Malta: Country outlook
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- Economist Intelligence Unit
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Malta: Country outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
POLITICAL STABILITY: Since independence from the UK in 1964, Maltese politics has been dominated by the Labour Party (PL) on the centre left and the Nationalist Party (PN) on the centre right. At the general election held in March 2013, the PL came to power for the first time in 15 years, defeating the incumbent PN. The current PL government was elected in a snap election in June 2017 and holds 37 seats in the 67-seat parliament. It suffered a serious blow in January 2020, when the prime minister and PL leader, Joseph Muscat, resigned amid a corruption scandal that implicated several senior government figures. In January 2020 Robert Abela assumed office as prime minister and PL leader. The Economist Intelligence Unit expects the PL government to remain in power until the end of its term in 2022. It has a comfortable majority, which will support stability. However, the executive now faces serious challenges in managing the coronavirus (Covid-19) pandemic as, Malta has registered one of the sharpest spikes in infections in the EU since the end of the winter holiday season.
ELECTION WATCH: In June 2017 the PL won a snap general election by a larger margin than expected. The party secured 55% of the vote, giving it 37 seats in the 67-seat House of Representatives (parliament), owing to strong voter loyalty and continued support for pro-growth policies. The alliance of the PN and the Democratic Party (PD) won 44%, taking the remaining 30 seats. The next general election is scheduled for 2022. The PL continues to outperform the PN in opinion polls, but this could change under the new PN leadership, or if the fallout from the coronavirus crisis erodes confidence in the government.
INTERNATIONAL RELATIONS: The murder of an investigative journalist and blogger, Daphne Caruana Galizia, has prompted EU institutions to scrutinise the safety of journalists in Malta, as well as the country's financial regulatory framework, its IIP and other aspects of its governance. In November 2020 the European Commission began legal action ("infringement procedures") to investigate both Cyprus's scheme and the one offered by Malta. The Maltese government said that it had noted the Commission's concerns, but highlighted its recent move to replace its Individual Investor Programme (IIP) with a new residency-by-investment programme. We do not expect the government to abandon the new scheme, owing to its vital role in the economy, and especially not in view of the economic and fiscal fallout from the coronavirus pandemic.
POLICY TRENDS: Policy priorities revolve around stemming the spread of the virus while co-ordinating the vaccine rollout. Malta won international praise for its effective response during the first wave of the pandemic, as cases were broadly contained, despite the country having one of the least stringent lockdowns in the EU. According to the stringency index of the Blavatnik School of Government at the University of Oxford, Malta scored 52.78 out of 100 as at February 8th 2021. This contrasts with neighbouring Greece and Italy, which scored 80.56 and 78.7 respectively. However, in January 2021 cases soared as a result of increased gatherings during the holiday period. In contrast to other EU countries, Malta did not impose strict restrictions during the holiday season: restaurants and shops remained open (albeit with social distancing measures), and there was no curfew in place. To stem the spread, in January the government cancelled carnival events that usually take place in January and imposed an 11 pm closing time on restaurants, bars and pubs.
ECONOMIC GROWTH: We estimate that real GDP contracted by 8% in 2020. In the third quarter of 2020 Malta's real GDP contracted by 9.9% year on year, and we estimate another contraction in the fourth quarter. The contraction was attributable to the huge fall in tourism, which is crucial to the economy and is one of the sectors in which recovery will be protracted. During the first half of the year heightened levels of uncertainty and the reimposition of restrictions in Malta and its main trading partners will lead to an increased preference for saving. We estimate that private consumption will contract by 8% in full-year 2021
INFLATION: We estimate a sharp slowdown in the average inflation rate in 2020, to 0.8%. The current fiscal and monetary stimulus measures have not yet fed into price rises, as people are still mostly saving rather than spending, but from mid-2021 a recovery in economic growth in the euro zone and a rise in average global oil prices this year will support inflation. In 2021 we expect inflation to rise to 1.2%, driven by demand-side factors as domestic demand recovers. In 2022 we expect inflation to rise further to 1.5%--a comparatively high rate for a member of the euro zone.
EXCHANGE RATES: The euro experienced high volatility throughout 2020. A depreciation against the US dollar in the early months of the year, when the coronavirus forced European countries into lockdowns, was followed by a rapid appreciation after the EU announced the establishment of a new recovery fund worth EUR750bn. We forecast that the single currency will stabilise at an average of US$1.21:EUR1 in 2021, supported by the ongoing weakness in the US dollar. In 2022 muted inflation and growth prospects in the single-currency area will force the European Central Bank (ECB) to maintain its ultra-loose monetary policy stance for longer than the Federal Reserve (the US central bank), prompting a slight depreciation of the euro against the dollar. The euro will strengthen from 2023 onwards, supported by the euro zone's structural current-account surplus and the gradual unwinding of the ECB's pandemic emergency purchase programme (PEPP).
EXTERNAL SECTOR: Malta's financial services industry, which is several times the size of its nominal GDP, is highly dependent on the external sector. The main risk that Malta's financial industry faces, according to a recent report by the Council of Europe, is the risk of exposure to money-laundering or the financing of terrorism. With a global trend towards increased protectionism, the sector could suffer severe fallout if the government does not address these risks, which would damage the country's attractiveness for FDI.
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