Malta’s test results came in on Wednesday when the latest country-specific EU semester report was published. Ivan Martin goes through the main findings.

Rave review of economy

The European Commission’s latest appraisal of the island’s performance, released earlier this week, at times reads like a rave review – especially when it assesses the economy.

“Malta’s economic performance has been outstanding in recent years” is the opening line of the economic overview.

Growth, the Commission said, had been “job-rich”, with the country tapping into the potential of the domestic labour force.

The fiscal situation – Malta’s national accounts – had “improved markedly”. In 2016 Malta moved from a deficit to a surplus position and the debt ratio fell to new lows – positives the Commission said were the result of budgetary measures in recent years and favourable economic conditions.

Government spending per capita was growing fast, especially for health and education. And, although the rate of public expenditure in Malta was below the EU average, its growth was one of the highest.

According to the latest figures, corruption is perceived as a problem in Malta by a large portion of local businesses

So, what about inflation? It has stabilised at “relatively low levels”.

Income inequality? It’s not that bad either. The share of income held by the richest 20 per cent of households was 4.2 times greater than that of the poorest 20 per cent in 2016 – among the lowest in the EU.

Unemployment dropped yet again, while employment growth remained “robust”., the Commission said.

Youth unemployment was well below EU average.

Meanwhile, Labour productivity was improving “strongly”, and wages were expected to increase between this year and next year.

But threats exist

So is it all peachy?

Well, the report also highlighted the threats facing Malta’s economic future.

The Commission was quick to put Maltese minds at rest: “Short- and medium-term fiscal risks appear contained.” Public finances were in good shape, thanks to increased tax revenue and considerable revenue from initiatives such as the cash-for-passports programme.

But in the long-term the situation was not as certain.

“Age-related” public spending in the healthcare and pension systems, for instance, was expected to increase relatively fast compared to other EU countries.

Maltese society is aging, and that, Brussels warned, is expensive.

What are the main threats to Malta’s economic future?

■ Effective financial supervision remains a challenge. The recent introduction of anti-money-laundering legislation should be monitored closely, the Commission said. Malta needs to protect its reputation.

■ House prices have surged and require monitoring. While construction and mortgage lending are experiencing rapid growth, this could make the economy vulnerable to the fluctuations of the housing market.

Read: Third of companies in Malta reporting skills shortage

■ Skills shortages have become “very pronounced”. Around a third of companies in Malta complain of a lack of skilled workers. These shortages are being filled with foreign labour across all skills levels, but an overdependence on imported labour poses concerns. The rate of early school leaving remains very high. Basic skills among young people are “weak”.

■ Poverty and social exclusion risks have been reduced but remain for some groups. While poverty has dipped to levels last seen before the economic crisis, single-earner households and the low-skilled face substantial poverty risks.

■ Judicial and anti-corruption shortcomings have negatively affected the business climate. The justice system continues to face challenges concerning its efficiency, and according to the latest figures, corruption is perceived as a problem in Malta by a large portion of local businesses.

■ Roads are still a major infrastructural challenge. Severe traffic congestion is a barrier to investment and generates significant external costs as well as greenhouse gas emissions. The government plans to redo all of the island’s roads is only expected to reduce the problem “modestly”.

■ Over-reliance on the construction sector should be ditched for a more circular economy. If not addressed, “bottlenecks” in natural resources and infrastructure could start to affect sectors such as tourism – still a key pillar of the Maltese economy.

■ The Individual Investor Programme (cash-for-passports) is estimated to have reached 4.3 per cent of GDP cumulatively between 2014 and 2017. Brussels has warned that it is difficult to predict the outcome of the passport programme in the medium term, since it is not linked to any concrete economic development.

Health

The health system’s performance had improved notably, the Commission said, presenting high life expectancy and preventable mortality rates below the EU average as evidence.

Access to innovative medicines, mainly for cancer treatment, was improved by introducing clinical pathways and innovative procurement strategies.

In addition, hospital waiting times for surgical interventions and diagnoses were “being tackled”.

Nevertheless, some developments could have a negative impact on the sector’s sustainability in the future.

Brussels warned that rising obesity levels pose a significant challenge to public health in Malta.

The “institutional” nature of the sector puts pressure on both hospital and emergency care, making the management of care for patients with chronic conditions more complex. Hospital and primary care are not well coordinated, and emergency care remains inefficiently used. Finally, access to innovative medicines remains a major challenge.

Property

House prices are soaring, the Commission noted.

Strong economic activity and a “buoyant” labour market, together with an influx of foreign workers and low interest rates, which make property a more attractive asset, are all behind the property price hike.

Lower loan interest rates have both reduced the cost of borrowing and boosted the demand for property.

“Despite increasing house prices, housing in Malta is generally affordable, though there are increasing concerns for low-income households,” the Commission concluded.

Meanwhile, construction has been experiencing “very rapid growth”, which the Commission said could further fuel price speculation.

As demand grew, so too did supply, with profitability in the sector increasing despite growing costs.

Building permits have been on an upward trend since 2014, and the increase was more pronounced in 2016, especially for apartments – in which case it doubled.

The volume of property transactions has been among the highest in the EU.

Anti-Corruption

Malta still has a “fragmented” landscape of agencies dealing with corruption allegations, the report says.

The Attorney General’s Office, the police, the Permanent Commission against Corruption and the Internal Audit and Investigations Department all deal with allegations of corruption, which leads to unclear roles in the fight against it.

Police commissioners and attorney generals are appointed by the government, and the Permanent Commission against Corruption is designed to report its findings directly to the government. Other organisations competent in processing corruption allegations face challenges for thorough enquiries because of a lack of necessary means, powers or resources. The absence of established procedures to ensure independent treatment of cases could lead to inconsistencies.

Corruption and favouritism are still perceived as a problematic factor for doing business in Malta. The latest Commission figures show that a large proportion of Maltese feel corruption is widespread in Malta, and in one study, more than half of the managers surveyed identified corruption as a problem.

The perceived quality of governance also seemed to have slightly decreased over the last decade. According to the World Bank’s 2017 Worldwide Governance Indicators, Malta’s rank between 2006 and 2016 in almost all areas of governance has slightly worsened, in particular concerning the areas of the rule of law and control of corruption.

Ultimately, anti-money-laundering efforts are of “critical importance” given the size of Malta’s financial sector.

Transport

Citizens and businesses in Malta have to put up with “significant economic costs” caused by traffic congestion.

Traffic congestion costs are projected to rise to a staggering €721 million by 2025. Photo: Matthew MirabelliTraffic congestion costs are projected to rise to a staggering €721 million by 2025. Photo: Matthew Mirabelli

Brussels said roads were often highly congested and it considers them a weak point of Malta’s business environment. The costs of traffic congestion (time spent, additional fuel costs, accidents and economic costs of congestion) are projected to rise to a staggering €721 million by 2025.

The contribution to air pollution from road transport remains high, fuelled by increasing congestion levels and a growing demand for transport.

So far, measures focus on the improvement of road infrastructure but will only mitigate the problems “modestly”. Current transport policy, Brussels said, lacks a clear target on reducing greenhouse gas emissions from transport. Reducing emissions is particularly pressing in road transport, considering the ageing and increasing car fleet.

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