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Malta’s 12% growth will make it impervious to Brexit over long run

Central Bank policy note says even under worst-case scenario, Malta will see off negative effects of Brexit

matthew_vella
Matthew Vella
29 March 2017, 1:55pm
Prime Minister Joseph Muscat with UK prime minister Theresa May
Prime Minister Joseph Muscat with UK prime minister Theresa May
The exit of the United Kingdom from the European Union will herald a slowdown in the foreign demand for Maltese exports, the Central Bank has warned, due to the direct effects of subdued economic growth in the UK, as well as due to indirect effects caused by the likely slowdown in EU as well as US economic growth.

In a policy note on Brexit, the Central Bank said the real effective exchange rate for Malta would also be likely negatively affected by the depreciation of the Pound Sterling in relation to the euro, and positively affected by the appreciation of the US dollar.

But the Central Bank said Malta’s economic growth over the next three years would mean it would be impervious to the negative effects of Brexit, save for a negligible effect.

In the best-case scenario, which assumes that the UK will eventually accede to the European Economic Area, the main negative economic consequences are related to a limited period of uncertainty surrounding the two-year negotiations, as well the exit from the customs union.

In the worst-case scenario, unsuccessful negotiations between the UK and the EU would see the trade agreement between the two parties defaults to the WTO rules.

“These projections result in a peak fall of 0.7% on Maltese foreign demand under the worst case scenario, as opposed to a fall of around 0.2% under the best case scenario. The nominal effective exchange rate for Malta from the import side is assumed to appreciate by around 2.5% while that on the export side is assumed to appreciate by around 3.5%.”

The Central Bank said its results are being considered preliminary and treated with caution given the high degree of uncertainty surrounding the terms of the UK’s exit from the EU.

“On the upside, fuelled by robust domestic performance as well as by an increasing momentum in the global economy, economic growth recently registered in the UK has been stronger than what has been initially envisaged in the immediate aftermath of the vote to leave the EU.

“Moreover, in the medium to long run, Malta could also benefit from the UK’s exit from the EU, especially if it manages to attract companies that seek to relocate outside the UK, for instance, in the financial sector, especially given the high proficiency of Malta’s workforce in the English language and in the light of the similarities that exist between Maltese and British legislations,” the Central Bank said.

It added that over the next three years, the Maltese economy is projected to grow by close to  12%, implying that even under the worst case scenario, the UK’s exit from the EU would have a negligible impact on Malta’s pace of economic expansion.

What Brexit?

  1. EEA membership
    The best case scenario is that the UK adopts the so-called Norwegian model that would allow it to retain access to the single market. In return, however, it would need to accept free movement of people as well as pay contributions to other EU countries. Moreover, under such a scenario the UK would not be allowed to benefit from the customs union and other third party trade agreements struck by the EU.
     
  2. Bilateral agreements
    The Swiss-model is similar to the Norwegian model, but allows free-trade to occur within specific goods categories and does not feature trade concessions in financial services.
     
  3. WTO rules
    This is the worst case scenario and is the default agreement that would come into place should negotiations fail. Under the WTO rules, the UK and the EU would trade under fixed maximum tariffs established by the WTO. The UK would lose access to the single market, but will be free to set its own rules concerning migration and would not contribute to the EU budget.


matthew_vella
Matthew Vella is executive editor at MaltaToday.
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