Ernst & Young expects GDP growth in Malta to average two per cent in 2011, down from 2.7 per cent in 2010, and to drop to 1.5 per cent in 2012, according to the firm’s latest Eurozone Winter Forecast.
The forecast implies a slowdown of the economy in the second half of 2011, due to the weaker external outlook. It says that assuming that the Greek debt default happens in an orderly fashion, growth should pick up from 2013 onwards, averaging just below three per cent in 2013–15.
“Risks to this forecast are balanced. The downside risks stem from possibly weaker demand and financial asset prices in the eurozone than we currently envisage. Upside risks relate to the performance of the financial sector that we could be underestimating,” the report says.
Ernst & Young says that despite the slowdown, the Maltese economy remains on course to avoid recession and steer clear of the wider financial problems affecting the eurozone. Tourism and financial services contributed significantly to growth in the first half of 2011 with export growth offsetting downward pressure on investment, it says.
“We expect inflation to continue to decline in the coming months and stabilise at 2.3 per cent in the next few years, after averaging 2.5 per cent in 2011. Lower inflation will support purchasing power and, hence, consumption,” the report says
The forecast says Malta’s economic recovery has so far been accompanied by an improvement of the fiscal balance and enabled further fiscal deficit reduction plans in the 2012 Budget. However, it adds: “We believe that the government’s targets of restricting the deficit to 2.8 per cent of GDP in 2011 and 2.2 per cent in 2012 are too optimistic, as the approach of the elections in 2013 will make public spending cuts – especially on industrial subsidies – harder to implement in 2012. As a result, we expect the Budget deficit to narrow more gradually than in the government’s plans.”
The report says that markets will continue to monitor these developments very closely.
“In particular, the scale of public debt has already prompted one credit rating downgrade in Q3 2011. Under the current policies, we expect public debt to peak at around 70 per cent of GDP in 2012 and to decline gradually below 68 per cent of GDP in 2015. But any fiscal slippage could push debt higher, with possible further downgrades as a result.”
Ernst & Young says the financial sector’s resilience during the crisis to date has boosted its reputation, improving Malta’s attractiveness for inward investment. Moreover, a stabilisation of property prices in the first half of 2011 has contributed positively to the sector performance by relieving one of the banks’ main domestic exposure risks.
The report says that Air Malta and Enemalta will continue to require subsidies in 2012, despite turnaround efforts now under way.
“Enemalta’s losses will be reduced by above-inflation power price increases permitted this year, but it continues to require heavy borrowing for investment in new technologies to replace the present oil-based power generation. While the government has restructured the company to raise more of its capital from the private sector, its public loan guarantees remain substantial, amounting to 17 per cent of GDP.”
It says that with public debt set to peak to 70 per cent, the government has little room for manoeuvre if strategic sectors require assistance or the economy slows unexpectedly. Moreover, pension reform remains a longer-term priority which, if not addressed, could cause renewed strain on public finances.
The report points out that credit ratings from the three main agencies were confirmed in October, but with notes of caution over the slowdown in growth and consequent setback to fiscal deficit reduction plans.
“Moody’s reduced its foreign-currency sovereign rating by a notch (to A2) in September, and assigned a negative outlook, expressing doubt about the government’s ability to reduce its deficit and contain public debt; but Fitch and S&P are, so far, still persuaded that the economy will grow fast enough to keep deficit reduction on track.”
It says that an MFSA probe of Bank of Valletta, over the running of one of its property funds, has demonstrated the regulator’s power to discipline even the largest domestic players.
It says that tourism maintained its strong first-half growth into Q3 2011, with arrivals between January and October up seven per cent from a year ago, and cruise passenger visits heading for a new record after matching their 2010 total in the first 10 months.
“October’s traffic through Malta International Airport was up four per cent year on year to a record 346,500, lifting the total for January-October by 7.3 per cent (to 3.1 million). This has allayed fears that Air Malta’s restructuring will reduce tourist arrivals. The arrival of new budget airlines has not offset a reduction in flights by the state-owned carrier, but higher flight occupancy means more traffic is arriving at less overall cost,” it says.
On prospects for increased business links with Libya, the report says: “The end of the conflict in Libya opens up opportunities to renew and extend the projects that were previously in progress there, especially in construction and civil engineering. The government is rebuilding relations with Libya’s new leaders and preparing to bid for new commercial opportunities. Visits to Valletta by the US Secretary of State and UK Foreign Secretary during October confirmed close relations with the NATO powers that led the campaign, and will now be involved in post-war reconstruction.”