Malta’s economic outlook for 2012 has improved slightly, and GDP growth will be limited to around one per cent as the main eurozone markets remain subdued, according to Ernst & Young’s latest Eurozone summer forecast for Malta.
There is a risk that the EU financial transaction tax proposal would have an impact on Malta’s large fund management sector
The Maltese economy officially entered a recession in the first three months this year after growth contracted by one per cent, after it had contracted by 0.3 per cent in the last three months of 2011. This latest forecast should be welcomed by the government as it predicts that there will indeed be economic growth in 2012, however limited.
The report says that tourism will struggle to match last year’s record arrivals and industrial output will continue to decline in the first half of the year.
It says consumer price inflation is expected to average around two per cent in 2012–13. “The economy remains vulnerable to cost pressures from imported energy and raw materials, and we expect that inflation will rise back above two per cent over the medium term,” it says.
The report says Malta’s deficit reduction has removed EU pressure to clamp down on other areas of social spending, including health care and education. “This has also preserved the scope for major infrastructure projects designed to lower energy costs through new-generation technology and mainland interconnections.”
The forecast says public debt is expected to start to decline from 2013 as growth gains momentum. However, it points out that its rise to almost 70 per cent of GDP in 2012 will remain a source for investor caution, maintaining some uncertainty over the stability of sovereign credit ratings. As a result, pressure for fiscal discipline will remain strong.
The Ernst & Young report says a significant risk to government finances is represented by the large size of the financial sector, which will raise concerns about the state’s ability to support it if conditions in the eurozone deteriorate further. But its strength in “alternative” investments and the relative solidity of the banks provide some insulation against financial contagion from elsewhere in the EU, it says.
It adds: “As a consequence, although banks already meet minimum capital requirements, there is continued pressure to move above this level, in particular, because of exposure to property and other higher-risk investments. This will restrain credit growth in 2012–14, making public input essential for large capital projects.
“Moreover, there is a risk that the EU financial transaction tax proposal would have an impact on Malta’s large fund management sector, although larger financial centres will also maintain their opposition to it.”
The report says that exports and increased tourism kept last year’s growth rate above two per cent, despite the eurozone’s financial problems and sharp fiscal consolidation.
“Growth prospects for 2012 have been hit by the continuing crisis in the eurozone, because of the constraints this imposes on financial services exports and tourism. We now forecast GDP growth of 1.1 per cent in 2012, with a slight pickup to 1.9 per cent in 2013 as exports start to recover. In the medium term, we expect growth to rise to some 2.0 to 2.5 per cent a year,” it says.
It adds: “Nevertheless, the short-term outlook remains uncertain. Tourist arrivals were down in the first quarter of 2012 but picked up again in April and May. Tourist nights also fell in Q1 despite a small lengthening of average stays. Hopes of exceeding last year’s total might be influenced by the fact that Italy and the UK – the main sources of visitors last year – are both in recession.”
The report says that weaker economic activity will also weigh on investment growth, which is expected to remain in negative territory for the fifth year in a row in 2012. Given the heightened uncertainty in the eurozone financial sector, which will constrain credit availability in the short term, there is little prospect of meaningful recovery until 2014.
The forecast says wage discipline helped to keep unemployment at a relatively low six per cent in Q1. In particular, hourly labour costs were €11.90 in 2011 – just six per cent higher than in 2008. They are level with Portugal and just ahead of the Czech Republic (and just 44 per cent of the Italian average), according to Eurostat comparisons.
The report says that after bringing the fiscal deficit below three per cent of GDP last year, the government will struggle to make further progress against this year’s backdrop of slower growth.
“The deficit widened in January–April, owing to an expenditure rise that substantially exceeded revenue growth. Around one-third (€37 million) of the extra spending was assigned to capital projects.”
It adds: “The central bank is dissatisfied with the rate of deficit reduction and is concerned that slow growth could halt progress. We expect the fiscal deficit to be equal to 2.9 per cent of GDP in 2012, up from 2.7 per cent of GDP in 2011 – and above the central bank’s forecast of 2.7 per cent of GDP. However, we expect the deficit to decline from 2013 and fall below two per cent of GDP in 2015, when we forecast public debt will have fallen to 67 per cent of GDP from a peak of 70 per cent of GDP in 2012.”
The forecast points out that although the main risks to Malta’s continued growth in 2012–13 come from its very high exposure to EU trade, there is also a risk of financial contagion if sovereign debt strains lead to a recurrence of eurozone banking problems.
However, it adds: “The danger is largely one of perception, arising from the large size of banking assets in relation to GDP. In practice, the banks are well capitalised, all having passed stress tests of equivalent severity to those imposed by the European Banking Authority, although the exposure to the eurozone periphery is significant.
“And with investors now cautious about all countries with bank assets that are multiples of national output, the IMF has also repeated its warning that banks’ capital may have to rise above international minimum ratios to avert any panic in the event of a disorderly sovereign default. However, there are also concerns about banks’ exposure to the domestic property market, the recovery of which will be delayed if banks are forced to restrain lending in order to strengthen their balance sheets.”
It says that success since 2009 in attracting hedge funds could be set back by new taxes and regulations imposed by the EU.
“The idea of a Europe-wide financial transactions tax is gaining ground in the EU as a means both to raise much-needed revenue and to discipline the financial sector. The UK, Sweden and the Netherlands have endorsed Malta’s call for a veto on the measure, but strong German and French support has kept it on the eurozone agenda.”