Times of Malta in conjunction with Seed is serializing the economic report Agile. Perspectives on Malta’s economy post COVID-19. The report was authored by JP Fabri, Glenn Fenech, partner and senior consultant at Seed, and University academics Professor Vincent Cassar, Dr Stephanie Fabri and Dr Jonathan Spiteri. The full report can be read here. 

Over the past few years, Malta’s economy has grown at a relentless yet sustained pace, giving rise to long-term sustainability concerns. Rebounding after a period of sluggish growth, which was further dampened due to the 2008 global crisis and a restructuring process, the Maltese economy was characterised by fast GDP and employment growth, propelled by a strong services sector. This positively impacted public finances as the deficit and rising debt were reversed, with fiscal surplus and declining debt ratios being registered. However, recent data started to indicate that the economy was reaching its peak, with heightened concerns on the long-term sustainability of the current growth trajectory.

Strong though moderating economic activity…

Real GDP growth in 2019 was 4.4 per cent, moderating from the 6.9 per cent average reported in the previous two years. While net exports continued to grow, domestic demand is becoming a critically important growth contributor. Private consumption has increased on the back of high employment growth and higher disposable income. This is also due to the increasing workforce and population, particularly third country nationals which in turn increased the size of the domestic market. 

The economy remains strongly oriented towards the export of services. The tourism industry continues to be one of the main pillars of the economy and over the past few years it has experienced an unprecedented boom, both in terms of tourist arrivals and expenditure levels. However, the sector is also undergoing a transformation. 

New planning regulations allowed hotels to increase their building height generating increased capacity of beds. At the same time, the increase in incoming tourists has been more skewed towards private accommodation rather than collective accommodation. This transformation might present a challenge to the local hotel industry as the market might be characterised by excess supply. Due to the global halt in tourism, COVID-19 is expected to highlight this as a pressing challenge for the industry with various ramifications across the economy. The tourism sector has also been an important contributor to employment growth.

Gaming is another sector which has steadily increased its contribution to economic activity over the past years and today directly accounts for around 13.7 per cent of the total gross value added (GVA) generated in the local economy. Moreover, the gaming industry contributes to the economic performance of other major sectors, including professional services, ICT (information and communication technology), financial activities and real estate. In fact, the improvement and increased contribution of the gaming sector also led to the very fast growth in the professional services sector and improved performance in financial services. In addition, these sectors have also contributed to the increase in employment levels and increased foreign participation in the labour market.

…Continued to tighten the labour market…

On the back of strong and sustained economic growth, the labour market continued to be buoyant. According to Jobsplus the total number of registered employed by the end of September last year was 253,712. Those employed within the public sector account for 22 per cent of total employment. The second highest number (at 17 per cent of total employment) are employed by the professional services sector and closely followed by the wholesale and retail trade sectors. The gaming sector which directly contributes 13.7 per cent towards the Maltese economy employs 12,477 people or 5 per cent of the total registered employed. In reality, however the gaming sector is an important user of services provided by other sectors of the Maltese economy such as professional services and the ICT sector. The effect of the gaming sector on employment is therefore higher than what is directly reported. The same applies for tourism which affects the livelihood of a significant number of employees working across different sectors, not just accommodation and food services.

The strong performance of the domestic labour market, coupled with skill shortages, started to lead to heightened wage pressures. However, wage growth was, to a certain degree, contained due to the inflow of foreign workers.

…Attracting a larger share of foreign workers…

As Malta reached practically full employment with an unemployment rate of around 3.4 per cent in 2019 (Labour Force Survey), 39 per cent of jobs created during this period were taken up by EU nationals while 24 per cent were filled by third country nationals. The share of foreign workers in Malta (as a  per cent of total registered employed) as a result increased from 6.1 per cent in 2010 to 22.5 per cent by the end of 2018, and today includes roughly 55,000 foreigners. 

This influx of foreign workers has played a key role in the transformation of Malta's economy and in sustaining the level of economic growth registered in recent years. Foreign workers are not just filling job vacancies, but they are also fueling economic activity:

• A good number of foreign workers are employed in sectors were higher than average salaries are paid. This provides for stronger spending powers which boosts private consumption at household level.
• Expats are seen to be an important source of economic activity for the retail, restaurant and entertainment sectors.
• Some expats settle in Malta with their whole family. In this case the spillover to economic activity, particularly by way of consumption, is higher.
• Expats also attract a significant number of visits from family and friends which in turn contribute to the tourism sector. In 2019, it is estimated that least 329,000 or 12 per cent of all tourist arrivals in Malta were related to such visits. 

As more foreigners came to Malta to work, coupled by a laxer approach to permit approvals, the Maltese construction industry responded. New permits for developments increased across all sectors, including housing, commercial, office and tourism related. 

This increase in development projects has raised concerns of excess supply with the possibility of an eventual correction in market prices. Between 2013 and 2018 the number of residential units approved by the planning authority increased substantially year on year. This has been very much mirroring growth in the number of foreign workers who have been increasing by an average of more than 22 per cent since 2012. Natural population growth, on the other hand, has been rather flat for the past years, thus suggesting that the supply of housing will outpace changes in the Maltese population and being driven primarily by the inflow of foreign workers. This can present excess supply concerns should the rate of growth in the foreign population abate.

Against this backdrop, public finances remain strong

Malta’s public finances have gone through a significant change with a sustained deficit turning into a surplus over the past couple of years. The increasing debt ratio was also reversed as GDP grew at a much faster rate than new debt, giving Government much more room and comfort to maneuver. 

For a number of years, government had been running deficits to support the building of Malta’s supply capacity and spearhead the country’s economic transformation towards a higher value-based service offering which required heavy investments in education and other infrastructure. Also, the global financial crisis in 2008 required government to step up and support sectors and sustain jobs. During this time, Government also experienced loss of revenue as a result of slow economic activity triggered by the crisis. Following 2013, Government moved to consolidate its fiscal position resulting in lower deficit levels year on year and eventually turning the tide into a surplus from 2016 onwards. General government debt in absolute terms continued to increase at a much slower rate of three per cent annually and plateaued in 2016 to the tune of €5.7 billion. Complemented by strong GDP growth levels, the debt to GDP ratio fell from 68.4 per cent in 2013 to 45.7 per cent in 2019, which is significantly lower than the 60 per cent Maastricht criteria benchmark. 

As a result of the current crisis, GDP is expected to be negatively impacted and therefore the debt-to-GDP ratio is expected to increase even without the expected increase in debt levels. In fact, due to the measures that were announced and others that will be taken, it is expected that the ratio will increase even further. Notwithstanding, Government is in a very strong fiscal position to maneuver and support the economy in this time of crisis.

87 per cent of total government debt is local with an average cost of debt of 3.3 per cent as at the end of 2018. Furthermore, average remaining maturity of total debt in 2018 was eight years which provides government with sufficient time to raise additional finance in this crisis and go for longer-term maturity of debt. 

Besides, the National Development and Social Fund has net assets worth €462 million, of which only €56 million have so far been committed to specific projects and €265 million are held in cash and cash equivalents. 

The financial sector remains robust but faces challenges too

The assets of core domestic banks, which have strong links with Malta’s economy and are thus economically most relevant, stand at €41.3 billion as at February 2020. Overall loan growth to domestic clients is in line with economic growth. The increase in domestic banks’ assets is mainly driven by higher lending, primarily mortgages to households. Banks have continued to engage in mortgage contracts and now almost half of resident loans are household property related. On the liabilities side, domestic banks are highly liquid. Domestic banks fully rely on retail deposits, most of which are from domestic residents. The growth of deposits from domestic residents has continued apace and stand at €20.4 billion as at February 2020.

Malta Stock Exchange (MSE) data also show that large companies are increasingly making public issuances of corporate bonds and equity. As at 3rd April 2020, €1.7 billion in corporate debt was listed on the MSE. The amount of equity listed on the MSE has also increased in the past years, and stands at almost €3.6 billion, further confirming the liquidity of Maltese households.

Various international reports and agencies have highlighted that the supervisory capacity is not fully in line with the size and international dimension of the financial sector. An effective supervisory framework is crucial to safeguard financial stability and protect Malta’s attractiveness as an international financial centre. This has led to a tightening of relationships between the banking sector and corporates with long-onboarding and processing procedures.

Economic sentiment was already down and will be exacerbated by the pandemic  

The Business Climate Index, as compiled by the Central Bank of Malta, continued to decline over the past few months. In fact, it was being felt that Malta’s performance had reached its peak and was now going to stabilize. The political instability towards the end of last year further reduced confidence. The negative sentiment captured by the economic sentiment indicator outweighed the positive economic performance that was registered. Given this already subdued sentiment, it is expected that the pandemic will only exacerbate the decline in confidence.