Malta Economic Review by Melvyn Mangion

Melvyn Mangion on Malta’s economic review

Economic downturn after years of strong growth

Malta has been one of the fastest-growing countries in Europe over almost a decade, thanks to its specialization in services (accounting for two thirds of GDP), notably remote gaming and tourism. In 2020, GDP is expected to contract by -8.0%, given a drop in domestic demand (-8.2%) as well as exports (-9.0%) in light of the Covid-19 pandemic. Strong national lockdown measures and restricted air travel led to a sharp decline in tourist arrivals (estimates range from -60% to -75%), hurting the essential tourism sector that makes up more than 30% of Malta’s GDP. The labor market, however, proved to be quite resilient to the crisis, with unemployment still standing at 4.1%. We expect no massive increase in 2021 and 2022, with an upper limit at 5%. We expect real GDP to rebound by +4.0% in 2021 and +5.5% in 2022, reaching pre-crisis levels again in mid-2022.

Solid public finances despite massive fiscal relief measures in 2020

Malta has announced a financial support package totaling EUR2bn (15% of GDP), including EUR1.6bn dedicated to offering liquidity to businesses (EUR700mn in tax deferrals and EUR900mn in loan guarantees). In a post-crisis world, debt sustainability will become a priority. The public fiscal balance, which was in surplus from 2016 to 2019, should register a -6.8% deficit in 2020. Whilst public debt fell to 42.6% of GDP in 2019, it is set to rise to as much as 53% of GDP in 2020, before peaking at 60.3% in 2022. This is still one of the lowest GDP-to-GDP ratios in the Eurozone. The government bond purchases by the ECB act as a backstop for Malta’s sovereign funding costs. Risk from financial markets should therefore be contained for the foreseeable future.

EU Next Generation fund could help to address bottlenecks in the economy

From the EU Next Generation fund worth EUR 750bn, Malta should be granted EUR160mn between 2021 and 2022, followed by EUR44mn in 2023. For Malta this could mean a maximum envelope in loans and grants of more than 7% of GDP, with an expected impact on GDP growth of up to +1pp. That money could be used to address infrastructure gaps, especially digitalization, road quality, utilities and education. Indeed, companies continue to face skills shortages as the labor supply is very dependent on foreign migrant inflows (which tripled between 2010–17). Strong migrant inflows, portfolio rebalancing towards property investment, surging demand for tourist accommodation and some public measures (extensions of the first-time home-buyer duty relief, reduced tax rate on rental income) have pushed property prices and rents to very high levels over the last few years, forcing the government to address the issue through macro-prudential measures.

Key metrics suggest that Malta’s banking system is in rather good health. The NPL ratio has fallen to around 3% in 2019, which corresponds to EU average. Challenges are the high exposure to property-related loans (see above) and the significant share of volatile non-resident deposits.

Covid-19 and Brexit put Malta’s trade balance at risk

Dropping exports (-9.0%) due to the global pandemic this year led to an only slightly positive current account balance at 0.5% of GDP, which has been characterized by strong surpluses in the past years. Yet Malta continues to be a net creditor, with a net international investment position of over 54% of GDP in 2019. Exports are expected to rise again in 2021 (+1.8%) and 2022 (+4.6%). This should restore a current account surplus of around 66.0% of GDP. The recovery of the tourism sector, however, accounting for a large part of Malta’s services exports, strongly depends on the further evolution of pandemic-related travel restrictions as well as the degree of damage to the airline industry. Brexit also poses a major risk in the medium term, with tourist arrivals likely to decline due to a weaker GBP. — December 2020

Original content was published www.eurlerhermes.com

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