IMF and Moody’s

Malta’s economy has shown resilience and strong growth, but it also faces a number of challenges. These challenges are detailed in two reports: the IMF’s 2024 Article IV Mission Concluding Statement and Moody’s November 2024 rating report for Malta. This article will explore these challenges across different areas, including fiscal policy, financial stability, structural reforms and institutional strength.

The IMF report highlights Malta’s need to consolidate its fiscal position. While the authorities have committed to reducing the deficit, the IMF recommends shifting focus away from energy subsidies and towards investment and innovation for long-term, sustainable growth. Energy subsidies, though projected to decline, remain significant and pose fiscal risks. The IMF suggests a gradual phase out of the fixed energy price policy and a move towards more targeted subsidies and market-based pricing. This would create fiscal space for investments in areas like public infrastructure, education and innovation.

Improving revenue administration and expenditure efficiency is also crucial, according to the IMF. This includes strengthening the Malta Tax and Customs Administration and enhancing public procurement practices. Additionally, developing a long-term fiscal framework that aligns with strategic priorities is essential. The planned revision of the Fiscal Act provides an opportunity to implement such a framework. The IMF also recommends a roadmap for corporate income tax reform aligned with the EU’s Minimum Tax Directive. This roadmap would provide guidance to taxpayers and investors and help avoid potential revenue loss to other jurisdictions that implement the directive sooner.

On the other hand, Moody’s also notes that while Malta’s public finances are a strength, they could be affected by spending pressures, including those related to energy subsidies. Moody’s expects Malta’s public finances to remain strong as the country meets its budgetary targets under the EU’s excessive deficit procedure. However, larger-than-expected economic support measures, especially for energy subsidies, could negatively impact public finances.

The IMF report identifies substantial exposure to real estate as a risk to Malta’s financial system, despite the system being generally sound. Close monitoring of real estate markets is needed, particularly given their sensitivity to factors like economic growth, interest rates, population growth and tourist flows. The IMF also recommends addressing data gaps in the commercial real estate sector. Supervisors should ensure that banks maintain robust underwriting and appraisal practices for loans to the real estate sector.

A tightening bias in macroprudential policy is recommended by the IMF, considering strong credit growth in real estate and the potential for monetary easing in the euro area. The IMF suggests considering an increase in the sectoral systemic risk buffer rate on residential mortgages and expanding its scope.

This leads me to the long-drawn subject of structural reforms. The IMF report emphasises the need for structural reforms to promote high-productivity economic activity and innovation for sustainable long-term growth. This includes evaluating and improving schemes that support innovation, start-ups and scale-ups. Easing administrative burdens for accessing public funding schemes is also crucial. The report acknowledges the establishment of Malta’s Venture Capital Fund as a positive step but suggests periodic assessment of its size and design. Moreover, addressing skills’ shortages, particularly in Stem fields, is also vital for promoting innovation and digitalisation. The IMF recommends focusing on educational outcomes, digital skills’ enhancement and promoting adult learning.

Both the IMF and Moody’s reports acknowledge Malta’s vulnerability to climate change. The IMF calls for concerted efforts from both public and private sectors to achieve Malta’s climate goals. This includes implementing existing strategies and plans, phasing out the fixed energy price policy to encourage energy conservation, and increasing public green investment. Moody’s notes that as a small island economy, Malta is exposed to physical climate risks, highlighting the country’s limited natural capital and elevated waste and pollution risks.

Effective tourism sector management is another important aspect highlighted by the IMF. Given the sector’s potential to strain resources and infrastructure, implementing the Malta Tourism Strategy 2021-2030 for promoting sustainable and high-quality tourism is crucial. Once we are on the subject, the latest inbound tourism numbers for September are in, depicting the below situation. We remain in line to hit around 3.6 million incoming tourists in 2024, which would be a 20% increase over 2023. However, if we were to eliminate the inflation experienced post-pandemic, to compare the real tourist expenditure on 2019 inflation levels, we can see that when comparing January to September to the same period in 2019, effective real average expenditure per tourist has declined by 3%. This means that September must have seen an increase in effective average real expenditure over September 2019, as when comparing January to August, to the same period in 2019, the drop with regards the average real tourist expenditure was of 4%, which has now reduced to 3%.

While Moody’s acknowledges Malta’s strong governance profile, the report points out remaining challenges related to the control of corruption, rule of law and the supervision of money laundering-related risks. Moody’s notes that further evidence of reforms to strengthen the country’s institutional framework would be credit positive. Conversely, institutional shortcomings in areas like anti-money laundering and combating the financing of terrorism would be credit negative.

The IMF report, on the other hand, focuses on the effectiveness of Malta’s AML/CFT framework, acknowledging progress in strengthening it, particularly in bolstering resources for supervisors and regulators. However, the IMF emphasises the need to remain vigilant in monitoring emerging threats and enhancing the risk-based approach.

In conclusion, while Malta registered strong economic performance, addressing the outlined challenges will be crucial for maintaining its economic success and ensuring sustainability in the long-term. Implementing prudent fiscal policies, mitigating risks to financial stability, pursuing structural reforms and strengthening institutional frameworks will be key to navigating these challenges effectively.