Malta begins the year with a projected economic growth for 2011 of three per cent and a deficit target of 2.8 per cent of GDP. Reaching both targets will not be easy and will depend on a number of external as well as domestic factors.
However, the fact that the government expects GDP growth for 2010 to average 3.4 per cent is encouraging. Also promising is the fact that Malta’s deficit was kept reasonably under control in 2010, and at 3.8 per cent of GDP is one of the lowest in the European Union.
Not everyone, however, shares the government’s optimism over its growth and deficit figures. The latest Ernst & Young forecast for Malta, for example, says the economy will slow slightly in 2011.
“Despite the Budget’s emphasis on investment, GDP growth will slow in 2011 due to weaker net export growth and the delay before rising private investment brings new capacity on stream. Stronger investment-led growth will resume in 2012,” the report said.
Ernst & Young said it expects growth to average 2.1 per cent in 2011 before accelerating towards three per cent from 2012.
The Ernst & Young Forecast also considers that the 2011 deficit target of 2.8 per cent as unlikely to be achieved “as the Budget assumed 8.5 per cent revenue growth that will be hard to achieve as the pace of recovery slows.”
“Given that growth is likely to be weaker than the government projects, we expect the deficit to still be 3.8 per cent of GDP in 2011. The government is expected to persist with its present strategy which, on present forecasts, will bring the deficit below three per cent of GDP by 2013, as the GDP growth rate returns to a trend of around three per cent,” it said.
When presenting its Budget for 2011 the government made it clear that its priority was to reduce the deficit, yet it did not announce any austerity measures and – unlike what is happening in other European countries – actually increased its expenditure on sectors such as education and health. Finance Minister Tonio Fenech explained that the government’s measures to reduce public spending would include government departments being required to improve their efficiency by at least two per cent, less recruitment in the public sector and a review of the government’s procurement methods. It will be interesting to see how successful these measures turn out to be in reducing the public sector, and hence, the deficit.
Another challenge for the government is to try and reduce its public debt –which currently stands at 69 per cent of GDP – and to move towards meeting the EU’s 60 per cent public debt threshold.
Malta’s economic performance in 2011will of course depend a lot on the global, especially the European, economy. Most economists expect the developed world to continue along the path of a moderate economic recovery in 2011 and the emerging world to witness rapid economic growth. However, the latest warning by the International Energy Agency that high oil prices threaten to derail the fragile global economic recovery should worry governments all over the world. The Maltese economy certainly cannot afford another steep increase in utility tariffs, which would hurt consumers and industry alike.
Ernst & Young’s latest Eurozone Forecast is predicting that GDP growth in the bloc will fall to 1.4 per cent in 2011 from 1.7 per cent in 2010, so the recovery is still somewhat fragile. Germany, however, an important economic partner for Malta, is expected to see healthy economic growth this year, and this is good news for the Maltese economy.
Of great importance is the performance of the British economy in 2011, considering the harsh austerity measures introduced by the Conservative - Liberal Democrat government, including an increase in the VAT rate to 20 per cent. Britain accounts for 30 per cent of Malta’s tourism figures and is also a major investor in Malta so if its economy doesn’t perform well there are bound to be consequences for Malta.
One also has to take into consideration the harsh austerity measures taking effect in many eurozone countries and the fact that the eurozone debt crisis is probably not yet over. Many of these countries are important economic partners of Malta and deterioration in their economies could affect the local recovery.
Pension reform is bound to feature on the government’s agenda this year after the Pensions Working Group finally released its long-awaited report, although it is doubtful if any radical reform measures will be introduced. The report’s proposals included the immediate introduction of a mandatory private pension scheme targeted at people under 45 and that the pensionable age should be tied to an index on life expectancy.
Although the Working Group stressed that the country could not keep postponing the introduction of the second pillar pension – it said the present system was becoming increasingly insufficient for pensioners to enjoy the quality of life they were used to – many observers believe the government will not introduce a mandatory private pension scheme before the next election. The General Workers’ Union, for example, has already warned that in the present economic climate workers would not be able to afford such an additional cost. If a second pillar pension scheme is introduced, it will probably be on a voluntary basis.
The cost of living and increased costs for businesses will be major issues in 2011 and the government will be put under pressure by the unions, employers and the opposition to try and keep prices stable. The year started badly in this regard, with sharp increases in the price of gas, despite (or because of) the liberalisation of this sector, and increases in the cost of fuel, although the latter is beyond the government’s control.
However, consumers and businesses are still coming to terms with the huge increases in the utility tariffs and an EU report last year highlighted the fact that 41 per cent of Maltese were constantly struggling to keep up with bills. Furthermore, a survey conducted by The Sunday Times and published last Sunday showed that most people considered the cost of living as their number one concern. The government’s recent decision, therefore, to award MPs and ministers a hefty salary increase – a huge public relations disaster – could not have come at a worse time, especially when one considers that the cost of living increase for 2011 was only €1.16 a week.
Furthermore, the government will have to come to terms with the claim by Eurostat that 59,000 Maltese are at risk of poverty – 14.6 per cent of the population. In a survey on income and living conditions in Europe, Eurostat said that in Malta, 16,000 were “severely materially deprived”. It added: “Such people could not pay rent/mortgage or utility bills, keep their home adequately warm or face unexpected expenses. They also could not afford to eat meat, fish or protein equivalent every second day and cannot afford a car, washing machine, colour TV or telephone.”
We can expect business organisation to keep on harping on the need for the government – and its social partners – to focus on improving Malta’s competitiveness. Although Malta is generally considered a good place for foreign direct investment, the World Economic Forum’s Global Competitiveness Report 2010-2011 placed Malta in 50th position out of a total of 139.
While the report pointed out that Malta fared well in financial services, openness to trade and foreign investment, telecommunications infrastructure, auditing standards, a liberalised market, education and health, it did not get high marks for the quality of its roads, government regulation, electricity, government debt, labour market efficiency, flexibility of wage determination and low female participation.
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. This is a challenge that the government will certainly have to face in 2011.
Air Malta will definitely be in the news this year and presents a huge challenge for the government. The loss making national airline will have to undergo major restructuring, downsizing – which means redundancies – as well as drastic changes in work practices, in return for Brussels allowing the Maltese government to grant it much needed state aid. The EU has already given the go-ahead for €50 million to be given to Air Malta as part of a one-off emergency rescue plan.
With some luck the micro-credit scheme, which was first announced in the November 2009 Budget and which was meant to have been introduced in the first quarter of 2010, will finally see light of day, much to the delight of the GRTU and the country’s SMEs. SmartCity should have its first mega client this year if DayBreak, an American hi-tech company that started operating from Malta last month and which plans to create 1,000 jobs by 2014, is based at the Ricasoli knowledge and IT village.
It will be interesting to see how the dispute between La Valette Multi Manager Property Fund investors and Bank of Valletta is settled, if at all, and when the MFSA will finally publish its long awaited report on the matter.
Other interesting issues this year will be the continuing uproar over Melita and Go’s loss of television stations, the launch of SkyMalta, the new public transport system to be launched in July, the PAC witnesses speaking about the power station extension project, how the Palumbo shipyard progresses and whether the government can afford to introduce tax cuts in its Budget for 2012.