Malta: Risk Assessment
Country Risk Rating
Business Climate Rating
- At the crossroads of the eastern and western Mediterranean regions
- Eurozone membership
- Public and external accounts in surplus
- Public debt held by residents
- Tourism (2 million visitors a year for 430,000 inhabitants) and port activities
- Low taxation
- Productive, English-speaking, and growing workforce
- Inadequate higher education provision, shortage of highly qualified workers, R&D, and innovation
- Road infrastructure still inadequate
- Small, isolated country resulting in close relationship between public authorities and business
- Slow legal process, favoritism, corruption
- Potential impact of EU adoption of a consolidated, common tax base for companies
- Potential impact of Brexit on number of visitors from the United Kingdom (29%)
Growth Still Strong
As in 2017, growth will be driven by internal demand. Private consumption (50% of GDP) will benefit from good labor market performance as well as higher wages due to the scarcity of labor. Moreover, household incomes will benefit from the indexation of wages to inflation (Cost of Living Allowance or COLA). Public investment will be sustained by ongoing road works, construction of tourist or education facilities and social housing. Investment is expected to profit from the start of operations at the Malta Development Bank, which, alongside the financing of major infrastructures, also has to finance SMEs. Exports of electronic, electrical and optical components, the archipelago’s main manufacturing output, as well as generic medicines and seafood products, should benefit from the upturn in the European economy. Tourism (27% of GDP and 27.8% of jobs in 2016 including related activities) will continue to benefit from Malta’s competitiveness (price/quality ratio, security and health conditions) compared with other Mediterranean destinations for European visitors, in particular from the UK and Italy (29% and 11% of spending respectively). Income from online gaming (e.g. poker) via the Internet and digital TV, and from database management is rising. Finally, port activity is benefitting fully from the country’s optimal position at the crossroads of Mediterranean routes and especially its position half-way between the Suez Canal and Gibraltar. The contribution of trade in goods and services (290% of GDP) is expected to remain positive.
Consolidated Public Accounts
Fiscal consolidation has not been a top priority for the Labor party, back in power under the leadership of Prime Minister Joseph Muscat since 2013 (re-elected with 37 out of 67 seats in the early elections of June 2017, triggered by allegations of corruption against the Prime Minister) after fifteen years of rule by the center-right National Party. However, a budget responsibility law was passed in 2014 and the public accounts posted a surplus as early as 2016. The improvement is down to strong growth, structural measures like improved tax collection, and tax hikes on tobacco, construction material, and other products. The surplus is expected to drop in 2018 due to the impact of the new collective wage agreement in the public sector and the introduction of a basic pension. Moreover, the income from the Individual Investor program allowing any foreigner with more than a year’s residence to claim Maltese nationality by contributing EUR 675,000 and owning a residence worth EUR 350,000 for five years can vary. Finally a new bailout for the national airline, Air Malta, cannot be excluded. The primary surplus (excluding debt interest) and growth help bring down the considerable level of public debt (to which should be added the State guarantee for publicly-owned enterprises representing 10% of GDP), which is held by residents, specifically the local banks.
The trade deficit is broadly offset by the services surplus
Despite huge deficit in the trade in goods (19% of GDP in 2017), due to the shortage of energy resources, poorly diversified manufacturing output and the strong import component of consumer goods, the country runs a current account surplus. This due to the positive balance on services associated with tourism, online electronic gaming and the duty-free port at Marsaxlokk. This port is used for the transshipment of cargoes from high-tonnage vessels to smaller vessels suited for smaller capacity Mediterranean ports and vice versa. The port of Valetta retains the other port operations.
A Large Offshore Financial Center
The banking sector manages assets equivalent to 468% of GDP and contributes about 15% to public revenues. The truly local banks, chiefly Bank of Valletta, HSBC and Mediterranean Bank manage assets representing 245% of GDP. They hold a third of sovereign debt and are very involved in mortgage loans to households, which are rising as houses become more expensive. The lack of competition ensures good profits, even if non-performing loans represent 10% of the portfolio of loans to non-financial companies. The other share of the assets (223% of GDP and falling) is held by subsidiaries of foreign, especially the UK, German and Turkish, groups looking for advantageous tax arrangements. They operate with non-resident resources, invest only abroad and employ few local staff. Their services, and also online games, database management and the citizenship acquisition program are under closer surveillance in a context marked by allegations of corruption against the whole political class.