Brexit’s impact on Maltese economy will be contained, even in worst-case scenario

The negative effects on Malta of Britain’s departure from the EU will be well-controlled, even in the event of a no-deal Brexit, a Central Bank of Malta study has found. 

The study, which formed part of the Bank’s 2019-2022 economic projections, published on Monday, found that Brexit could reduce Malta’s baseline GDP by -0.19% to -0.39% between 2019 and 2021.

The findings were based on two possible Brexit scenarios analysed by the Bank, and indicate a lower impact than that predicted by a previous study conducted in 2017, which had predicted that Brexit could reduce Maltese GDP by -0.5%.

A Central Bank spokesperson told BusinessToday that, for the current study, the Bank looked at best- and worst-case scenarios.

A best-case scenario would be one where the UK will have access to a free-trade or customs-union-like agreement with the EU both during the transition period and at the end of the Brexit process, while a worst-case one would assume unsuccessful negotiations between the UK and the EU, as a result of which the trade agreement between the two parties would default to WTO rules.

Given its openness, the Maltese economy is likely to be affected by Brexit in two ways, the spokesperson said.

Firstly, foreign demand for Maltese exports is likely to slow down due to subdued economic growth in the UK, as well as indirectly by the likely slowdown in EU and US economic growth.

Secondly, the real effective exchange rate for Malta is likely to be negatively affected by the depreciation of Sterling vis-à-vis the euro, and positively affected by the appreciation of the US dollar vis-à-vis the euro.

Once weighted for their relative importance in the Maltese trade basket, the projections result in a peak fall of 0.7% on Maltese foreign demand under the worst-case scenario, as opposed to a fall of around 0.3% under the best-case scenario.

The main contributor to the fall in GDP would originate from outside Malta. The fall in demand brought about by a slowdown in exports would result in more slack in the labour market which would in turn ease the pressure on wage growth which would eventually lead to a slowdown in private consumption and investment, and subsequently a fall in domestic demand.

The spokesperson said that, according to the Bank’s findings, even under the most pessimistic of scenarios, the effects of Brexit on the Maltese economy were expected to remain contained, noting that even the latest international studies suggest that Brexit might have a lower effect on the UK and EU economies, when compared to the earlier reports used in the 2017 study.

There is a caveat to the findings, the spokesperson highlight: the results above should be treated with caution given the high degree of uncertainty that still surrounds the terms of the UK’s exit from the EU.

In addition, international studies could be underestimating the economic impact of the exit process, meaning it could be worse than expected – but this could be offset by the possibility that Malta could benefit if UK companies relocated to the island.

The final outcome of the Brexit process depends both on the agreement (or lack of) reached at the current juncture as well as on the future negotiations which are likely to take place in the following years.

The full study can be accessed at: https://www.centralbankmalta.org/en/economic-projections. 

The Central Bank of Malta’s Brexit Task Force was formed in autumn 2017 and has been regularly monitoring the situation since then.