Malta is emerging as one of the best-performing economies in the eurozone with steady economic growth and low unemployment. The fiscal deficit has been reduced, and the banking sector is performing well. The key to Malta’s economic success can be found in a broad diversification strategy that has created a strong, balanced economy while avoiding dependency on any individual sector. Financial services, tourism, information and communications technology (ICT), maritime services, and high-value manufacturing are among the sectors that form the basis of the island’s economic success. While there is much to be optimistic about, there is increasing awareness that raising productivity and increasing efficiency are critical if economic growth is to be sustained, and that Malta’s small open economy is vulnerable to external events beyond its control.
With virtually no natural resources, a location at the periphery of Europe and Africa and a domestic market of just 421,000 people, Malta has always had to be versatile in adapting to the changing realities of the global economy. Until it gained independence in 1964, after 150 years of British rule, Malta was described as having a ‘fortress economy’. The majority of the Maltese workforce was either employed directly by the British forces or in industries servicing the military machine. After the departure of the British, the newly independent nation was confronted with the challenge of building up an economy practically from scratch. The industries it chose to develop, tourism and manufacturing, were labour-intensive, enabling local companies and foreign investors to gain maximum benefit from the island’s flexible workforce and the low wages prevalent at the time. In the face of rising labour costs in the 1980s, Malta focused on high-value activities in areas such as electronics manufacturing and precision engineering, thus laying the foundations for the development of a world-class knowledge-based economy.
Financial services, science and technology, high-value manufacturing, health, tourism, education, maritime services and creative industries are today the dominant features of Malta’s economic landscape. In particular, Malta’s EU and eurozone membership helped the country to strengthen its services sector, and the export of services across the 28 member states is today a prime driver of economic growth. Malta’s economy is almost entirely made up of small businesses, of which some 95 per cent are microenterprises employing less than 10 people. There are only a few large enterprises in Malta, including chip manufacturer ST Microelectronics and toy manufacturer Playmobil.
While the importance of traditional sectors such as agriculture and manufacturing has shrunk over the past few years, new ones have emerged to take their place. International financial services now account for 13 per cent of GDP, while ICT, iGaming, games development, aviation, life sciences and the manufacture of pharmaceuticals, are joining the traditional economic generators to create a solid base of diverse operations, enabling Malta to compete at an international level. Tourism remains a key pillar of the economy, contributing 25 per cent of GDP, while construction and real estate account together for some 9 per cent.
Malta's economy has proven to be remarkably resilient in the face of the global economic downturn. It has remained healthy and registered a positive performance in the past four years. In 2013, the country recorded an increase of 2.4 per cent in its GDP, while in 2014 it kept its growth momentum, registering GDP growth of 3.5 per cent. Most of Malta’s key economic sectors have contributed to this result. The tourism industry has enjoyed another record year, while financial services are growing at a healthy rate. Online gaming and other IT-related activities, the aviation and maritime industries and, most notably, the manufacture of pharmaceutical products, all contributed to the island’s above-average performance. This has also allowed Malta to maintain one of the lowest unemployment rates in Europe, hovering around 6 per cent against the EU average of 10 per cent. Inflation averaged around 0.8 per cent in 2014.
Deficit reduction has been successful, and for the second consecutive year managed to attain its fiscal targets. The deficit was brought down below the 3 per cent threshold by the end of 2013, and in 2014 Malta reached a deficit of 2.1 per cent of GDP. Public debt stood at 68 per cent of GDP in 2014. Malta’s broad and balanced economy has been commended in recent years by the International Monetary Fund, the European Commission and rating agencies for its strong performance in the challenging economic climate. Malta’s finance industry has avoided contagion from the European financial crisis. The island’s debt is almost all held locally by the Maltese public, and the banking sector is not significantly exposed to foreign sovereign debt risks. In addition, assets held by the island’s five core banks are twice the size of Malta’s GDP, which itself is only half the EU average. Also in its favour is the fact that international banks operating from the island have only limited or no interaction with the Maltese economy.
Trade & Investment
Trade and investment are of vital importance to Malta’s economy and, according to the 2013 Open Market Index published by the International Chamber of Commerce, Malta has the fifth most open economy in its league table of 75 nations. Malta’s main commercial partner is the European Union, however trade with Asia – mainly China and Singapore – Russia and the USA is also increasing. In 2014, the country registered imports of €6.4 billion, up from €5.7 billion in 2013. Exports reached €3.7 billion in 2014 compared to €3.9 billion the previous year. Malta’s reputation as a safe investment location has also been boosted, in contrast to other countries in Southern Europe which have seen their economies stall amidst the debt crisis. Over recent years, Malta has secured foreign direct investment (FDI) in a wide range of areas including: financial services, digital gaming, high-end manufacturing and aircraft maintenance. Malta’s FDI stock position stood at €136.8 billion at the end of June 2014.
Despite global economic uncertainty, Malta’s commercial credentials remain impressive: a stable economic environment, a well-educated workforce, a competitive fiscal regime, and an attractive business climate. But there is broad consensus that the current level of growth is not sufficient to maintain employment. Innovation and the ongoing development of new economic opportunities are therefore among the government’s priorities. Sectors such as digital media and life sciences promise to develop into key economic contributors. Further growth potential also exists in niche areas such as marine sciences, educational services, health tourism and the energy sector. Fundamental to unlocking these economic opportunities will be Malta’s ability to successfully compete internationally. Although policymakers and investors remain cautious in the current economic climate, Malta’s economic growth and relatively low unemployment rate are expected to be maintained over the coming years. The European Commission is forecasting real GDP growth of 3.6 per cent for 2015, while the deficit is projected to decline further to 1.8 per cent.