Malta - A victim of its own success?

Written by Financial Fortify Team

#Opinion #Economics #Malta #Beginner

13 min read
Last Updated on June 24, 2021

Urban, Going Out, Greyish


In this article we show how Malta succumbed to the same fate as all major economic empires throughout history by becoming a victim of its own success. The chain of events which led to the rise and decline of once dominant world powers like the British, the Dutch, the Chinese, Japan and presently the US, are astoundingly similar to the evolution of the Maltese economy since the start of the millennium.

For the benefit of our foreign readers, this week Malta was grey listed by the Financial Action Task Force (FATF) - whether we agree with the verdict or not, it is no use crying over spilled milk. But should we worry about getting grey listed? How will it affect us? Towards the end of the article, I lay out what the potential implications of economic greylisting are for the Maltese economy.


The rise and fall of nation states

In the first chapter of his latest publication "The Changing World Order", economist and hedge fund legend Ray Dalio presents a series of events which lead to the rise and fall of potent empires. When studying the evolution of these empires, Dalio noted several cause-and-effect relationships which were experienced by every ruling nation. All empires went through three phases:

  1. the ascent phase,
  2. a topping phase, and
  3. an economic decline.

These phases are determined by the synergistic behaviour of government and its citizens. In the following section I describe the characteristics of each phase and lay out how Malta seems to be going through the same trajectory as major economic empires. But will it face the same fate?

The Ascent Phase

Economists agree that the long term success of nations is determined by the ability to enhance their productivity, which is measured by GDP per worker or GDP per hour. Over time productivity improves, as each worker learns to do things better, and as countries borrow and implement existing technologies to enhance their efficiency and living standards.

The speed at which productivity is improves is determined both by the government and the cooperation of its citizens.

Government lays the foundation for productivity enhancement using its policies on education, inclusion, ease of doing business, competitiveness, acceptance of technology and openness to trade.

  • In Malta, the ascent phase commenced when we entered the European Union in 2004, and strengthened upon our access into the single market and the reinvention of our economic business model from one based on goods towards services.


  • Significant progress has been made when it comes to education, but human capital was enhanced further thanks to the inflow of skilled migrants from 2010 onward. This influx of foreign skilled labour enabled the domestic workforce to learn new skills which enhanced productivity and enabled the Maltese economy to become more competitive.

  • As incomes grew, foreign capital flowed into Malta, allowing new industries with new technologies to be created. Malta improved their global market shares in gaming and business services. Combined with attractive corporate tax rates, capital continued to flow into the island, and Malta became a reputable financial centre.

While government sets the policies and incentives, citizens need to cooperate for productivity to improve. Citizens enable the economy's productivity potential to be realized when they are willing to learn and work together and when they respect the rule of law.

  • Government's policies since the start of the millennium were successful in increasing female participation in the workforce, promoting work-life balance, extending the duration of work lives and decreasing the number of school dropouts. All these factors helped increase productivity making Malta one of the fastest growing economies in the EU.

The synergy of government policy and hard-working citizens attracts foreign investment and generates further productivity gains. This period of high income continues until the economy reaches its peak.

The Topping Phase

Homeless, Charity, Poor, Indifference, Poverty

During this phase, the economy becomes a victim of its own success. Dalio attributes this peaking phase to the insatiable pursuit for more money and a disequilibrium in power.

As people's incomes improve, they are able to afford more luxurious lifestyles.

  • In fact, Maltese citizens had enough income to demand assets like property, which, combined by migrant-driven population growth, caused a rapid surge in property prices.

Because of the increase in incomes, labour becomes more expensive to hire. Therefore, prices rise and the economy becomes more expensive to live in. But this squeezes the incomes of those who are left behind. As the economy continues to grow, the inequalities among citizens increase, widening the disparity in wealth, power and opportunity.

  • As people became wealthier, Maltese citizens became more greedy, arrogant and started to look down on foreigners. The amount of Maltese individuals engaged in low skilled work has declined significantly over recent years, as hard labour was left for migrants, who were willing to work for a cheap wage.

Dalio recounts how citizens become lazy and "expect" the Government to be the good Samaritan when they are in need. Threatened by the potential loss of votes, the Government provides the support needed, which reduces the value of work and amplifies social tensions.

Economies follow what is known as the business cycle, which is characterized by periods of boom, following by periods of healthy recession in economic activity. This economic cycle tends to span 8-12 years on average, conflicting drastically with political cycles which are of shorter duration. This means that the ruling political party has every interest to prolong the economic expansion as much as possible to avoid an economic bust while in office and increase the likelihood that they are re-elected.

Therefore, Governments come up with new policies to try squeeze out few more years of growth from the economy. On an international level, as we witnessed during COVID, Central Banks provide easy lending conditions by reducing interest rates and quantitative easing, and Governments provide direct monetary support to their citizens, with the hope that economic activity will pick up steam devaluing the currency in the process. But when the economy cannot continue its growth trajectory in a sustainable way, policymakers are tempted to come up with innovative, shady ways to continue moving forward.

  • Malta was no exception. After establishing a strong competitive edge in certain services like gaming, programs like the golden passport scheme were introduced and contracts with dubious economic benefits were signed. Moreover, several malinvestments, mostly of a construction nature took place at the expense of the environment.

Those who have power strive for more power, which leads them eliminate anyone who is a threat to their power:

Who's who in the Daphne Caruana Galizia murder plot

Dalio concludes by stating that economic success naturally leads to larger wealth gaps and opportunity inequality. In fact, those who do bad things but are in places of power tend to get away with anything. "Those with wealth and power naturally work in mutually supportive ways to maintain the existing system that benefits them."

Yorgen Fenech Arrest - Schembri and Mizzi should shoulder political  responsibility and immediately disappear from the political scene –  Moviment Graffitti -

This injustice fuels tensions among other segments of the population who are penalized for disobeying the rule of law.

The Decline Phase

These developments lead to anger and social unrest. When wealth and opportunity gaps become very large, protests ensue.

  • A 2020 survey commissioned by the Times of Malta found that 6% of the population attended a protest in 2019, and that 1 in every 5 individuals signed a petition. The number of activist groups in Malta is at record high.

People, Police, Protest, Water, Shield, Helmet, Gear

Dalio goes on to mention that a high probability of conflict emanates between those in power and the working class, which leads to political extremism between major parties.

  • The Maltese Nationalist party back stabbed their own country when admitting Malta's governance deficiencies to international regulators in an attempt to garner political points.

When the country starts to receive negative media attention, then it is a sign that things have topped out. Other countries start envying the country's success and find an opportunity to benefit from the country's downturn.

  • In fact, the US, Germany and long time ally the UK voted in favour of greylisting Malta. On an international level, Malta has been attacked several times over the past years on its corporate tax policy and governance. But in truth, Malta's growth story is a manifestation of the capability of its citizens. Our growth story has been the envy of all Europe. Malta managed to record second best economic performance over the decade and still enjoys one of the lowest unemployment rates in Europe.


Even when dealing with international emergencies like the COVID-19 pandemic, Malta outperformed other Europeans in the vaccination progress.

Dalio goes on to write: "When the rich fear their money will be taken away, that leads them to move their money and themselves to places that they feel are safer. These movements reduce the tax and spending revenue in the locations experiencing these conflicts."

  • Will companies relocate to other jurisdictions? Will big businesses leave the island?

If so, productivity will fall again, which shrinks GDP and causes more conflict about how to divide the shrinking resources well, "which leads to fighting between populist leaders from both sides who want to take control and bring about order."

The economic implications of greylisting

Being added to the grey list simply serves as a signal to the global financial and banking system that any dealings made with Malta are of higher risk, which may result in increased skepticism surrounding the economy’s future outlook which can curtail local investment, exports, and inward foreign direct investment.

Research shows that the economic implications of being greylisted are not substantial. A useful case study is that of Pakistan, which was grey listed from 2012 to 2015. The study shows that trade, GDP and the stock market all went up during this period.

Notwithstanding this, there has been no research showing the impact of greylisting on financial centres like Malta. In a financial centre, reputation matters. And the implications of damaged reputation are unknown. But here are a few effects which we should expect:

Job losses

One of Malta's most prominent growth engines is the gaming sector, which formed around 12% of 2020 value added and employs over 8,000 people.

Gaming companies need to a license to operate, and the reputation of the jurisdiction providing the license has a profound bearing on their attractiveness. Over the past years, Malta has been one of the most prestigious license guarantors in the world, but it is now unclear whether greylisting will affect the reputation of this license. Even if a few gaming operators choose to relocate operations to an economy on the white list, the effects on the labour market may be severe.

A counterargument may be that more than half of the employees in the gaming sector are foreigners, so if they lose their jobs they may return to their country thus causing limited effects on the unemployment rate. But the gaming sector also has strong inter-linkages with other economic sectors in which several native workers are employed. Professional services like accounting, tax, advisory, insurance and even the IT sector produce added value which is directly or indirectly linked to the gaming sector, so a shock to the gaming industry may have profound implications on the private sector as a whole.


Most foreign companies registered in Malta do not transact in euros. Less than 30% of Maltese registered companies export to non-European economies in euros and only around 36% invoice their non-European imports in euros.

This means that these companies need banks to provide them with foreign currency and hold their foreign currency receipts. These are called correspondent banks. Since these big companies transact in foreign currencies like dollars, pounds, franc or krona, the local banks of gaming companies require correspondent banks to facilitate currency exchange.

These correspondent banks are likely to become more stringent which will obviously discourage foreign companies from setting up operations in Malta. For those foreign companies already set up in Malta, they may resort to more risky currency conversion practices which take longer to settle, and increase the likelihood of losses from exchange rate fluctuations.

Moreover, it is common knowledge that local big banks have been reluctant to provide bank accounts to gaming companies because they perceive their activities as high risk. Following the greylisting announcement, local banks' appetite to host accounts of risky companies will continue to deteriorate.


Trade relationships may be damaged as fewer countries may be willing to do business with Malta. Geopolitical tensions may emerge, because rumors have it that the Americans, the Brits and the Germans supported Malta's inclusion in the grey list. These geopolitical conflicts may result in transaction settlement procedures becoming more cumbersome due to additional audits and checks.

This may cause delivery delays and higher costs, causing imports to become more expensive. Exports may also suffer, as less countries will be willing to transact with Malta, particularly when it comes to professional services and gaming. These effects will be negative for Malta's trade balance which may lead to lower net export driven growth over the foreseeable future.

Inward and outward tourism

The implications on the tourism sector should not be material. However, foreigners may develop a negative opinion on our island, especially if the dwindling trade tensions mentioned in the previous point make travelling to Malta more bureaucratic. We're now in the same book as Syria, Yemen, Panama and Zimbabwe. Face it, which of these countries are at the top of your travel bucket list?

Besides, this may have implications on those who intend to seek placement and work opportunities abroad, because other countries may look upon us negatively.

Social implications

Job losses imply a fall in income, which results in a drop in spending. Since one person's spending is another person's income, a perpetual cycle of income-spending declines may ensue.

These economic effects will not take long to transfigure into social tensions, civil unrest, an increase in illicit activities and crime. All these social implications have negative effects on people's health, so health costs may also rise.

Property market

It is unclear how the impact of greylisting will affect Malta's attractiveness to foreigners. I don't suspect that this will be material in the short term, because the post-COVID economic environment in other countries is much worse than in ours.

But ultimately, foreigners come here to find work. If there is no work, then foreigners will not stay here. And this will have undeniable implications on the property market, especially given the building frenzy that took place over the past few years.

If foreigners choose to leave our country, there will be a clear oversupply of vacant properties on the market. If landlords are unable to rent their property, they try their luck selling it. This will increase the supply of properties for sale. Combined with a receding demand due to the emigration of foreigners, house prices will correct downwards.


There is likely to be a drop in inward foreign investment, and the implications of this will be lower future growth potential. However, the strong net lending position Malta has built up over the years will help us finance any funding requirements which may arise. But if our external position worsens due to the trade situation or a shock to our gaming exports, we may need to pay a higher interest rate on issued debt.

Equity markets

Investors are forward-looking and price in negative events before they actually occur. In fact, the possibility of a negative result from grey listing started to be gradually priced in a few days before the actual announcement. The local equity market started its decline from June 17th and dropped a total of 4.5% till the day of the grey listing announcement on the 23rd of June.

However this does not mean it is all doom and gloom for Maltese stocks. In fact, the Pakistani stock exchange witnessed a 3% increase throughout its initial greylisting years 2012-2015.

Increased scrutiny from European Commission

Malta may be put under increased transnational scrutiny by the European Commission, and may face more rigorous monitoring and attention. Hopefully,the greylisting will not affect the support we are eligible for.

Bottom Line

Before concluding, we would like to express our disappointment on the verdict which was taken on the 23rd of June. Although the economy may have made mistakes in the past, over recent years Malta have made exceptional progress in rectifying these deficiencies. Putting Malta on the grey list given the improvements made was an intentional political manouvre by international regulators to damage the country's reputation and send a message to other states.

Looking ahead, greylisting is only one of the obstacles the economy faces. The Maltese economy is still significantly bruised from the pandemic, and international pressures to harmonize the global tax system will also be a headwind to Malta's international competitiveness.

That said, the Maltese economy has always been able to fight through obstacles. Our size makes us economically vulnerable, but also makes us more flexible in adjusting our business model and adapting to challenges. In the past we were conquered numerous times, but we always emerged stronger than ever. We should unite as one country and learn from our mistakes, make our voices heard, fight for what's right, support each and show international bodies that:




Dalio (2020), The Changing World Order: Why Nations Succeed and Fail

Eurostat: Extra-EU trade by Member State, shares by invoicing currency (ext_lt_invcur)

Malta Stock Exchange:

"Productivity and Structural Reform: Why Countries Succeed and Fail and What Should Be Done So Failing Countries Succeed.$38-billion-to-pakistan/

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