Malta

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Continued economic rebound in 2022

In 2022, Malta will continue the economic recovery that began in 2021. The country was significantly impacted by the pandemic, and its economy contracted in 2020 with the drop in tourism. Without the support of online services (betting, IT, finance), as well as the pharmaceuticals and electronics industries, the decline would have been even more significant. Nevertheless, Malta continues to suffer from the effects of the pandemic, and its 2019 GDP level is not expected to be reached until late 2022. The tourism sector in particular (16% of GDP and 22% of employment in 2019), remains sluggish due to low mobility of people and continued international restrictions. Nevertheless, the rapid progress of the vaccination campaign (82% of the population covered in December 2021), with an unlikely recourse to local restrictions on mobility, is playing in favour of the expansion of consumption and private investment, especially residential. Furthermore, the low unemployment rate (3.6%) favours its expansion. Finally, despite the return of growth, inflation remains well below the European average.

While the country is suffering from a partial and temporary halt in the inflow of skilled foreign labour, Malta will continue to attract skilled foreign labour and investment in the long-term, as it has favourable fundamentals for the technology industry. Malta was one of the first jurisdictions in the world to establish a specialised legal framework for online gaming (virtual poker, casino games, sports betting) and database management. The government is following a similar strategy in activities related to Blockchain technology applied to virtual financial assets (crypto assets, in particular) and artificial intelligence. With the return, albeit timid, of tourists and the undiminished dynamism of services, foreign trade is expected to contribute significantly to growth in 2022.

The threat of declining budget revenues

Like most European countries, Malta has deployed unprecedented fiscal support measures (4.5% of GDP in 2021) to protect the private sector from the economic fallout of the pandemic. The phasing out of these measures and the normalisation of the fiscal policy will reduce the deficit by 2022. However, the country may see a decline in tax revenues in the future for several reasons. On the one hand, the country is dependent on corporate tax revenues, although the introduction of a global minimum tax rate (15%) could lead to a deterioration in the country's competitiveness in this area. On the other hand, the EU's rethinking of the citizenship by investment programme ("Malta Individual Investor Program", MIIP) is also a concern. The MIIP has helped reduce the country's public debt burden, increasing GDP by 1 to 2% per annum between 2013 and 2020. These developments underscore the country's need for fiscal reforms. Due to the deterioration of the fiscal balance because of the crisis, public debt has increased, but it is expected to decrease in the medium-term.

The current account, traditionally in strong surplus, has shrunk considerably due to the pandemic, which has reduced tourism revenues. As a result, revenues have struggled to offset the merchandise trade deficit, which has been widened by rising energy and food prices, as well as repatriation of earnings by foreign investors. Nevertheless, the gradual normalisation of tourism should allow it to recover in 2022.

The ruling party, shaken by scandals, is trying to restore its image

Although it still has a comfortable majority in the legislature (37 seats out of 67), the Labour Party, in power since 2013, faces the challenge of distancing itself from the scandal-ridden government of its former leader, Joseph Muscat. With members of his cabinet implicated in the 2017 murder of investigative journalist Daphne Caruana Galizia, Muscat resigned in January 2020 and was replaced by newly elected party leader Robert Abela. While Abela has worked to distinguish his government from Muscat's, the Caruana investigation has continued to raise transparency and governance issues involving the LP elite. This led to a cabinet reshuffle in November 2020.

The next parliamentary elections will be held in May 2022, and the Labour Party still appears to be leading in voting intentions, ahead of the opposition Nationalist Party (NP).

 
The European Commission has launched an infringement procedure against the Citizenship by Investment Programme as part of its fight against money laundering. The MIIP will likely be replaced by a residency by investment programme with much higher transparency standards. Incidentally, the country was placed on the Commission’s grey list in June 2021 by the Financial Action Task Force due to the lack of transparency in ownership, as well as the lack of collaboration in the fight against tax evasion.

Last updated: February 2022