Private sector investment ‘below EU average’

Investment by the private sector in Malta averaged some 15.3 per cent of GDP during the 2000 – 2009 period, the lowest when compared to the country’s main EU competitors, according to the government’s Pre-Budget 2011 document launched this week.

This level is low even when compared to the EU average of 17.7 per cent, suggesting that a higher level of investment is needed for the Maltese economy to grow at the pace of EU countries.

“Specifically, the level of investment as a per cent of GDP would have to increase by around four percentage points to reach the level of investment by the main EU competitors. The negative implications of the economy’s productive capacity are exacerbated by the fact that around 20 per cent of investment is directed at housing construction. The improvement in productive investment can either be domestic-led or foreign-led or both,” the document says.

Varying between 11 to 16 per cent of GDP, the level of domestic savings (typically used as an indicator of the level of domestic investment) has been relatively low when compared to that of the EU-27. However, it is close to the average of the level of Malta’s main competitor countries.

The document also reveals that 60 per cent of the stock of foreign direct investment in Malta takes the form of capital inflows in the financial sector. This suggests that a significant share of capital investment did not finance the purchase of new machinery or other equipment. The report points out that a significant share of foreign direct investment pertains to banking institutions which do not operate in the local market.

“In this context, it is important to assess the nature of foreign direct investment flows in Malta, and specifically whether such flows relate to balance sheet transactions of a financial nature, or inflows which are more directly related to productive investment in the domestic economy,” it says.

However, at 102.1 per cent of GDP in 2008, the stock of foreign direct investment in the Maltese economy is by far the highest when compared to that in Malta’s major EU competitors and some 40 percentage points higher than the EU-27 average.

The level of investment in research and development has also been low compared to the EU-27 average. When compared to its major European competitors, Malta fares only better than Cyprus, possibly reflecting the fact that both countries have significantly large services sectors.

The pre-budget document contains a strong emphasis on upgrading Malta’s education and health sectors. It says single parents should be encouraged to combine work with family life and that their social security entitlements are to be reviewed and carefully analysed.

Expenditure on social protection as a percentage of GDP is 19 per cent in Malta, the report highlights.

The document emphasises that the Maltese economy increasingly depends on its ability to diversify its economy towards high value-added industries that can generate a higher rate of return than other industries, and points out that the culture and creative industries offer great opportunities in this respect.

The report says that the government believes its medium-term fiscal consolidation strategy should be largely expenditure based, rather than on tax measures.