Malta – an oasis of peace and prosperity

Malta’s positive outlook reflects Standard and Poor's opinion of at least a one-in-three likelihood of an upgrade in domestic growth within the next 18 months

This month saw marginal gains in the price of Brent crude oil, up at $45.58 a barrel, while US crude was up at $42.50. All this helped world stock markets to rise following signs of economic stabilisation. These geopolitical developments are important wildcards, expected to contribute a positive impact on the corporate sector. Another challenge to advanced economies is the rapid change in the pace of technological innovations, which is accelerating with incidence of data analytics, artificial intelligence, nanotechnology and robotics – all areas benefitting from higher US investment.

Back home, we notice domestic growth potential has been highlighted by the recent favourable upgrade by Standard and Poor’s agency to a stable outlook BBB+/A-2.  Quoting from its latest report, the agency says that Malta’s positive outlook reflects its opinion of at least a one-in-three likelihood of an upgrade within the next 18 months if medium-term growth continues without a return to current account deficits or emergence of other macroeconomic imbalances.

The rating agency could also raise the ratings if fiscal consolidation advances faster than it currently expects, including further improvements in budgetary sustainability.  Positive trends are seen in tourism, as a result, during the first 10 months of 2015, tourist arrivals increased by 5.6% on a year earlier, while nights stayed and total spending went up by 5.0% and 7.4%, respectively.

Although all major expenditure components increased substantially on their year-ago levels, spending on accommodation and “other expenditure” experienced the largest gains. Meanwhile, in the third quarter of 2015 the number of cruise liner calls rose to 102, from 91 a year earlier. As a result, the number of foreign cruise liner passengers rose to 192,570, an increase of 39,522 over the same quarter of 2014.

These positive trends are tangible and reflect the improvement registered in the number of new jobs created. In fact, according to the Labour Force Survey (LFS) the unemployment rate stood at 5.4% in the second quarter of 2015, down from 5.8% a year earlier.  As can be expected with more shoulders to the wheel, more tax revenue is collected, such that during the second quarter of 2015, revenue grew by 7.5%.   Meanwhile, receipts from capital and current transfers went up by a respectable 19.4% on the back of higher capital transfers.

In the last quarter of 2015, the government recorded a surplus of €95.3 million. During this quarter, total revenue stood at €1,154.7 million, an increase of €111.1 million when compared to the fourth quarter of 2014. Another feather in our cap is the reduction in debt. At the end of 2015, gross consolidated debt amounted to €5,620.7 million, an increase of €198.8 million from 2014 and stood at 63.9 per cent of GDP.  (2014, 67.1 per cent of GDP).

A miracle is about to happen should the minister of finance succeed, in two years’ time, to achieve a balanced annual budget – something that has never occurred in the past 30 years. In 2016, party apologists can lax lyrical about the soundness of the asset management conducted by the financial wizard minding the store at the ministry of finance – Professor Edward Scicluna. It is amazing how, in a short period of less than three years since the change of government, the prescribed Maastricht threshold of 60% net government debt to GDP will be reached. This ratio of debt goes down to 54% of GDP by the end of 2018, from 72% in 2009.

Party apologists blow their trumpets and rub their hands with glee, saying that the economy continued to expand robustly in 2016, with real gross domestic product (GDP) reaching 6.3%, reflecting superlative results gained by both the tourist industry and the gaming sector. Naturally the proof of the pudding is employment statistics and these point to a healthy and steady improvement reaching historically low levels.

Sadly, Enemalta will not generate profits until 2017 even though last year the price of oil did reach a low of $25 per barrel. Yet it is proud to announce its first major export order consisting of an €80 million wind farm project in Montenegro. It is no surprise that rating agency Standard & Poor’s has raised Enemalta’s credit rating to BB- on the basis that the power utility had improved its liquidity and that restructuring efforts “are delivering improvements in cost structure earlier than expected”.

Quoting Standard & Poor’s: “We believe the group will post positive cash flow after capital expenditures over our two-year rating horizon.”  Other state-owned enterprises also represent fiscal risks, as exemplified by this year’s government financial support to Air Malta and the accumulated debt outstanding at the Freeport and Gozo Channel. Malta registered a historic economic growth last year, with its GDP amounting to €8,796.5 million, however Scicluna noted that this was largely due to a 21.4% increase in gross fixed capital formation – due to the sudden launch of several EU-funded projects ahead of the deadline to tap into the structural funds.

It goes without saying that our Achilles heel is low R&D. Collectively, we must step up the spend on research and development, which ideally must make up 2% of Malta’s GDP, according to EU2020 targets.  It currently only makes up 0.4% of GDP. 

All this bonanza did not come by reciting Hail Marys but by sheer determination by the government to improve growth in private consumption, buttressed by falling unemployment (now reaching a low of 3,700), higher exports, lower energy costs and a concerted drive by Malta Enterprise to attract new foreign investment.  The deal secured with China to invest in Enemalta – the ailing national utility (previously lumping along with €800m in foreign debts) has turned the tables in its favour and the energy sector is further consolidated by capital injected in the construction of a new gas power plant.

Another milestone was the introduction of the second pillar (apart from a voluntary third pillar) in the national pensions. This was resisted tooth and nail by the previous administration saying (quite rightly) that prior to 2012 the economy was not ready to face the strain of additional pension contributions. Usher in the Labour administration and due to the improvement in the economic health there has been a change of heart and the government is studying ways on how to ease the cost of contributions to employers and their employees.

The finance minister said that the government has adopted a long-term strategy to gradually increase pensions, bearing in mind their weight on public finances. He was prudent and quickly dismissed calls for the state to instantly distribute more wealth, warning that government revenue has not yet reached a high enough level. It is true that the Individual Investor Programme – a scheme which is resisted by the party in opposition, saying we are selling our soul – will contribute over one billion euro at the end of its cycle but feet on the ground, a cautious stance is advisable considering mounting competition on exports by other Mediterranean nations such as Cyprus, Greece, and Spain.

As always, the rate of wealth distribution is a delicate topic – if Malta loses its competitiveness, then it will face a drop in exports and government revenue will plummet.  In conclusion, we must continue to be vigilant in our ways if we wish to maintain our status quo and continue to reap the benefits and pleasures in life cocooned in an oasis of calm and prosperity. Focus on the bright side and let go of scaremongers. 

George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years’ experience in accounting, taxation, financial and consultancy services.  Through his efforts PKF has been instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island. George can be contacted at [email protected] or on +356 21493041.