How exposed is the Maltese Economy to the effects of Brexit?

 

Malta’s significant foreign trade balance with the UK implies that the Maltese economy is potentially one of the most exposed EU countries to the consequences of Brexit.

According to the IMF*, the value of all imports from the UK is equivalent 27.3% (21.1% services 6.2% goods) of Malta’s GDP – the highest for any Member State. The UK’s departure from the EU could lead to higher import costs in the form of tariffs thus pushing up prices for Maltese consumers. On the other hand, this may be mitigated by the appreciation of the euro against the pound.

Meanwhile, a cheaper pound will make Malta’s exports to the UK more expensive. The effect on Malta’s balance of payments will ultimately depend on the price elasticity of demand of the exported goods and services. Tourism may be a vulnerable product to such a currency depreciation, given its relatively high price elasticity. According to the IMF, Malta is the second most exposed Member State (after Cyprus) in terms of services exports to the UK, which amount to 6.5% of the country’s GDP. Meanwhile, Malta exports the equivalent of 2.0% of its GDP of goods to the UK. Exports of goods will also be adversely impacted by the depreciation of the pound, the extent of which depending on how price sensitive UK consumers are.

Standard & Poors** also highlights Malta as being ‘on the frontline of economies susceptible’ to trade aftershocks from Brexit. S&P indicate that FDI from the UK into Malta amounts to 6.3% of Malta’s GDP, the highest figure of all Member States along with Cyprus. How adversely affected such flows will be now that the UK has voted to leave the EU depends on the degree of integration that the UK will negotiate with the EU.

The exit negotiations and the UK’s future relationship with the EU are likely to take a number of years to be determined. In the meantime, Maltese businesses should carefully reconsider their strategy to mitigate any potential threats and identify opportunities that the UK’s departure may present to their business.

Our dedicated team of financial experts can help you in dealing with these issues. For more information, please contact:

Joseph Muscat
Advisory partner
Deals

 

Michel Ganado
Advisory partner
Consulting

 

Of particular interest is the report that PwC UK prepared for the Confederation of British Industry - Leaving the EU: Implications for the UK economy.


*IMF Country Report No. 16/169, dated June 2016
**S&P Global RatingsDirect, dated June 9 2016


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