Positive Economic growth for Malta

| Published on 14 Jul 2015

Chetcuti Cauchi

Rating Agency Standard and Poor’s has confirmed positive economic growth for Malta. Malta's rating was revised upwards from ‘stable’. It does seem that events in Greece are unlikely to have a material bearing on Malta’s credit profile.

Malta’s budgetary consolidation is expected to continue, leading net general government debt to decline to 55% of GDP in 2018, from 59% in 2014. Malta's real GDP grew by 3.5% in 2014. This is projected to expand by close to 3% annually on average in 2015-2018.

Low corporate tax rate also continues to attract significant foreign investment into Malta's economy.  

Energy as a Growth Industry

The Agency commented that Malta's economy is benefitting from investments in the energy sector namely the laying of the interconnector cable between Malta and Sicily, the construction of a liquefied natural gas terminal, a natural gas plant and the conversion of the power plant from heavy fuel oil to gas.  “We believe Malta’s economy will continue to outpace the eurozone as a whole, notably because of investments in the energy sector,” S&P said referring to the interconnector and the Delimara LNG project.

Other Growth Industries

Further diversification of the economy is expected beyond 2016 that will boost investment, particularly the areas of information and communication technology and medical tourism. Domestic demand is expected to be backed by stronger private consumption, resulting from government-mandated cuts to utility tariffs that have reduced electricity prices by 25%. Finally, consumption tendencies are being supported by increased wages and wider female involvement in the labour market.

Exposure to Greece

S&P stated that “We do not believe events in Greece will have a material bearing on Malta’s credit profile. Like all eurozone members, Malta is exposed through common monetary, fiscal, and development institutions such as the European Central Bank, the European Financial Stability Facility, and the European Investment Bank.

“Apart from contingent liabilities associated with those institutions, Malta’s exposure to Greece is limited. Malta’s trade with Greece is small and direct financial links are few. We assess the external debt of Malta's domestic banks as sufficiently contained such that Malta would cope with a permanent real increase in external funding costs spilling over to eurozone markets from Greece.”

Euro-Area Membership

Eurozone membership secures Malta’s monetary policy and provides its banks access to funding at low nominal interest rates. Having said that the agency commented that membership in a monetary union increases the responsibility on member governments to support competitiveness through fluid labour, product, and services markets, and to build up fiscal buffers against future shocks.

“We note that nominal unit labour costs have been increasing at one of the fastest rates in the euro area, posing risks for competitiveness when many euro area neighbours are undertaking structural reforms and internal devaluations.” This is becoming more and more relevant following the ECB’s Governing Council announcement of a quantitative definition of price stability as  “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.”

S&Ps rating was welcome news to the Ministry of Finance which, in turn described the positive review as encouraging while noting the favourable comments made in the report with regards to Malta's low exposure to Greece. Finance Minister Edward Scicluna commented “Standard & Poor’s’ decision to upgrade the outlook to positive re-affirms the solid performance of our economy and prospects for the upcoming years.”

 

 



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