Economic Vision 2021

I have chosen to analyse this document to see what sort of future is being forecasted for the year 2021, and whether some form of economic recovery is envisaged. This magazine brings together several different sectors and key people to discuss macro business, financial and economic outlook for the coming year. This analysis will be divided depending on the themes brought out throughout the magazine and by the various spokespersons.

Covid-19

The most spoken about topic in the year 2020 will surely not be forgotten this year, with its lasting effect and on-going spread in the year 2021. The pandemic pushed everyone “into a tight corner”[1] and created the need to be agile and flexible in their business model to be able to profit the most from arising opportunities. The forecasts of 2021 will very much depend on the extent of the pandemic. Mr Gregory, partner at RSM Malta, states that if the pandemic endures till March, the economic situation will be as dreary as the previous year, if not more[2]. Looking at the present situation, it is very likely to say that 2021 will be very similar to last year, given we are yet again in a quasi-lockdown affecting a lot of Maltese businesses. To this regard, Dr. Malcolm Mifsud, the founding partner of Mifsud & Mifsud, does not believe that the economy will grow this year, 2021 is expected to be one focused on the recovery of our collapsed economy[3]. It is more likely that a full economic recovery, and potential growth, will occur between 2022 and 2023. Hon Dr. Mario de Marco refers to the pandemic as a “perfect storm”[4]. In this phrase he is signalling to the disastrous amount of damage to consumer buying behaviour and to the consequent effect on the confidence levels of the market. Both these elements would require significant time to recover. To quantify the effect of the pandemic on confidence levels, GDP has contracted by 16.2% in the second quarter of 2020 (as compared to the same time the previous year), showing the deteriorative effects of the uncertainty surrounding the current situation. This can be seen in the below chart, where GDP growth took a harsh hit in quarter 2 of 2020, however it seems to be a slow, and not so steady, recovery.

Figure 1 – GDP Growth Year-on-Year. Source – NSO, 2021

Recovery Post Covid-19

The International Monetary Fund published a report in April 2021, where they revised previous growth projections. The year 2021 and 2022 are expected to increase by 0.8% and 0.2%, over and above the October 2020 World Economic Outlook projections. Recovery is anticipated to fast track, partly due to the accelerated distribution of the vaccine, along with even more fiscal support provided by governments. This is quite encouraging considering the estimated deflation of 3.3% in the previous year. The vaccine is likely to be one of the main factors impacting the pandemic, it is dependent on the success of the vaccine and its effect on the various strains of the virus[5].

The chairman of the Malta Development Bank warns against “a possible K-shaped recovery, where different parts of the economy would recover at different rates, times, and magnitude”[6]. Naturally, this is coming from travel and tourism sectors developing differently post-pandemic, as opposed to other industries which were not as adversely hit. Prof. Bonnici predicts that 2021 will be a “challenging year characterised by a fluid economic landscape”, which will hopefully lead to a better flow of economic activity.

Professor Edward Scicluna predicted a rebound of 6.4% (nominal terms) in 2021[7]. However, projections during such an unpredictable time are always a gamble, and thus should not be taken to heart. While the economy in 2021 is projected to improve and possibly even grow, recovery to public finances will likely take longer. In fact, Malta is believed to spend more years in a fiscal deficit. Previously, public debt was expected to reach 56.1% of GDP in 2021, however with the introduction of even more measures in the 2021 Budget we can assume that this number will be higher. From notes prepared by the NSO, it is stated that government debt in January 2021 stood at €6,832.1 million, a €1,439.4 million rise from 2020.[8] The most current projections set out by the Central Bank of Malta estimate that the deficit will linger into 2021, however it is expected to narrow from 9.5% to 6.6% of GDP. It is also expected that as the spread of the virus gets more contained and mitigation measures are reduced further, the deficit should stand at around 3.9% of GDP by 2023. As a consequence, to the persistent deficit being faced, the debt-to-GDP ratio is expected to reach 60.3% by 2023, as compared to the 42.4% registered in 2019[9]. However, even with Malta’s increase in debt-to-GDP, compared to other EU and Euro area countries we are still in a better position, with the EU average standing at 97.3% and the Euro area average at 89.8%. It needs to be kept in mind that this is not only a result of the increase in government debt, but also with the all-over decrease in GDP[10].

Dr. Mario Vella assures that “our debt sustainability analysis has shown that Malta’s public finances can withstand the protracted impact of quite severe economic shocks.” Malta’s debt-to-GDP ratio remains below the average in the Euro area, which is allowing the banking sector to remain relatively liquid and capitalised, allowing the private sector to enjoy higher liquidity levels. This should alleviate some of the strain on the economy coming from Malta’s high dependence on tourism, when compared to other member states[11].

With national accounts data being lower than expected for the second quarter of 2020 and foreign demand decreasing even more, the projected estimates are likely to be adjusted. “These factors are likely to be reflected in a downward revision in GDP growth for 2020, which will have some spill-over effects into 2021 in the next projections update”. The Central Bank of Malta had previously forecasted that GDP would contract by 6.6% in 2020 and then grow by 6.1% in 2021, with GDP levels returning to 2019 levels mid-2022. Since this magazine was released, the Central Bank of Malta released another set of projections for the economy in January 2021, which provide a more accurate estimation of the future. It shows that given the impact of rigorous containment measures that continued into 2021, GDP growth has been revised downwards for 2020 and 2021. On the contrary, for 2022 and 2023, GDP growth has been revised upwards. With all of this in mind, the Central Bank of Malta still believes that 2019 levels will be reached around the end of 2022. This is all dependent on the speed and success of the rollout of the vaccine.[12]

Projections are always based on a significant amount of situational uncertainty. To mitigate against this the Central Bank of Malta released an adverse scenario in its projections. However, in both scenarios the sharpest decline in GDP is forecasted in 2020. The below chart shows the comparison between the baseline and the severe projections for a few key economic metrics. These were presented in the updated projections of the bank, which were released end January 2021.

Figure 2 – Projections-baseline and severe scenarios. Source: Central Bank of Malta

Taking everything into account, 2021 is still expected to perform better than 2020, however it will unlikely be the year where we reach 2019 levels.

Optimism and the Vaccine

One of the only things that can help to create more confidence in consumers, and businesses alike, would be the development of a vaccine that would help to limit the spread of the virus. In fact, vaccine rollouts in the beginning of 2021 are likely to increase confidence levels of a prospective future. The then Minister of Finance believes that once the vaccine is available to a wide portion of the population, 2021 will be the year that 2019 levels are met yet again. However, it is also important that we keep in mind that the distribution of the vaccine might not be as effortless, as necessary. Prof. Josef Bonnici, the Chairman of the Malta Development Bank, says that “hope is tempered when one considers that it would take time to fully test the vaccine, manufacture it, distribute it, and vaccinate those willing to be vaccinated”[13]. Therefore, recovery in 2021 is unlikely to be smooth sailing. Apart from this, it is important that businesses are not made to think that once the vaccine is out that all will be stable again. In fact, the CEO of Malta Enterprise states that “the prospects of a vaccine are positive and inspire confidence, but I would be cautious about putting businesses’ minds at rest that all will be well after we have a vaccine”[14].

Covid-19 and Maltese Industries

The former Chairman of Air Malta believes that tourism was one of the worst hit sectors globally. Caused by the “drop in the number of people travelling, lockdowns, and the ever-changing travel restrictions”[15]. With airline passengers dropping by around 85%. Tourism is expected to take a few years for it to recover to pre-Covid levels. This will also impact other industries which are dependent on tourism such as “transport operators, retail, real estate and to a lesser extent, gaming”[16]. It might be worth it to start attracting high value tourism instead of looking at the numbers alone. Gordon Cordina estimates that the pandemic has caused Malta to lose four years’ worth of economic growth, with much of the loss coming from the tourism industry. He estimates that we will return to a stable state in 2022 and early 2023. This is to allow for other countries to be able to travel once again[17].

Naturally, Covid-19 has not had the same impact industry-wide. In fact, contrary to the tourism industry, the technology sector has seen to have had “an upswing of activity as a result of Covid-19”[18]. Edward Scicluna also mentions that the financial services (especially insurance), the maritime industry and the i-gaming industry seem to have fared well in the crisis[19]. The industries that kept on going and growing, were the lifeline of the economy, and allowed it to keep moving. Dr. Mario Vella also noted that while the GVA of sectors related to tourism decreased, there was further development in financial services and ICT. The below chart shows the GVA from 2016 and 2020 amongst the various industries. Below that there is the key to which industries are represented by which letter in the chart.

Figure 3 – Gross Value Added amongst Industries. Source: NSO.

Industry codes in the above chart:

• A – Agriculture, forestry, and fishing
• B – Mining and quarrying; manufacturing; electricity, gas, steam and air conditioning supply; water supply; sewerage, waste management and remediation activities
• C – Construction
• D – Wholesale and retail trade; repair of motor vehicles and motorcycles; transportation and storage; accommodation and food service activities
• E – Information and communication.
• F – Financial and insurance activities.
• G – Real estate activities.
• H – Professional, scientific and technical activities; administrative and support service activities.
• I – Public administration and defence; compulsory social security; education; human health and social work activities.
• J – Arts, entertainment and recreation, repair of household goods and other services.

Covid-19 and the Mitigation Efforts by Governments

The IMF predicted that were it not for the effort that was put in by various governments, the recession would have likely been three times harsher[20].

Several measures have been put in place by institutions, not only in Malta, but throughout the world, to further promote economic recovery. However, recovery is not solely dependent on these measures, but it depends on the strain felt by the specific industries. Even though these measures put a strain on government finances, due to their significant cost, they are necessary to maintain a minimal level of consumer confidence. Apart from confidence, they also help to keep companies and individuals afloat during these times. George Gregory, Partner at RSM Malta, anticipates that for the foreseeable future some form of government intervention will be needed. However, it is essential that these are given to specific industries and sectors in the economy which are trying their best to shift their business model to one that is more sustainable in the long-term, so that they can kick-off once the pandemic’s effect diminishes[21]. Some argue that these schemes are not as wide scale as necessary, which might lead to certain industries being forgotten.

Figure 4 – Employment in General Government. Source: Multiple

Regardless of this, unemployment was not seen to increase significantly with the drop in GDP, which shows the power of the mitigation efforts. However, this can also be coming from the larger-than-average portion of the working population employed with government. These are jobs that are considered safe. Therefore, around a quarter of the Maltese working population is very unlikely to enter unemployment, even during troubling times.

Mario Vella, the outgoing governor of the Central Bank, states that we were able to have these measures in place because of the fiscal discipline in the past, “this has allowed significant leeway to Government to provide the necessary fiscal support to mitigate to some extent the effects of the pandemic. Without such support the situation would have been far worse”[22].

The Shift in Business Model

COVID-19 has pushed businesses and the economy to evolve in a way that they would not have done for a number of years. The pandemic has forced businesses to change the way they operate. For example, Kurt Farrugia mentions that with the incorporation of video conferencing, business travel will be reduced in the future as it will likely be seen as an unnecessary cost. Christian Sammut, the CEO of BMIT Technologies, envisages that more companies will shift online and stay that way. This will be seen in more people working from home and outsourcing certain IT systems, to allow them to increase and decrease this supply depending on the situation. Also, already discussed previously, this presents more opportunities for the IT and technology industry. Many companies discovered that they needed to be more flexible to withstand the pandemic, and its harsh effects, while also dispersing their risks. Ronald Attard, the Country Managing Partner at EY Malta, found that in doing so companies opted to “onshore or nearshore part of their production, supply chains and back and middle-office functions”[23].

Mario Vella emphasises the need for employees, and companies alike, to not rely solely on the help provided by government. They need to prepare themselves for the future and to invest in growth sectors. In this case, staff training should be the way forward, so that throughout the development of the company, the staff continue to meet their needs.

The lesson learnt from the pandemic is that disruptions occur and will continue to occur, it is up to businesses to be flexible and resilient, by ensuring their business model is averse to these harsh conditions.

Environmental Considerations & Sustainability

On a more positive note, Gordon Cordina, co-Founder and Executive Director at E-Cubed Consultants Ltd., states that in the past the world, and specifically Malta, did not have the insight and care to seek sustainable development for future generations, however now the world is pushed to do so. Many companies and governments have put sustainable development in their yearly plans. Climate change requires more attention, where life-changing measures need to be put in place to have a radical effect. Edward Scicluna mentions two areas which are key to making our future better, which are the green economy and digitalisation. Hon Dr. Mario de Marco also believes that these two areas are critical for the future, while also mentioning the importance of the well-being of society and high-value tourism.

Malta’s Reputation

Given Malta’s recent threat to its reputation, it is important, now more than ever to focus on good governance. It needs to be the focus and basis for businesses, this way our reputation will be restored, and we will be on better terms with our international partners. For this to be achieved we need leaders which possess strong values and command respect and reciprocate it to others, and to the environment. To move past this, it is important that the country shows the level of seriousness in the area and that they wish to move forward and continue to grow within the appropriate framework.

The Moneyval assessment will be a pivotal turning point, in either direction, for Malta’s reputation. The CEO of BOV remarks that “if such a situation materialises [negative outcome from the report], Malta’s trust rating on an international level will suffer a blow which will inevitably cascade to banks and other operators in the sector”[24]. This would likely discourage foreign financial services companies from relocating to Malta, and therefore considering other locations. Hon Dr. Mario de Marco is anticipating that regardless of whether Malta is grey-listed or not, the economy will suffer either way. Being grey listed can create weaknesses when conducting business on a global level with regards to bargaining power. Dr. Malcolm Mifsud, Founding Partner of Mifsud Advocates, states that the result of this evaluation “has to be embraced, wherever Malta is placed, and anti-money laundering enforcers have to take up the task, without giving shocks to the industry”[25]. This should be a lesson learnt, and when attracting foreign investment, the focus should not be solely on the advantageous tax regime, we need to create a competitive advantage on other levels.

Governance and reputational issues need to be addressed as they can, and already are seen, to create a damaging effect on Foreign Direct Investment. The EY Attractiveness Survey 2020 reported a decrease of 15% in the number of investors who saw Malta as an attractive place to open a business in. “Investors cite a lack of coordination and variances in the bureaucratic processes of different entities as one such issue, and although there have been improvements over the past years, there’s still a long way to go to ensure a smoother way of doing business in Malta”, states Kurt Farrugia.

Business Attractiveness

In the year 2020, 35 FDI companies were confirmed, which was 3 more than the amount of FDI in the year 2019, mentioned Kurt Farrugia, the CEO of Malta Enterprise. This shows that the business environment in Malta is still attractive to FDI and is relatively stable. Mr. Farrugia emphasises that it is not just the number of FDI coming to Malta but the quality of them. Malta Enterprise’s mission with FDI is attracting companies that are more likely to open a complete operation on the island, and thereby create local employment. The EY Malta Attractiveness Survey 2020 recorded a drop of 15% in FDI attractiveness, from 77% in 2019 to 62% in 2020. The areas that seem to have caused this decrease are the stability and transparency of the political, legal and regulatory environment, along with the innovation environment, R&D and transport and logistics.

The Global Environment: Brexit & the US

The departure of the UK from the European Union is another important element that needs to be kept in mind when looking to the following year. The pandemic has brought with it a change of lifestyle and habit, with Brexit likely to have a similar effect by causing people to adjust certain aspects in their life, especially when looking at the special relationship between the UK and Malta. The biggest expected consequences on the Maltese consumer and tradesman, are the bureaucracy and additional costs. This is also combined with a decrease in internal tourism from the UK, which was one of the biggest contributors in previous years. A possible benefit from this might come from cheaper imports as a consequence of a decrease in the value of the pound[26].

Looking even further away from our shores, the change in the US presidency does serve to provide some more hopefulness with regards to communication and diplomacy among nations. It is assumed that there will be a better regard to large multinational organisations and issues such as climate change. The assumed decrease in volatility in the Biden administration will reduce tensions in trade amongst the world[27]. However, it is still felt that their focus will be solely on the interests of the USA.

Martina Vella

PA to the CEO and Economist in Research Centre

Express Trailers Ltd.

[1] Looking Ahead

[2] Mr. George Gregory

^[3] Dr. Malcolm Mifsud

^[4] Hon. Dr. Mario de Marco

[5] International Monetary Fund, April 2021

[6] Professor Josef Bonnici

[7] Professor Edward Scicluna

[8] NSO, 2021

[9] Central Bank of Malta – Projections, 2021

[10] Eurostat News release, 2021

[11] Dr. Mario Vella

[12] Central Bank of Malta – Projections, 2021

[13] Prof. Josef Bonnici

[14] Mr. Kurt Farrugia

^[15] Dr. Charles Mangion

[16] Hon Dr. Mario de Marco

[17] Dr. Gordon Cordina

[18] Mr. Christian Sammut

^[19] Prof. Edward Scicluna

[20] International Monetary Fund, April 2021

[21] Mr. George Gregory

[22] Dr. Mario Vella

[23] Mr. Ronald Attard

[24] Mr. Rick Hunkin

[25] Dr. Malcolm Mifsud

[26] Mr. Rick Hunin

[27] Mr. Kurt Farrugia