Above +3% GDP growth since 2014
Annual real GDP growth reached +3.6% in 2014, the highest rate of growth since 2010. The resilience of the Maltese economy when compared to the Eurozone is attributable to a spur in private consumption, stronger investment, high government expenditure and the attempt to diversify exports. During the first 9 months of 2015, GDP grew at the strong pace of +4.4% y/y on average. Euler Hermes forecasts +4% growth in 2015 before slightly moderating to +3.5% and to +3.2% in 2016 and 2017, respectively. The main drivers of growth for the next two years are projected to be investment, benefitting from a number of large scale construction and energy projects, EU funding absorption (mostly in 2015) and domestic demand, on the back of increasing disposable incomes and favorable consumer sentiment. Continued strong performance of the tourism industry is also expected to support growth.
Deflationary pressures less of a concern
Price inflation in Malta is expected to exceed that in the Eurozone over the 2015-2017 time horizon on the back of rising services inflation and Malta’s higher dependency on services compared to goods. The moderation of the effect of the pass-through of lower oil prices, the base effects linked to the decline in electricity tariffs for households in March 2014 and the euro depreciation are expected to support inflation (+1.2% in 2015 and +1.3% in 2016, well above the Eurozone inflation level of +0.1% in 2015 and +0.9% in 2016).
Fiscal sustainability reliant on the banking sector
The sustained growth helped lowering the fiscal deficit to -2.7% of GDP in 2014 and debt has declined to 68.4% of GDP. Fiscal consolidation will continue during the next three years thanks to the reforms introduced by the Fiscal Responsibility Act (FRA) in 2014. The fiscal deficit is projected to decrease to -2.3% of GDP in 2015 and the government’s aim is obtaining an annual fiscal consolidation of about 0.6pps of GDP. We expect the fiscal deficit to stand at -1.4% of GDP and the public debt to settle close to 65% of GDP by 2017, far below the Eurozone average debt of 93% of GDP. However, the size of the Maltese financial sector and its steady growth over the past years – bank assets close to 7 times of GDP and non-bank financial institutions’ assets around twice the size of GDP – is the biggest downside risk for fiscal sustainability, given that the banking sector is the major Maltese tax payer. Financial sector vulnerabilities also stem from the relatively high level of non-performing loans and the high exposure to the real estate market.
Current account surplus since 2012
The current account surplus registered in 2014 and 2015 will persist (+1.2% of GDP in 2016, +2.0% in 2017), supported by lower oil prices, the continued recovery in external demand due to the high responsiveness to the euro depreciation, and Malta’s competitiveness in the services sector.