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הולנדSlowdown ahead, but fiscal spending protects against energy crisis
The Maltese economy will suffer a slowdown in 2023-2024 that is being instigated by inflation’s depressive effect on household consumption. Malta does not depend on Russia and Ukraine for significant tourism revenue or the supply of key imports. However, it does depend on imported oil and natural gas for the bulk of its energy supply (45% and 40% of the energy mix, respectively), making it vulnerable to global shocks. As one of the few eurozone states to comply with the Stability and Growth Pact’s debt ratio rule, Malta has used its fiscal headroom to strongly insulate households and businesses from the effects of the energy shock. Its flagship measure was to freeze retail energy prices at 2014 levels, for which the state has subsidised the losses of public utility Enemalta. As a result, Malta has experienced one of the eurozone’s weakest inflation rates. At the same time, the labour market, which was already tight before the pandemic, is running even hotter, with an unemployment rate of under 3%, resulting in continued upward wage pressures. The effects of inflation on private consumption are being partially cushioned as a result. The tourism sector (25% of GDP and employment) is expected to continue growing, albeit at a more moderate pace. Robust growth in the IT and tech sector – virtual poker, casino games, sports betting, and database management – is likely to decline sharply amid the industry’s global readjustment, but will continue supporting service exports, along with the financial and shipping industries. Despite the inflated imported energy bill, net exports will post a positive contribution. Investment will be partly encouraged by the relatively small NextGenerationEU (NGEU) fund allocation (1.7% of GDP) and the country’s efforts to build a business-friendly environment, particularly for the tech sector. However, the persistent background risk of criminal sanctions related to suspected money laundering and other illicit activities is likely to erode this potential.
Fiscal position remains strong despite high budget deficits
Thanks in large part to its citizenship by investment scheme (“Individual Investor Programme”, IIP), Malta has achieved a low-risk fiscal position that has been degraded somewhat in recent years by the expenses necessary to combat the pandemic and energy crises. The deficit is expected to normalise as the effect of these shocks subsides. The net cost of energy support measures is expected to drop from 2.5% of GDP in 2022 to 1.7% in 2023 and 1.5% in 2024. However, Malta’s investor citizenship scheme was referred to the European Court of Justice for infringement proceedings in September 2022, raising the material prospect of the scheme being scrapped, as was the case for Cyprus. It is estimated that this would amount to losses of around 0.3%-0.4% of GDP per year. But amid high nominal GDP growth and the growth of social contributions related to the very high employment rate, tax revenue growth will remain robust. The complete phase-out of pandemic-related measures will also have a favourable effect. All of this will result in a durably high albeit moderating deficit. Nonetheless, in the event of higher-than-expected global energy prices, the cost of maintaining such generous subsidies could quickly escalate.
Beyond being an investment disincentive, risks related to the rule of law and money laundering suspicions also thwart the country’s outsized financial sector (assets accounting for 200% of GDP). Should it be sanctioned in any significant way, Malta would lose one of its most competitive industries. Furthermore, banks have significant real estate exposure and, as such, the sector would be strongly impacted by the scrapping of the IIP given the corresponding decrease in foreign demand for domestic housing. Malta’s structural external position has been fundamentally strong but has suffered in recent years from the pandemic-induced tourism recession, as well as from an unfavourable value effect on energy imports. It is expected to progressively recover lost ground, but energy uncertainty again poses a downside risk.
Stable political outlook, but vigilance on corruption still warranted
In May 2022, Prime Minister Robert Abela’s Labour Party (LP) won their third consecutive election, securing 55% of the vote and 50 seats out of 79 in the unicameral legislature. It gained a further 8 seats despite the LP’s alleged links to the 2017 murder of investigative journalist Daphne Caruana Galizia by associates of former Prime Minister Joseph Muscat. Barring any new developments, Abela’s government is expected to serve its full term of office which is due to end in 2027. Threats to political stability stem from the risk of renewed corruption allegations and the public’s diminishing trust in the governing class. For the moment, these threats are latent and do not appear to be imminent. The country’s removal from the Financial Action Task Force grey list signals improvement in Malta’s fight against money laundering, but the country will remain in the European Commission’s cross-hairs on issues of transparency, corruption, tax evasion and the rule of law. In particular, the government’s reluctance to abandon the IIP even after the Commission’s formal request does not bode well for the country’s relationship with Brussels. Furthermore, Malta’s geographic location places it at the frontline of migration flows from Africa and Asia. Along with other gateway states like Greece and Italy, it will be a key voice in foreign policy debates on this topic.
