Malta registered healthy economic growth in 2010 after its economy contracted by 1.9 per cent in 2009. The recovery actually began in the last quarter of 2009 when the economy grew by 2.4 per cent. After that Malta witnessed three consecutive quarters of economic growth in 2010: 3.4 per cent in Q1, 3.9 per cent in Q2 and 3.6 per cent in Q3. The government expects GDP growth for 2010 to average 3.4 per cent.
So this year the recession in Malta was clearly reversed, partly due to an improved global economic climate but also due a lot to the government’s decision to specifically help the manufacturing and tourism sectors.
The government adopted a policy of targeting financial support for individual companies, rather than adopting a national stimulus programme, as well as supporting the tourism sector through increased funding.
Malta’s fiscal deficit was kept reasonably under control – the forecast for this year is 3.8 per cent and the government has targeted a figure of 2.8 per cent by 2011. A study by Allianz SE, a Brussels-based research institute, singled out Malta and Germany as the only two EU member states which boosted their fiscal stability and competitiveness in the last five years.
In June, the registered unemployment rate stood at 4.4 per cent of the labour supply while the 12-month moving average inflation rate and the annual inflation rate in November was 1.19 per cent and 2.43 per cent respectively.
Malta’s tourism arrivals figures this year were encouraging, thanks mainly to the government’s policy of increasing airline seat capacity and routes and of allocating additional funds to the Malta Tourism authority.
In the first eight months of this year, tourism expenditure was up by 20.5 per cent, which translates into an increased expenditure of €132 million compared to the same period last year.
Despite the recovery in Malta’s tourism sector hoteliers complained of increased government-induced costs and declining profits. The Malta Hotels and Restaurants Association, for example, was especially critical of the government’s decision to raise the VAT rate on hotel accommodation from five per cent to seven per cent, as from January 1, 2011, with the Association president, George Micallef, saying he was “shocked” with the decision.
The Maltese financial services sector, which broadly accounts for around 15 per cent of GDP (including its indirect contribution) and employs over 6,000 people continued to perform well during the year. Sixty per cent of foreign direct investment into Malta takes the form of capital inflows in the financial sector, according to the government’s pre-Budget document published earlier this year.
Maltese banks’ prudent business model enabled them to escape largely unscathed from the banking crisis and their performance in 2010 was good. The latest World Economic Forum report on global competitiveness ranked Malta among the top 10 countries insofar as soundness of the banking system is concerned.
Bank of Valletta’s results for the year ended September 30, 2010 show that the group registered a pre-tax profit of €98.9 million during the past 12 months. This represents a growth of 20.9 per cent over the previous year, and is just €2.8 million below the record level of profits achieved in 2007.
HSBC, on the other hand, reported that profit before tax for the first six months of 2010 rose 21.4 per cent from €34.76 million to €42.19 million. Total operating income increased to €125.95m for the period, a 32 per cent rise. In a statement accompanying the results the bank noted that the improved profitability was “substantially driven by an improved level of revenues while keeping costs flat”.
The €275 million SmartCity Malta project, which is transforming the former industrial zone of Ricasoli along the lines of Dubai’s Media city, was officially opened on October 10. Meridium, the Virginia-headquartered asset performance management software provider, announced that it is to base a four-member team there.
In what could be a major boost for SmartCity Malta, DayBreak, an American hi-tech company that started operating from Malta earlier this month, said it intends to be based at Ricasoli knowledge and IT village and plans to create 1,000 jobs by 2014.
Malta seems to be doing well in attracting foreign direct investment and the Ernst & Young Malta Attractiveness Survey revealed that 74 per cent of foreign investors in Malta are considering expansion next year.
Although Malta’s economy seems to be on the right path, the government still has to face a number of challenges, which it cannot afford to ignore. These include further reducing the size of the public sector, pension reform, boosting spending on research and development, maintaining its competitiveness – notably its wages levels and reducing the public debt from the present level of 69.1 per cent to below the Maastricht threshold of 60 per cent.
Also of some concern is the announcement by the government – in its pre-Budget document – that 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. 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 report said.
A report issued by Eurostat earlier this month on poverty in Malta is also worrying for the government. The study, Income And Living Conditions In The EU, shows there were 59,000 people considered to be living at risk of poverty in 2008, the latest available data – equivalent to almost one in every seven Maltese.
Bond issues continued to be popular with the public and a number of them were held in 2010, including BoV, Corinthia Finance (IHI), Grand Harbour Marina plc, Eden Finance plc, Tumas Investments plc, FimBank, MIH, Izola Bank and Premier Capital plc.
The Midi share issue was disappointing, showing Maltese investors’ preference for bonds. An EGM of Midi plc had to pass a resolution enabling “companies that are Connected Persons of some of the directors” to participate in its share issue. This means that companies in which the directors of Midi are involved were able to purchase shares in Midi.
A €100 million Malta Government Stock issue which took place in November, however, was over-subscribed by the public. As a result, for the first time in a long number of years, no tenders were accepted by financial institutions as the full balance of €100 million was taken up by the public.
In October Finance Minister Tonio Fenech presented the government’s Budget for 2011 saying that this was aimed mainly at reducing the fiscal deficit to 2.8 per cent of GDP through decreased public expenditure and modest tax increases.
In an attempt to reduce public spending government departments will be required to improve their efficiency by at least two per cent, there will be less recruitment in the public sector and a review of the government’s procurement methods will take place.
Furthermore, a system of independent auditing will be set up to evaluate samples of persons receiving free medicines in order to combat abuse in this sector.
VAT on tourism accommodation went up from five per cent to seven per cent while there were slight increases in the excise duty on fuel, the tax on cigarettes and tobacco, the tax on beer and the tax on spirits.
Despite an emphasis on reduced government spending and unlike what is happening in other European countries, expenditure on education and health in 2011 will increase to €340 million and €378 million respectively.
A cost of living increase of €1.16 was announced, the supplementary allowance for low income earners was increased and a scheme was introduced in which anyone scrapping an old car will be entitled to a €2,000 subsidy when buying a new small car.
The Malta Tourism Authority Budget was increased to €35 million and fiscal incentives for parents sending their children to private schools were also increased.
In a major development various investors in the La Valette Multi Manager Property Fund filed a number of judicial protests against La Valette Funds Sicav, Valletta Fund Management and Bank of Valletta claiming that they had suffered significant damages as a result of a breach of the investment restrictions in the supplementary prospectus issued by the fund. The case is still on-going and the MFSA has still not yet finalised its report on the matter.
Other major developments during the year include the granting of a banking licence to Deutsche Bank, the crisis surrounding Air Malta, Malta’s €30 million loan to Greece to help it solve its deficit crisis, the delay in the introduction of the micro-credit scheme, the Memorandum of Understanding between the MFSA and the China Securities Regulation Commission, the banning by the EU of the Iranian shipping line IRISL, a record $22 million damages ruling by Malta’s Court of Appeal to Finaval SpA, an Italian company, the PricewaterhouseCoopers survey which revealed that many family firms around the world, including in Malta, are not doing enough to plan for the future, the distribution dispute between Liquigas and Easygas, Malta’s €60 million loan guarantee for Ireland, and the revised utility rates which came into force.