measures (regulatory requirements that activate during financial booms) to lean against mortgage credit growth. Hence, bank’s ability to lend to risky borrowers has been restricted. Since the crisis, banks have been increasingly concentrating their assets in the property sector: lending for construction, house purchase and real estate accounts for almost 70% of lending to the private sector. This has come at the expense of corporate lending, forcing firms to rely on one another to meet their financing needs. Half of all the debt funding of corporates is in the form of intercompany lending, up from 25% before the crisis. In this configuration, economic risks become more correlated as shocks to one sector can affect liquidity conditions for others. Though the financial sector is important in size (400% of GDP), the prevalence of offshore banking (half of all assets) mitigates the exposure to global financial risks.
Stained by the Caruana Galizia affair, the Prime Minister resigns
After several of his cabinet members were linked to the 2017 murder of journalist Daphne Caruana Galizia, PM Joseph Muscat announced his plans to resign. While the incumbent Labour Party (holding 37 out of 67 seats) is likely to remain in power even with a snap election, we do not know the full political cost of the Caruana scandal. Furthermore, the EU is heavily scrutinizing the country on matters of transparency, corruption and money laundering. The ECB recently revoked the license of Pilatus bank for failing to comply with EU anti-money laundering regulation. The IIP scheme is therefore having to apply stricter standards, with the associated revenues now around 1% of GDP, down from 2% in the program’s first years. These proceeds, along with the favorable business cycle, have been instrumental in reducing public debt, which accounting for government guarantees will reach 46% of GDP in 2020. Nonetheless, the government will continue to post a surplus (0.8% of GDP), owing to wage spending restraint and improvements in tax collection and management of state-owned enterprises. To alleviate capacity constraints, the government’s capital investment will once again increase to reach 3.4% of GDP, up from 3% in 2019. The current account surplus is expected to remain large at 9% of GDP, underpinned by a hefty service surplus (tourism, i-gaming, transhipping) of 35% of GDP that largely compensates the trade deficit. The duty-free port of Marsaxlokk will continue to be a key spot for Mediterranean transhipping routes.