Greylist reversal lifts investors’ mood, now concerned about tax, wages and labour supply

EY-Partheneon Malta Attractiveness Survey finds bounce-back in investor confidence after Malta removal from FATF greylist

The FATF plenary held in Berlin that voted to remove Malta off the greylist in 2022 (Photo: FATF)
The FATF plenary held in Berlin that voted to remove Malta off the greylist in 2022 (Photo: FATF)

Malta’s investment attractiveness has bounced back to its 2020 ratings at 58%, according to the annual survey carried out by EY.

Carried out just after the country was taken off the FATF grey list in June 2022, EY-Parthenon’s 18th Malta Attractiveness Survey also revealed a corresponding improvement in the decrease in number of respondents who expressed the view that Malta ‘is not attractive’.

“This bounce-back in confidence should be welcomed by investors and policymakers alike but, while perceptions have improved, it is worth noting that the rating still falls short of the very high confidence levels achieved prior to 2020,” Ronald Attard, EY Malta managing partner, said.

As in previous years, corporate taxation (71%) is once again viewed as the parameter that most existing foreign investors think is attractive.

The second-strongest parameter is the stability of social climate (69%), an increase of 11 points compared with 2021. Telecommunications infrastructure (68%), another strong parameter over the last few years, ranks third on the scoreboard.

The stability and transparency of the political, legal and regulatory environment, a parameter that used to score highly on Malta’s attractiveness scoreboard, is now seen to be attractive by 31% of respondents, up 14 points from 2021. While 41% still state that it is not attractive, this compares with 64% in 2021, at the time of Malta's greylisting.

The three parameters that cover labour, previously ranked fourth to sixth on the attractiveness scoreboard, are now in sixth to eighth position. In 2022, they are the only parameters that have seen percentage declines over one year. The attractiveness of labour costs (35%) saw the biggest decline, with a 12-point decrease, followed by local labour skills level (40%), which decreased by 10 points, and flexibility of labour legislation (41%), which decreased by 4 points.

Biggest risks facing Malta’s FDI attractiveness

With corporate taxation ranked as Malta’s strongest FDI parameter, the changes brought about by international tax policy developments are considered by 58% of respondents to be Malta’s greatest risk for the next three years.

These are followed by skills shortages (54%), banking challenges (38%), cost competitiveness (36%) and reputational concerns (36%). Only 5% believe the war in Ukraine will affect Malta’s FDI attractiveness.

A majority (69%) of existing FDI companies surveyed still believe their future is in Malta. While the last year has seen a decrease in “no” responses, the number of “don’t know” responses has increased, with many respondents commenting that, in today’s fast-changing economic and geopolitical environments, a 10-year prediction has become increasingly difficult to make.

Skill challenges, Ukraine effect

Companies’ ability to retain specialised personnel has remained high and in line with the last year and pre- pandemic levels.

However, because of the country’s economic expansion, Malta’s skill supply has been unable to keep up with increasing demand for specialised skills. In 2022, 66% reported not being able to find the required specialised skills in the local labour market. However, this is a slight improvement on the last year, which indicates that the challenge is being tackled on several fronts and, positively, not worsening further.

Respondents were asked how their financial performance is currently being impacted by various external factors. The largest impact on financial performance was due to increased costs (excluding logistics) as a direct result of COVID-19, which impacted 66% of investors to a large or some extent. Sixty percent were impacted as a result of increased operating costs due to inflation following the war in Ukraine. 58% were impacted due to increased logistic costs as a result of COVID-19 and ongoing supply chain challenges. On the other hand, 29% are experiencing a loss of revenue from source markets as a direct result of the war in Ukraine.

Priorities to remain globally competitive

The top priority to remain globally competitive is education and skills, followed by ease of doing business and developing new economic sectors.

“Removal from the greylist has helped to restore investor sentiment,” said Ronald Attard. “Although back on the right path, it is worth noting that at 58% it still falls short of the extremely high confidence levels Malta was reaching a few years ago.”

Looking at Malta’s most attractive feature for FDI, he underlined external factors which may soon come into play: “As in recent years, our strong point for FDI remains our tax regime. Survey respondents are clearly aware of the risks of this changing. If our biggest pull factor is potentially coming to an end, what is our attractiveness offer going to be in a new global tax environment? We have a great social climate and telecommunications infrastructure, but is it going to be enough?”

He also highlighted Malta’s current skills shortages and labour costs but questioned whether attracting more people to the island would only serve to exacerbate other challenges.

“The natural reaction would be to look elsewhere and bring in people to plug this gap. But with the island being so small, with bottlenecks in infrastructure cropping up and virtually full employment, is that the wisest of moves? Especially if we are trying to look beyond GDP as a measure of success and instead champion a better quality of life for our inhabitants.”

On the difficult but important task of balancing the economy with growing environmental pressures he stated: “Analysing our current economic model further, some friction is starting to develop. For example, surveys indicate that people are tired of overdevelopment and construction. Yet does our legal and tax framework prioritise property development as opposed to other activities?

“Even foreign investors on the island believe that to increase Malta’s investment attractiveness, the country should prioritise the quality of its built and urban environment, and the preservation of rural and natural areas.”