Malta can contain Brexit effect on tourism and financial services – S&P

Key takeaways

• In real terms the Maltese economy will expand by 2.9% a year on average during 2016-2019 and that it will remain one of the faster-growing economies in the eurozone.
• Impact on growth of the U.K.’s exit from the EU (Brexit) to be relatively contained, despite Malta’s links to the U.K. through tourism and financial services.
• Budgetary consolidation to continue, reducing net general government debt to 53% of GDP in 2019 from 58% in 2015.

Ratings agency Standard & Poor’s has affirmed a BBB+/A-2 rating for Malta, with a positive outlook for the country.

S&P has said the United Kingdom’s vote to leave the EU may cut into tourism and financial services in Malta.

U.K. arrivals generate almost 30% of tourism receipts, and the weaker sterling is likely to harm the sector. “That said, the Maltese tourism sector is facing supply constraints and we expect it to easily fill the gap in the medium term.”

The implications of Brexit for the financial services are less clear-cut and would mostly occur through financial institutions other than domestic banks, however.

If the asset management industry in the U.K. slows down, Malta-based investment funds may generate fewer service exports, which would cut export growth, but are unlikely to create balance-of-payments risks.

“On the other hand, Malta-based banks that have significant exposure to the U.K. may experience a deterioration in their asset quality, which would undermine their profitability and, as a result, nominal GDP growth in Malta,” S&P said.

“Overall, we consider the financial services industry to be relatively diversified, and expect the Brexit impact on it to be contained.”

Malta’s tax regime has attracted significant foreign investment into the country’s banking, insurance, and information technology industries, implying that the economy would be sensitive to a eurozone-wide standardization of corporate tax regimes.

Debt down, slow growth in wages

S&P said it expected Malta’s debt as a percentage of GDP to be set for steady downward course.

Malta’s real GDP grew by 6.4% in 2015 due to high investment in the energy, transport, and healthcare sectors, combined with accelerating private consumption. Coupled with lower global energy prices, investment in the energy sector has already created a positive supply shock for the economy.

“We project that the economy will expand by 2.9% annually on average in 2016-2019 due to investment growth, especially in the energy, healthcare, and education sectors, combined with the expansion capacity in the tourism and recreation sectors.

“As such, we believe Malta’s economic growth will continue to outpace that of the eurozone as a whole, supported in the later years of our forecast horizon by the inflow of EU structural funds and rising private consumption.”

S&P said increased disposable income will underpin a rise in private consumption, mainly deriving from a growth in jobs and steady net migration.

Malta has been attracting migration from EU nationals, an estimated 7% of the workforce in 2014 according to the International Monetary Fund. Private sector hourly wages however increased by an average of 3.5% in 2013-2015, which S&P said reflected a structural shift toward more labour-intensive, higher-value added, service-based sectors.