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Malta

Malta

Population 0.4 million
GDP 22713 US$
A2
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Synthesis

major macro economic indicators

  2014 2015  2016(f) 2017(f)
GDP growth (%) 8.4 7.4 3.9 3.5
Inflation (yearly average) (%) 0.8 1.2 1.0 1,4
Budget balance (% GDP) -2.1 -1.4 -0.7 -0.6
Current account balance (% GDP) 7.1 2.6 2.7 2.5
Public debt (% GDP) 67.0 64.0 63.0 62.0

 

(f) Forecast

STRENGTHS

  • Crossroads between eastern and western Mediterranean regions
  • Euro zone membership
  • Considerable investment in transport, energy, education and health
  • Tourist and port activities
  • High added value industries (electronics)
  • Productive, English-speaking and growing labour force (immigration, rising female employment rate)
  • Public debt held by residents

WEAKNESSES

  • Small size and insularity
  • Growing but ageing population
  • Structural deficit in trade in goods (no natural resources)
  • Inadequate higher education provision
  • Road infrastructure still inadequate
  • Expensive energy for businesses

RISK ASSESSMENT

Comfortable rate of growth, close to potential 

As in 2016, growth will be sustained by domestic demand. Private consumption will benefit from a lively job market (unemployment at 4.7% in September 2016), as well as from higher wages triggered by the scarcity of labour. Furthermore, household income is expected to benefit from the indexing of wages to inflation (Cost of Living Allowance or COLA), the raising of the tax threshold for pensioners aged over 62 to EUR 13,000, a doubling in housing benefit for those on low incomes, higher work-in and disability benefits. Public investment will be sustained by on-going work on the roads, the construction of marinas, a solar farm and schools, the start of a social housing construction programme and modernisation of the Has Saptan fuel depot. Industrial investment will remain solid, insofar as exports of electronic, electrical and optical components, the archipelago's main manufacturing output, as well as exports of generic medicines and seafood, gain from the euro's weakness. Tourism (23% of GDP and 9% of employment) will still profit from Maltese competitiveness (quality-price ratio, security and healthcare situation) compared with other Mediterranean destinations for European, especially British and Italian, tourists (30 and 11% of spending respectively). The likely reduction in the flow of British tourists associated with the depreciation of sterling will be offset by greater visitor diversification. Income from electronic gaming (e.g. poker) over the Internet and digital television is increasing. Finally, port activity is benefitting fully from the country's ideal location at the crossroads of Mediterranean routes and particularly its position half-way between the Suez Canal and Gibraltar. Nonetheless, the contribution of trade to growth is expected to remain slightly negative, because of the import content of investment.

 

Social policy and consolidation of public accounts

Fiscal consolidation was not an essential priority for Labour, back in power under the leadership of Prime Minister Joseph Muscat since 2013 after fifteen years of rule by the centre-right Nationalist party. All the same, a budget responsibility law was passed in 2014. Despite the adoption of new social spending, the setting up of a development bank and an export credit agency, the loss in momentum on sales of Maltese citizenship for EUR 650,000 euros to any foreigner with over one year of residency, not to mention potential new aid for the publicly-owned Air Malta, the deficit is expected to remain low in 2017. This is because revenues will benefit from robust consumption, higher taxes on tobacco, construction materials and other products, while the absorption of European funds will increase and debt interest payments will fall. The primary surplus (i.e. excluding debt interest) and growth will contribute to a substantial reduction in the public debt (to which should be added State guarantees on the debts of public sector companies like ENEMALTA, accounting for 14% of GDP), but which is, however, held by residents, specifically the local banks.

 

The trade deficit is broadly offset by the services surplus

Despite a huge deficit in the trade in goods (amounting to 22% of GDP in 2016), due to the lack of energy resources, poor diversification of manufacturing output and the high import content of consumer goods, the country runs a current account surplus. This is explained by the positive balance on services linked to tourism, remote electronic gaming, as well as the duty-free port at Marsaxlokk. Its transhipment, logistics and warehousing activities for containers and oil products are awarded as a concession by the state-owned company Malta Freeport Corp. Ltd to private businesses. This port is used for transhipping 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 sizeable offshore financial centre

The financial sector manages assets equal to 534% of GDP (as at end 2015) and contributes about 15% of public revenues. However, the largest share (284% of GDP, trending downward) is held by subsidiaries of foreign, namely British, German and Turkish, groups, looking for advantageous tax arrangements. They operate using non-resident resources, invest only abroad and employ few local staff. The true local banks, essentially Bank of Valletta, HSBC and Mediterranean Bank manage assets representing 250% of GDP. They hold a third of the sovereign debt and are very involved in household mortgage finance. The lack of competition ensures they have a good level of profitability, even if non-performing loans make up about 9% of their portfolios, held mainly in real estate and construction portfolios.

 

Last update : January 2017

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