Despite a controversial cash-for-citizenship scheme and an ‘unsustainable’ health sector, tiny Malta is still punching above its weight when it comes to its economy
When Malta’s new Labour government introduced a ‘cash-for-passports’ plan intended to raise millions from well-heeled foreigners, it inadvertently found itself having to fend off collateral damage amid potentially damaging international news headlines.
Germany’s Die Welt’s headline read ‘Cash-strapped EU countries hawk their passports’, while Italy’s La Notizia was even more alarming: ‘With its cash-box empty, Malta puts its citizenship up for sale’.
International media described Malta’s so-called Individual Investor Programme as a money-making scheme that had more in common with a banana republic in the Caribbean than an EU state.
But the foreign media was ignoring one simple fact: Malta was one of the few southern EU countries that managed to avoid the financial meltdown. To ward off the bad publicity, the Maltese government simply cited official statistics to show its economy was in no dire straits. In the first quarter of 2014, Malta’s economy outstripped the EU average and grew by 3.5 per cent. The European Commission’s latest economic forecasts expect the Maltese economy to continue to grow ‘robustly’ in the coming two years. Despite an increase in the number of jobless in the last year, Malta has the sixth lowest unemployment rate in the EU.
Deficit is the ominous word that has dominated the political landscape ever since Malta adopted the euro in 2008 and bound itself to reducing the fiscal imbalance below three per cent of GDP. Last year the deficit was cut to 2.7 per cent and the government is targeting a further drop to 2.1 per cent this year. This reduction is taking place as Malta slashes its top income tax rate to 25 per cent from 35 per cent over three years.
As competing tourist destinations like Cyprus and Egypt face devastating crises of a different kind, Malta has gained significantly in terms of numbers. The introduction of low-cost airlines, like Ryanair and Easyjet, provided a haven for tens of thousands of foreigners seeking the warm Mediterranean climate. Tourist arrivals last year exceeded 1.5 million, a 9.6 per cent increase on 2012, while hotel bookings were up by 8.7 per cent. Tourists spent €1.4 billion, an 8.6 per cent increase on the previous year. And what’s more, Malta is expecting yet another record year for tourism this year.
“The results are encouraging and show an economy that is growing at a steady pace, but it is not the time to shout hoorah,” Malta’s Finance Minister Edward Scicluna says.
Malta prides itself in bucking the recent eurozone trend – no mean feat for an island state of 420,000 people with no natural resources. A business-friendly environment coupled with the highly skilled English-speaking workforce has attracted many multinationals to set up shop.
A survey carried out by EY last year showed a whopping 88 per cent of respondents considered Malta to be attractive to foreign direct investment. Malta’s comprehensive regulation, relatively low costs (compared to established Western European markets) and EU membership appear to be the main drivers, with respondents identifying back office operations and headquarters as the business functions that will draw the most investment in the coming years. Gaming companies have also flourished.
When Malta marked its tenth year as an EU member state last May, there was a rare moment of political consensus. The Labour Party, which had vociferously campaigned against EU membership, acknowledged that the benefits of the single market had by far exceeded the disadvantages. Some sectors, of course, share different views. In the last ten years, the manufacturing sector took a thumping as scores of factories closed down amid rising labour costs and the emerging Asian markets. While in 2002 the manufacturing sector was employing 19.4 per cent of gainfully employed persons, it is now below 13 per cent. The delicate agriculture and fisheries sectors have had to adapt to more stringent conditions or close shop. But the loss of jobs in these sectors has been offset by the creation of jobs in others, especially the financial services industry and tourism.
The public service remains too big and public debt remains well over the Maastricht threshold of 60 per cent. But Malta avoided the eurozone crisis because its two main banks remain very liquid and operate along traditional business lines, with lending funded from local retail deposits. Besides, they have very little exposure to troubled eurozone countries. In reality, Prime Minister Joseph Muscat is, to a large extent, adopting the successful economic model steered by the centre-right nationalist administration for 15 years. In such a small country, perception can work wonders and Muscat’s government has been a master at trumpeting good news. One of the first measures of the new government was to slash the hefty energy tariffs and stabilise fuel prices for the consumer. Each agreement with a foreign entity is accompanied by a well-engineered PR campaign.
The election is more than three years away and the government has made it clear that it is increasingly looking eastwards, especially to China, for business opportunities. Shanghai Electric acquired Malta’s debt-ridden energy corporation Enemalta, as well as majority control of the island’s new power plant. Few tears were shed for Enemalta’s sale – in a similar vein, many economists had applauded the former administration’s decision to shut down the debt-ridden shipyards in 2010.
When the national budget was presented last November, with no increase in taxes and plenty of fiscal incentives, economist Karm Farrugia remarked: “This budget was so positive and leaves such a feel-good factor that the government could have presented it just before the next general election.”
Yet, in a country dominated by two main political parties, where elections are often decided by a few thousand votes, some worrying trends persist, despite the warnings of an impending time bomb. Malta still provides a free health system, which many see as unsustainable. Respected businessman Reginald Fava recently warned that if political parties kept treating free health care as a ‘sacred cow’ the entire system risked collapse.
Government schools are free and university students are not only exempt from paying but they actually receive a stipend! Pension reform is long overdue, but Finance Minister Scicluna says Malta is still adopting the reform enacted some years ago that gradually increases the retirement age to 65. He insists it makes no sense to speak of extending the retirement age further, particularly as the country has the lowest labour force participation rate in Europe. “There is still more potential to increase the number of workers, especially women, who will help pay for our retirees,” he says.
Despite the snide reactions of economists to such statements, they know that somehow the Maltese economy will probably prevail, even while living under the shadow of looming bigger economies. Speaking at a business conference organised by The Economist last March, Malta’s Deputy Prime Minister Louis Grech summed up the success of the Maltese economy: “We did this through perseverance, resilience and positive thinking. We have broken through barriers, both real and imaginary.”
Perhaps, in Malta’s case, size does matter.
