Country Report Malta June 2009

Outlook for 2009-10

On the back of a rapidly deteriorating fiscal position and worsening economic conditions, the governing Nationalist Party (PN) is facing a challenging period in office. Contracting economic activity, rising unemployment and a strong downturn in the domestic property market all add to the risk of a conflict between government and the social partners, especially since the government will be constrained to take painful measures to consolidate its fiscal position. Despite a one-seat majority and disgruntlement among backbenchers, the PN is nevertheless expected to remain in office throughout its full term. In the absence of concrete measures, the fiscal deficit is expected to remain well above the 3% limit allowed by the EU's Stability and Growth Pact as economic activity is expected to remain weak, thus adversely affecting government revenue and increasing welfare payments. The economy is expected to contract by around 4% in 2009 and to contract further in 2010.

The political scene

The political scene was dominated by immigration issues, as relations between Malta and Italy turned sour over who was responsible to aid illegal migrants in distress. Attention has also been on the European Parliament elections, with the PN focusing mainly on its success in job creation, and the opposition Labour Party attempting to counter voter apathy.

Economic policy

The significant widening of the fiscal deficit well beyond the 3% of GDP limit allowed by the Stability and Growth Pact led the European Commission to open an excessive deficit procedure against Malta. Thus, the government will be now expected to take painful measures to rectify the situation within two years. Malta's central bank published its Financial Stability report, which indicated the increasing vulnerability of the banking sector to the economic downturn. The government announced plans to embark on three new wind-farm projects.

The domestic economy

Economic activity slowed sharply in the final quarter of 2008, as investment and export demand declined. Consumer and business sentiment fell to historic lows in the first quarter of 2009. Malta's inflation rate eased slightly in early 2009, but remained easily the highest in the euro area. Unemployment rose to 6.7% of the labour force in March. Tourism activity continued to fall sharply.

Foreign trade and payments

The current-account deficit narrowed slightly to just below 6% of GDP in 2008. Trade flows declined sharply in the first quarter of 2009, in line with global trends. The trade deficit was largely unchanged from the year-earlier period.

This report covers the following industry codes:
SIC Code: 60;1;49;15;70
NAICS Code: 52;11;22;23;72