Population 0.426 million
GDP 8.415 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
3.2 |
2.1 |
1.2 |
2 |
|
Inflation (yearly average) (%)
|
2 |
2.5 |
3.5 |
2.2 |
|
Budget balance (% GDP)
|
-3.7 |
-2.7 |
-2.5 |
-2.2 |
|
Current account balance (% GDP)
|
-5.8 |
-1.3 |
-0.8 |
-0.9 |
|
Public debt (% GDP)
|
69.1 |
72 |
77.1 |
75.1 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Resilient financial sector
- Public debt mainly held by resident investors
- Tourism potential
- Manufacturing sector turned towards high value-added industries (electronics and pharmaceuticals)
WEAKNESSES
- Lack of natural resources
- Weak diversification of trade partners
- Low economic activity rate among women
- Importance of financial sector
Risk assessment
Growth dragged down by sluggish European market
The pace of growth will remain determined by economic conditions in the rest of the eurozone. As its economy is very open, Malta remains vulnerable to demand from its trading partners - mainly European. The production of electronic components, which accounts for 50% of exports, is mainly assured by the Franco-Italian company StMicroelectronics and is likely to remain sluggish in 2013 in line with modest European demand. Strongly affected since the beginning of the crisis, pharmaceuticals exports recovered in 2012 and are expected to remain in positive territory. Re-exports of oil products will continue to rise, reflecting the dynamism of the transhipment activities. With unemployment at 6.3% in late October 2012, well below the eurozone average, household consumption is expected to progress in 2013 supported by the employment of women. At 47% the rate of female participation in the workforce is the weakest in the eurozone, but rose by 5 points due to tax incentives in place since 2011. Public investment will be limited by the fiscal efforts required to satisfy the Maastricht criteria. In this context, the absorption capacity of the European structural funds, which requires national cofinancing, is not expected to increase (only 40% of the funds allocated have been used since 2007). The banking sector’s robustness, as shown during the crisis, will preserve the credit supply and accordingly ensure the private sector’s financing. Besides, tourism will continue to drive Malta’s growth, even if the geographic origin of the holidaymakers (85% European) poses a risk if European economic activity worsens again substantially.
Healthy public finances but under pressure
The consolidation of public finances, underway since 2010, is mostly due to higher fiscal revenues. Conversely, spending as a percentage of GDP has not fallen. Nonetheless, the improved fiscal balance of Malta (smallest eurozone’s economy) has resulted in the European Commission lifting the Excessive Debt Procedure in January 2012, a procedure imposed since July 2009. Meanwhile, public debt has continued to rise, due to the State’s contribution to the Greece bailout package and financial support for the national airline, Air Malta. Besides, government provides guarantees to ensure the funding of public-sector companies. These contingent liabilities, which amounted to 17% of GDP in late 2012, are not recorded in the public debt. However, 97% of public debt is held by residents. While Malta’s banking sector is eight times the GDP, namely a ratio higher than that of Cyprus but lower than that of Ireland, it is less exposed to the Greek crisis than other countries of the eurozone. The banks operate along a traditional model of prudent management, which explains the sector’s resilience to the financial crisis. Lending is mainly directed towards property loans, which is a major risk if property prices fall. Prices did not fall after the 2008 crisis and even resumed their progress in late 2011. However, in case of price reversal, the banking sector could be lastingly affected, especially as provisions for non-performing loans are among the lowest in Europe. Finally, due to the insular nature of the economy, there is still a balance of goods deficit. However, momentum in services, chiefly tourism and finance, are likely to help improve the current account balance in 2013.
Timetable for reforms affected by political instability
In December 2012, the left-leaning government of Prime Minister Gonzi found itself in minority on the vote of the 2013 budget, after the defection of a single MP. This vote of confidence resulted in the dissolution of parliament, effective in January 2013, with new parliamentary elections scheduled for March 2013. The public debate focused on higher taxes, which led to the unpopularity of Gonzi’s government. Victory by the opposition Labour party could delay the implementation of healthcare and pension reforms, initially planned for 2013 and supported by the EU as part of the process of consolidating public finances.
