RaboResearch - Economic Research

Country Report Malta

Country Report


Stronger economic growth and improved fiscal balances place Malta in a better position than a year ago, but challenges, such as the structurally high public debt, remain.

Strengths (+) and weaknesses (-)

(+) Good business environment

A low-cost, English-speaking labour force, strong institutions, and a favourable tax regime make Malta an attractive investment destination. That led to the diversification of the economy through the development of thriving (niche) sectors, such as offshore banking and online gaming.

(+) Low external capital needs

Maltese households have a strong net creditor position (net assets of roughly 200% of GDP). That allows the government and the private sector to rely on domestic financing and avoid exposure to external shocks on financial markets.

(-) Small and open economy

The high degree of openness of the Maltese economy makes it very vulnerable to external shocks. Besides, despite successful diversification of exports in the past decade, the high concentration of exports on several sectors makes FX income susceptible to sector-related developments.

(-) Weak fiscal position

A high level of public debt (72% of GDP in 2013, 90% including contingent debt) constrains the government’s capacity to adopt an expansionary stance when needed. On top of that, without reforms, ageing related costs are set to render the public finances unsustainable in the longer term.

Key developments

1. Growth accelerated on the back of domestic demand

Following two years of moderation, the Maltese economy picked up pace in 2013 and is expected to maintain momentum in the coming two years. Malta’s economy has proven resilient to the downturn in the eurozone, as its economic growth has outperformed the EU average since the financial crisis. A strong export sector, driven by diversification in terms of structure and destination, supported such a development. In 2013, economic growth is estimated to have doubled paced to 1.8% of GDP, on the back of a recovery in domestic consumption. Net external balance was also supportive of growth, but only because the contraction of exports was milder than that of imports. Growth was further hampered by a third annual contraction in investments. In 2014, domestic demand is expected to strengthen on the back of improved labour market conditions (especially due to increased participation of women and elderly workforce) and the implementation of a 25% reduction of the administered electricity price. Besides, recovery in Europe is expected to support external demand, while investments are expected to improve given the current high capacity utilisation. Therefore, looking forward, growth is expected to remain around 2% in coming two years. The risks to this scenario are balanced between energy reforms started in 2013 boosting economic activity and fixed investments failing to improve, amid a high indebtedness by corporates and tight credit conditions.

Figure 1: Growth picks up
Figure 1: Growth picks upSource: EIU
Figure 2: Public budget on a positive trajectory?
Figure 2: Public budget on a positive trajectorySource: EIU

2. Fiscal balances improved, but long term challenges remain

Following the opening of the Excessive Deficit Procedure in June 2013, Malta improved both its fiscal balances and the trajectory for coming years, but long term challenges remain. Based on a 3.3% of GDP budget deficit in 2012 and projections of a 3.7% of GDP shortfall in 2013, the European Council concluded that Malta’s pace of debt reduction towards the 60% of GDP threshold in the Stability and Growth Pact was insufficient. Consequently, the Council (re)opened the Excessive Deficit Procedure in June 2013, imposing a target of 3.4% of GDP in 2013 and 2.7% of GDP in 2014. The budget deficit is estimated to have reached 2.9% of GDP in 2013, mainly aided by an improvement in revenue as the economy picked up. The shortfall is expected to improve to 2.6% of GDP in 2014, driven by revenue increasing measures, such as a controversial new programme for granting Maltese citizenship in return for a fee and investments, to foreign individuals and families. Despite these improvements in the budget balance, the already elevated public debt is expected to keep increasing from 72% of GDP in 2013 to 74% of GDP in 2014. We find comfort in the fact that 97% of government debt is held by residents (the financial sector and households) and that financing is readily available. However, without reforms, the risks to this scenario are tilted to the downside. Indeed, contingent liabilities related to public enterprises (especially Enemalta- the energy company) could push public debt to roughly 90% of GDP and ageing costs related to the health and pension systems are poised to put the Maltese fiscal balances on an unsustainable path in the longer term. It is therefore positive that the ruling labour party has a clear majority in parliament, so that it can easily implement reforms. All in all, while Malta’s fiscal balances show some improvements in the short term, the country is not out of the woods yet and reforms are crucial for longer term fiscal sustainability.

3. Financial stability is maintained, despite vulnerabilities

A financial crisis in Cyprus in 2013 drew attention to the risks of large banking sectors that exceed the size of the economy, and eyes also turned to Malta. However, an in-depth analysis reveals that those risks are overstated, because the lion’s share of the Maltese banking sector has little material ties to the domestic economy (see background information). Furthermore, the reliance on domestic financing by the government and the corporate sector (including domestic banks) shield the Maltese economy from contagion from problems in the international financial sector. Nevertheless, the size of the domestic banking sector is still large (218% of GDP), but the good health of the sector and the traditional funding model (deposit- to- loan ratio is 69%) provide proper mitigation. Other domestic vulnerabilities, such as a high exposure to the sovereign and to the real estate market, also do not seem problematic at the moment. Consequently, despite its colossal size (789% of GDP), the banking sector does not pose a substantial threat to the Maltese economy.  

Factsheet of Malta
Factsheet of MaltaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Malta is a small island in the Mediterranean Sea, which became a EU member in 2004. Malta also joined the eurozone in 2008, so monetary policy is the responsibility of the ECB. The Maltese economy is fairly diversified and the high degree of openness makes it export driven. Malta’s main merchandise exports are industrial in nature, namely fuels, semiconductors and pharmaceuticals. The lion’s share of services exports is accounted for by online gaming (largest global supplier) and tourism (70% of exports together). Malta also hosts a very large offshore banking sector, whose assets account for 789% of GDP. However, there is a marked difference between the three subsets of banks: 1) international banks (62%) are 100% internationally financed, serve only international clients and are foreign owned; 2) core domestic banks (28%), run a traditional prudent deposit-based model that shields them from market volatility and focus on retail (Bank of Valetta and HSBC hold 90% of this market); 3) non-core domestic banks (10%), have limited links to the local economy, focus on corporates and non-interest banking activities and have foreign ownership. The concentration of resident banking with core banks translates into limited contingent liabilities for the state in case of bankruptcies. Besides, HSBC is expected to receive support from the UK holding. Moreover, all three segments of the banking sector are in good health, so such a risk is very low. Further integration of rules within the EU could erode Malta’s attractiveness as a financial offshore centre in the future, but economic impact should be contained.

Malta has been a democracy ever since independence from the UK in 1964, and it became a republic in 1974. The president, chosen every five years, holds a ceremonial role. Despite the high democratic values, corruption and nepotism are pervasive. The proximity to Africa leads to a high influx of immigrants. Malta has the highest refugee burden per capita in Europe, which has increased social tensions. Besides, lack of support from the EU has strained relationships with the union.  

Economic indicators of Malta
Economic indicators of MaltaSource: EIU, EC


  1. Maltese macro-economic data has been subject to large revisions in the past, and should therefore be interpreted with caution.
  2. The external position of Malta is inflated by the large presence of international banks, whose external liabilities are matched by external assets. Malta holds a net creditor position, but that could be distorted by the significant presence of foreign owned companies and their inter-company activity.
Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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