Malta’s economy is at a historic inflection point. Steady GDP growth and record-low unemployment have helped the island emerge as one of Europe’s best performers in recent years, and Malta has long traded on its growth pattern of economic diversification and foreign investment. Financial services, iGaming, tourism, maritime services, and high-value manufacturing are among the sectors that today form the basis of the economy. However, there are signs that Malta needs to pay greater attention to other powerful ingredients to safeguard macroeconomic stability and ensure future economic growth. Capacity constraints in the infrastructure sector and a shortage of talent in certain industries are putting upward pressure on the island’s cost competitiveness. Forging a path for future prosperity therefore requires capacity enhancing investment in areas such as transport, energy and the environment that are capable of genuinely transforming Malta from a European success story into a truly open, global economy that attracts the best and the brightest.
Malta has come a long way in a short time, and there is every reason to believe that it can continue growing and developing. With virtually no natural resources, a location at the periphery of Europe and a domestic market of just 435,000 people, the country has always had to be versatile in adapting to the changing realities of the global economy. Until it gained independence in 1964, after 150 years of British rule, Malta was described as having a ‘fortress economy’. The majority of the Maltese workforce was either employed directly by the British forces or in industries servicing the military machine. After the departure of the British, the newly independent nation was confronted with the challenge of building up an economy practically from scratch. The industries it chose to develop, tourism and manufacturing, were labour-intensive, enabling local companies and foreign investors to gain maximum benefit from the flexible workforce and the low wages prevalent at the time. In the face of rising labour costs in the 1980s, Malta focused on high-value activities in areas such as electronics manufacturing and precision engineering, thus laying the foundations for the development of a world-class knowledge-based economy.
A Focus on Services
Financial services, science and technology, high value manufacturing, health, tourism, education, maritime services and creative industries are now the dominant features of the economic landscape. In particular, Malta’s EU and Eurozone membership helped the country to strengthen its services sector, and the export of services across the EU member states is today a prime driver of economic growth. Malta’s economy is almost entirely made up of small businesses, of which some 95% are microenterprises employing fewer than 10 people. There are only a few large enterprises in Malta, including chip manufacturer ST Microelectronics and toy manufacturer Playmobil.
While the importance of traditional sectors such as agriculture and manufacturing has shrunk over the past few years, new ones have emerged to take their place, and Malta has become a leader in the export of services. International financial services account for 13% of GDP, while ICT, iGaming, games development, aviation, life sciences and the manufacture of pharmaceuticals, are joining the traditional economic generators to create a solid base of diverse operations, enabling Malta to compete at an international level. Tourism remains a key pillar of the economy, contributing more than 25% of GDP.
The internationalisation of sectors such as education and health is currently high on the agenda. Last year, more than 76,000 foreign students attended English language courses at local specialised schools, while the island managed to attract investment from various private companies setting up tertiary educational institutions on the island. Meanwhile, Gozo, Malta’s sister island, has received foreign investment for the opening of a new private hospital and a medical school seeking to attract students from across the world.
The country has recorded positive economic growth figures in the past six years, with GDP growth hitting a historic high of 7.4% in 2015 and 5% in 2016. While investment in Malta’s energy infrastructure has given GDP growth an additional boost, most of the country’s key economic sectors have contributed to the expansion of the economy. The tourism industry enjoyed a record year in 2016, almost breaking through the 2 million tourist mark, while financial services and iGaming grew at a healthy rate. Malta’s construction sector has also rebounded strongly after a period of subdued activity. Growth is projected to moderate somewhat, but to remain robust at 4.6% in 2017 and 4.4% in 2018. Consumer spending, as well as government consumption, on the back of several large projects in healthcare and education, are expected to remain stable.
From Deficit to Surplus
In 2016, Malta’s government balance turned positive, registering a surplus of 1% of GDP, up from a deficit of 1.3% in 2015. Higher tax revenues, which benefited from rising wages, strong corporate profits and increased investment activity are being seen as the key drivers of this better-than-expected outcome. High employment growth aided by the government’s introduction of special incentives for women to join and elderly people to stay in the labour force; as well as income from Malta’s citizenship by investment programme; have also contributed to the fiscal surplus. Looking ahead to 2017 and 2018, the fiscal surplus is expected to remain positive but to decline marginally due to lower proceeds from the citizenship scheme. Malta’s national debt has decreased to 58.3% of GDP in 2016, and it is projected to decrease further to reach 55.8% by the end of 2017.
Nearing Full Employment
Malta’s labour market has performed exceptionally well in recent years, and in 2016 the country’s unemployment rate fell to 4.7%. To ensure continued growth of the economy, it has been a key priority of recent years to widen the labour pool by promoting immigration in certain sectors of the economy, while also removing structural barriers that impede women from working. Fiscal benefits and free childcare have been introduced and seen the female participation rate in the labour force climb by 13% between 2008 and 2015. Nonetheless, Malta remains the EU country with the biggest gap in the percentage of working men and women. While 81.4% of men in Malta aged 20-64 are employed, a mere 53.6% of women are – a difference of 27.8%. Italy has the second-widest gap, with a 20% difference. Inflation averaged 0.9% in the past year – one of the highest in the Europe, with EU annual inflation being 0.3% in 2016. Commentators cite the higher costs of tourist services, including restaurants and cafes, as the main reason for the higher level in Malta.
Trade and Investment
Trade and investment are of vital importance to Malta’s economy and, according to the 2015 Open Market Index published by the International Chamber of Commerce, Malta has the 13th most open economy in its league table of 75 nations. Most of Malta’s trade is with the European Union, however the US and China are also among the country’s top commercial partners. In 2016, Malta registered imports of €6,04 billion compared to €6.1 billion in 2015. Exports reached €3,64 billion, also a slight increase compared to the €3.52 billion registered in 2015. Thus far, the import of oil has been weighing heavy on Malta’s trade balance, however, going forward, investments in the energy sector, including a shift to gas, are expected to have a positive effect on the country’s import bill.
Malta’s reputation as a safe investment location has also been boosted, in contrast to other countries in Southern Europe, which have seen their economies stall amidst the debt crisis. Over recent years, Malta has secured foreign direct investment (FDI) in a wide range of areas including: financial services, digital gaming, high-end manufacturing and aircraft maintenance. However, finance and insurance are the dominant sectors for FDI, accounting for 98.1% of FDI stocks at the end of June 2016. The total stock position of FDI in Malta stood at €156.7 billion at the same date, an increase of €10 billion over the corresponding period in 2015. The stock position of direct investment abroad stood at €61.8 billion in June 2016, up by €676 million over the stock position in June 2015.
Addressing the Labour Shortage
Across the board, Malta’s commercial credentials are impressive: a stable economic environment, a well-educated workforce and an attractive business climate. But there is broad consensus that a substantial reform agenda still lies ahead. A severe shortage in workers is currently one of Malta’s greatest challenges, and the country needs to find ways to mobilise higher amounts of women joining the labour force. While Malta has already introduced a flat tax rate for foreign professionals to work in Malta, it might be an opportune moment to introduce incentives for Maltese nationals working abroad to return home in an effort to pull in much-needed extra talent. Companies in Malta could also make better use of the skills and competencies of refugees and migrants living in Malta. Other European countries have already made it a priority to integrate these people in the labour market, and specialist HR companies have emerged that purely focus on recruiting refugee talent.
Emerging and Expanding Sectors
Another, perhaps more complex, challenge for Malta is how to maintain its attractiveness for foreign investment in the wake of initiatives calling for greater tax harmonisation by the European Commission and the OECD. However, Malta has always emphasised that it wants its sectors to have economic substance on the island with high value added and job creation. In this scenario, the development of new economic opportunities is also among the country’s priorities. The expansion of Malta’s logistics sector is currently high on the agenda, and if treated in the right way, it could be as transformational as the island’s decision to position itself as a centre for financial services. The maritime sector is also expected to receive a boost, with renewed interested in developing the blue economy. While the modernisation of the energy sector – once the island’s Achilles heel – is almost completed, there is also a need to invest in related sectors such as water, waste and renewable energies, where Malta is lacking behind. Privatisation has already played a major role in Malta’s economy. Greater involvement of private sector firms is also seen as a way of encouraging technological innovation and investment in research and development.
Infrastructure: The Missing Link
The adoption of new technologies needs to go hand in hand with general infrastructure investment as Malta’s public infrastructure hasn’t kept up with the island’s growth. This is particularly noticeable in areas such as transport and housing, which are sectors that might come under more pressure in the next years. Malta’s expanding economy will continue to attract more companies and capital, and the island might see its population grow at a steady rate. While demand for residential and office space is pushing prices up, traffic-congestion is affecting economic growth and quality of life. Economists are calling for long-term economic planning and for the development of a vision that outlines Malta’s goals and priorities for the next 20 years.
Aiming for the Best
Much of Malta’s past economic growth can be linked to a formula of offering value for money and attractive regulatory frameworks for a large number of sectors. While regulatory convergence is levelling the playing field among EU countries, the fact that demand and supply are out of balance in many areas has eroded Malta’s cost-competitiveness. Structural changes and greater efforts are needed to up the ante in the quality of the island’s offering – in terms of real estate, entertainment and leisure facilities, as well as transport networks. Looking to the future, Malta’s aspiration should not be to offer the cheapest services, but the best.