## 1mltea2020001 - 2020. It focuses on Malta’s near and medium-term challenges and policy priorities and was ## Source details **Canonical URL:** [1mltea2020001 - 2020. It focuses on Malta’s near and medium-term challenges and policy priorities and was](https://www.imf.org/-/media/files/publications/cr/2020/english/1mltea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1mltea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1mltea2020001.pdf.json) --- ### Executive Board assessment and context - On April 8, 2020 the Executive Board concluded the Article IV consultation with Malta and endorsed the staff appraisal on a lapse-of-time basis. - The staff report reflects discussions with the Maltese authorities in February 2020 and is based on information available as of February 28, 2020. It was prepared before COVID-19 became a global pandemic and does not reflect pandemic-related implications. - Recent performance highlights: - Average real GDP growth was above "7 percent" in 2013–18. - By 2018 Malta nearly closed its per-capita income gap with the EU average. - Unemployment and inflation remain low, public-debt ratio on a declining path, current account surplus sizable. ### COVID-19 developments and near-term policy response - Public health and containment timeline: - First COVID-19 case identified in Malta in early March; contagion increased rapidly thereafter. - As of April 1, "188 people" diagnosed with COVID-19; "Two" recovered and "none" died. - Travel restrictions culminated in full suspension of inbound flights starting March 21. - Social distancing escalated to shutdowns of schools, childcare centers, bars, restaurants, sport centers, non-essential shops and services; since March 28, full lockdown of the most vulnerable population. - Before the first case (March 7) authorities dedicated hospital facilities and accelerated purchases of protective and respiratory equipment and training. - Fiscal and support package (announced March 18 and subsequent measures): - One-off measures amounting to "1.8 billion euros (about 12 percent of GDP)". - Package components: - "210 million euros (about 1.5 percent of GDP)" direct injection (allowances to support businesses and workers, social assistance schemes, and "35 million euros" for healthcare spending). - "700 million euros" of tax deferrals for affected firms (about "4.5 percent of GDP"). - "900 million euros" of loan guarantees ("6 percent of GDP"). - On March 24, additional fiscal support raised wage subsidies for hardest-hit sectors, retroactive to March 9, estimated to cost up to about "61 million euros (0.5 percent of GDP) per month". - Healthcare spending revised upwards to more than "100 million euros (0.8 percent of GDP)". - Altogether, the full package amounts to roughly "15 percent of GDP", including about "4½ percent of GDP" of direct support. ### Outlook and risks - Uncertainty and downside skew: - The outbreak greatly amplifies uncertainty; risk to the outlook is skewed to the downside and depends on duration of pervasive disruptions. - Staff appraisal thrust unchanged: economic activity will be affected but the impact is highly uncertain and depends on domestic and global outbreak duration/depth and policy responses. - Staff strongly supports authorities’ prompt response, with near-term efforts focused on limiting human and economic effects. ### Key vulnerabilities and priority challenges - Financial integrity and AML/CFT: - Main medium-term challenge: mitigate financial integrity risks by addressing deficiencies in the AML/CFT framework. - Urgent focus: improving and demonstrating effectiveness of the AML/CFT regime. - Sectors/programs requiring strengthened monitoring: banks and higher-risk sectors such as remote gaming, VFAs, and the IIP. - Need to enhance AML/CFT enforcement actions, including timely and adequate sanctions. - Financial supervision and crisis management: - MFSA under strain due to large number of supervised financial institutions and new complex products. - Recommendations: guarantee operational and financial independence of the financial supervisor; enhance supervisory capacity; update and streamline bank insolvency legal framework; introduce an administrative regime for orderly closure/liquidation of failing banks to avoid undue delays via judicial appeal. - Nonbank financial risks: - Inter-company lending increasingly displacing bank lending as main corporate funding source, creating supervisory challenges. - Need better understanding of flow of funds between corporates and risk-management practices to identify contagion channels. - Recommendation to avoid over-exposure to large, indebted and interconnected corporates; monitor housing market; stand ready to tighten borrower-based macroprudential measures if warranted. - Fiscal vulnerabilities: - Maintain prudent fiscal policy and gradual consolidation excluding proceeds from the IIP due to contingent liabilities, age-related pressures, and heavy reliance on corporate income tax revenues. - Control current expenditure to preserve fiscal space for public investment in transport, health, education, environment, and social inclusion. - Enhance public investment management: adopt guidelines for project appraisal/selection, implement cost-benefit analysis for major projects, address public procurement weaknesses. - Reduce fiscal risks: implement legal framework for managing government guarantees; release statements on public corporations’ financial performance; adopt strategies for financially vulnerable public corporations. - Address long-term age-related spending pressures: prioritize measures to increase effective retirement age and encourage enrollment in voluntary savings schemes; complete institutionalization of the CSRs. - Diminish vulnerability to international taxation regime changes: explore options to strengthen and diversify revenues outside of CIT. - Structural and governance reforms: - Pursue reforms to sustain growth and promote inclusion: encourage female and elderly labor participation; upskill the labor force; stimulate innovation. - Address governance shortcomings urgently: step up fight against corruption and increase judicial efficiency while ensuring independence. - Improving access to affordable housing remains a key inclusion priority. - Political context: - Recent change in ruling Labor Party leadership calls for faster implementation of governance reforms; economic policy thrust not expected to change but urgent governance efforts needed. ### Staff recommendations (policy priorities) - Financial sector: - Immediately tackle shortcomings in AML/CFT implementation. - Guarantee long-term operational and financial independence of the supervisor and enhance capacity. - Address crisis management framework limitations. - Strengthen understanding of financial risks outside banking sector and close data gaps. - Fiscal policy: - Maintain gradual consolidation to ensure a balanced structural budget excluding IIP proceeds. - Continue addressing infrastructure needs while upgrading public investment efficiency. - Improve fiscal risk analysis and management. - Address long-term spending pressures related to pensions and healthcare. - Ensure sustainability of tax revenues heavily reliant on corporate income tax. - Structural reforms: - Encourage labor market participation of female and elderly workers. - Close skill gaps and improve housing affordability. - Foster innovation through stronger public investment in human capital and R&D. - Sustain attractiveness for foreign investment by improving the governance framework. *Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mltea2020001.pdf* --- ### Recent macroeconomic performance (2019 and near term) - Real GDP growth: - "7.3 percent in 2018", slowed to "4.4 percent in 2019". - Growth projected to moderate to "4.0 percent in 2020" and converge over the medium run to slightly above "3 percent". - Demand drivers: - Domestic demand remained main driver; weaker private consumption partly offset by one-off pickup in business investment and strong increase in public consumption. - Inflation and labor market: - Headline and core inflation eased after exceeding "2 percent" around late-2018. - Unemployment rate: "3.4 percent" in 2019:Q4. - Foreign workers account for nearly "one quarter of total employment". ### External position and current account - Current account surplus: - Surged to "10.5 percent of GDP in 2017", held broadly steady in 2018. - Preliminary estimates suggest narrowing to "8.4 percent in 2019". - Staff assesses Malta’s external position was moderately stronger than medium-term fundamentals in 2019. ### Fiscal position and public debt (selected figures) - Fiscal balance: surplus expected to reach "1.3 percent of GDP" in 2019. - Structural balance: estimated around "1 percent of GDP"; structural balance excluding IIP proceeds estimated slightly negative in 2019. - Public debt trajectory: public debt on declining path (charts referenced). ### Financial sector developments and vulnerabilities - Banks’ exposure: - Increased exposure to housing sector; focus on mortgage lending amid rising house prices and rents. - Credit to NFCs slowed in 2019 as inter-company lending and cross-border loans increased. - NPLs: - NPLs declined further in 2019:H1 but legacy NPLs in construction and manufacturing remain high. - Bank soundness: - Liquidity and capitalization of core domestic banks remained healthy in 2019:H1. - Loan-to-deposit ratio around "60 percent". - Profitability fell from 2012 peak due to low interest rates, smaller corporate loan book, higher compliance and provisioning costs. - Corporate insolvency: - Improving insolvency efficiency key to safeguarding bank profitability and reducing legacy NPLs. ### AML/CFT weaknesses and correspondent banking relationships (CBRs) - Moneyval July 2019 report found significant deficiencies in Malta’s AML/CFT framework; low ratings for supervision, ML investigations/prosecutions and confiscations. - FATF risk: Failure to address shortcomings could result in FATF identification of strategic deficiencies by early "2021". - Actions taken: - NCC coordinating an action plan. - FIAU and MFSA developed risk-based automated tools; recruited staff; created financial crimes compliance function within MFSA. - Asset Recovery Bureau established. - Sectoral risk assessments for legal entities, VFAs, NGOs; Fifth EU AML directive transposed. - MFSA licensed several VFA agents; no licenses for VFA service providers yet. - Pressures on CBRs: - Volume of payment flows dropped by "10 percent between 2012 and 2017". - Pressures intensified in 2019: one global bank announced complete withdrawal from CBRs to Maltese banks in late 2019; one core domestic bank may lose direct CBR for US dollar transactions by "March 2020". - Risks include higher concentration, higher transaction costs, de-risking and terminated accounts for clients without substantive local links. ### Outlook and risks (reiterated) - Growth projections and inflation: - Growth projected "4.0 percent in 2020", medium-term potential slightly above "3 percent". - Inflation expected to hover around "2 percent". - Downside risks include prolonged weak growth in advanced economies, rising protectionism, limited-deal Brexit, international taxation changes, sharper coronavirus shock, continued CBR pressures, sharp house-price correction, and slow structural reform progress. - Upside possibility: attraction of firms from the U.K. seeking to serve the EU market. ### Policy agenda — Financial Sector (priority actions) - Urgent remediation of AML/CFT deficiencies. - Build understanding of risks: - Monitor flows for non-resident clients and higher-risk sectors (remote gaming, VFAs, IIP). - Continue sectoral risk assessments. - Strengthen AML/CFT supervision: - Increase frequency/intrusiveness of supervisory inspections; ensure appropriate customer due diligence; strengthen supervision of higher-risk sectors; impose timely dissuasive sanctions. - Enhance preventive measures: - Verify beneficial ownership (Malta Business Registry); enhance licensing controls and fit-and-proper tests. - Enhance enforcement: - Prioritize ML investigations, prosecutions and confiscations in line with Malta’s risk profile. - Monitor and engage on CBRs: - Closely monitor pressures, demonstrate AML/CFT effectiveness, ensure sustainable alternative solutions, engage with correspondent banks and regulators. *Source: IMF staff calculations and related IMF analysis as presented in the provided content.* --- ### Strengthening supervisory capacity and crisis management - Progress since 2019 FSAP but further actions needed for stable recruitment of qualified staff. - Important gaps persist in crisis management framework. - Policy recommendations: - Improve crisis management framework promptly. - Clarify bank insolvency regime; lead by MFSA resolution arm; provide explicit powers to transfer assets/liabilities in liquidation. - Guarantee long-term financial and operational independence of MFSA and increase resources. - Implement MFSA’s business plan to reform supervisory fee structure and achieve financial independence by "2024". - Ensure sufficient resources/expertise for licensing and supervision of VFA companies and higher-risk sectors. ### Macroprudential policy and housing market (borrower-based measures implemented July 2019) - Initial measures (LTV-O/DSTI-O/Maturity): - 1st year: "85 percent LTV-O cap" with a “speed limit” of "20 percent" on volume of loans. - 2nd+ year: "75 percent LTV-O cap" with a “speed limit” of "20 percent". - Category I Borrowers (primary residential property): - "90 percent LTV-O cap" with a “speed limit” of "10 percent" for loans with market value in excess of "€175,000". - Stressed DSTI-O of "40 percent" for loans with market value in excess of "€175,000" with shock to interest rates of "150 bps". - Maturity term: "25 years" or official retirement age, whichever occurs first. - Category II Borrowers (secondary and buy-to-let): - Stressed DSTI-O of "40 percent" with shock to interest rates of "150 bps". - Maturity term: "40 years" or official retirement age, whichever occurs first. - Refinements recommended when more data available: - Lower speed limits for Category II to match Category I eventually. - Define Category I limits in terms of total value of new loans, not number of new loans. - Continue monitoring and be ready to tighten LTV/DSTI if systemic vulnerabilities build. ### Nonfinancial corporations (NFCs) and non-bank finance - NFCs increasingly rely on non-bank finance; inter-company lending predominant. - Risks: high NFC leverage; construction and manufacturing sectors possible contagion sources. - Data/monitoring needs: - Collect information on inter-sectoral exposure, credit conditions, maturity, concentration and costs. - Policy recommendations: - Incentivize equity financing. - Avoid over-concentration of banks’ exposure to large indebted corporates. - Enhance data collection on intercompany and NBFI lending. ### Authorities’ views and actions on financial stability - Authorities committed to safeguarding financial stability and integrity; actions underway: - Implementing Moneyval action plan. - Demonstrating AML/CFT controls, focusing on higher-risk sectors. - MFSA’s business plan expected to help medium-term funding/operational independence. - Working group to analyze bank insolvency framework improvements. - Analytical work on deposit compensation scheme, emergency liquidity assistance, and crisis management planning. - Plans to step up monitoring of risks outside banking sector and enhance data on intercompany and NBFI lending. --- ### Fiscal stance and projections (selected staff projections, Percent of GDP) - Staff projects structural balance to be neutral in near term and to improve by a cumulative "0.7 percent of potential GDP" over 2019–2024, excluding IIP proceeds. - Maintain gradual consolidation net of IIP given contingent liabilities and age-related pressures. - Staff projections (Percent of GDP): - Revenue: 2019 Est. "38.7" | 2020 "38.1" | 2021 "37.6" | 2022 "37.3" | 2023 "37.1" | 2024 "37.0" - Expenditure: 2019 Est. "37.5" | 2020 "37.0" | 2021 "36.8" | 2022 "36.5" | 2023 "36.2" | 2024 "36.2" - Overall balance: 2019 Est. "1.3" | 2020 "1.1" | 2021 "0.8" | 2022 "0.8" | 2023 "0.9" | 2024 "0.8" - Structural balance: 2019 Est. "0.9" | 2020 "0.9" | 2021 "0.8" | 2022 "0.8" | 2023 "0.9" | 2024 "0.8" - Structural balance, excl. IIP proceeds: 2019 Est. "-0.2" | 2020 "-0.1" | 2021 "0.0" | 2022 "0.1" | 2023 "0.4" | 2024 "0.4" - Public debt: 2019 Est. "42.8" | 2020 "39.8" | 2021 "36.9" | 2022 "33.7" | 2023 "30.9" | 2024 "27.7" ### Public investment and efficiency - Public investment-to-GDP ratio estimated around "4 percent of GDP" in 2019. - Major spending areas: road infrastructure, waste and natural resource management, health and education. - Recommendations: adopt project appraisal guidelines, disclose cost-benefit analysis for major projects, strengthen PPP framework and public procurement. ### Fiscal risk analysis, contingent liabilities and public corporations - Contingent liabilities: - Stock of government guarantees almost "10 percent of GDP" in 2017. - Total liabilities of nonfinancial public corporations stood at "15 percent of GDP". - Recommendations: implement legal framework for guarantees, release statements on public corporations’ financial performance, adopt ownership/monitoring framework. ### Long-term age-related spending and pensions - Age-related spending projected to increase significantly and faster than most EU countries; demographic trends could stress pension system after "2030". - Potential reforms: reassess contributory period; automatic indexation of statutory retirement age to life expectancy; penalties/incentives to increase effective retirement age; automatic enrollment in supplementary saving plans with opt-out. - Next periodic review expected by "December 2020". ### Tax revenues and revenue policy - Tax revenues below EU average and disproportionately reliant on corporate income tax. - Recommendations: enhance revenue institutions, consolidate revenue departments, increase e-services, report foregone revenues from tax expenditures, consider recurrent tax on immovable property and remove exemptions to property-transaction tax. ### Environmental investment and sustainability - Malta performs relatively well on greenhouse gas emissions but lags on waste management, renewable energy, multi-modal freight transport, and sustainability innovations. - More investment needed to upgrade environmental outcomes, especially waste management and renewable energy production. --- ### Labor force participation and inclusion - Priorities: increase labor participation of females and the elderly. - Ongoing measures: free childcare, in-work benefits, tapering benefits for those entering employment, flexible working arrangements, initiatives to finance private sector maternity leave and encourage later retirement. ### Skills, education and productivity - Upskilling and reskilling essential; firms report shortages of skilled staff and experienced managers. - Malta invests a higher share of GDP in education than EU average, but students—especially in disadvantaged schools—perform below EU average. - Recent curriculum updates and expansion of apprenticeship/vocational training underway. ### Innovation and R&D - Total R&D expenditure at "0.55 percent of GDP", below government target of "2 percent of GDP". - Initiatives: MDB-commercial bank partnerships, National Strategy for Artificial Intelligence, Start-Up Malta Foundation. - Recommendation: continuous monitoring, evaluation, and governance attention. ### Affordable housing and social inclusion - Poverty risk rising among elderly, low-skilled, and female single earners who do not own homes. - Government measures: housing benefit for low-income tenants; expanded Malta Housing Authority remit to regulate private rental market. - Recommendations: complement transfers with supply-side policies to expand affordable and social housing; prioritize construction of new units and conversion of dilapidated housing. --- ### Governance and corruption - Malta underperforms EU peers on perceptions and control of corruption; indicators deteriorated in recent years. - Recommended actions: - Complete separation of Attorney General’s prosecutorial and advisory roles. - Pursue GRECO and Venice Commission recommendations to strengthen anti-corruption framework and police capacity; ensure judiciary independence. - Increase use of ICT/E-Justice to reduce bureaucracy/delays in civil courts; reduce length of administrative, commercial and insolvency proceedings. ### Financial integrity and specific program risks - IIP risk mitigation: - Residence and citizenship schemes subject to reputational and ML risks if due-diligence insufficient. - Revision of IIP scheme parameters should address Moneyval and FSAP deficiencies. - Sectors requiring strengthened monitoring/supervision: remote gaming, VFAs, the IIP program. ### Authorities’ views and initiatives - Authorities report progress on structural challenges and initiatives to reduce skills gaps, labor shortages and early school leaving. - Governance initiatives: - New Court Services Agency for administrative autonomy of Courts. - Separation of Attorney General roles and appointment of State Advocate. - New police commissioner appointment process being reviewed by Parliament. - Reviewing IIP program to enhance due diligence and communication. ### Staff appraisal summary (paragraphs 31–37) - Growth/outlook: - Malta continued to overperform European peers; growth remained strong in 2019 though weaker than 2018. - Domestic demand expected to remain main engine as current account surplus declines. - Risks skewed to downside and linked to Coronavirus disruptions. - Priority actions: - Address AML/CFT deficiencies and demonstrate effectiveness. - Strengthen monitoring/supervision of banks and higher-risk sectors/programs. - Enhance AML/CFT enforcement including timely sanctions. - Assure MFSA operational and financial independence; update bank insolvency legal framework; introduce administrative regime for orderly bank closure/liquidation. - Improve understanding of corporate flow of funds; avoid over-exposure to large indebted corporates; monitor housing market and tighten borrower-based measures if needed. - Maintain prudent fiscal policy excluding IIP proceeds; control current expenditure to preserve room for public investment and social inclusion. - Enhance public investment management and reduce fiscal risks via guarantees framework and public corporation transparency. - Pursue structural reforms to encourage female/elderly labor participation, upskill workforce, stimulate innovation, and improve affordable housing and governance. *Source: 1mltea2020001 - 29. Addressing shortcomings in governance would help safeguard Malta’s business* --- ### Recommendation on consultation cycle - It is recommended that the next Article IV consultation be held in the usual "12-month" cycle. ### Key economic indicators and projections (selected series and figures) - Potential GDP growth (2016–2025): "7.4", "7.0", "6.3", "5.1", "4.6", "3.8", "3.4", "3.3", "3.2", "3.2". - Output gap (% potential GDP) (2016–2025): "0.8", "0.4", "1.3", "0.6", "0.1", "0.1", "0.0", "0.0", "0.0", "0.0". - HICP (period average) (2016–2025): "0.9", "1.3", "1.7", "1.5", "1.6", "1.7", "1.9", "2.0", "2.0", "2.0". - Real GDP (Year-on-year percent change) (2016–2025): "5.8", "6.5", "7.3", "4.4", "4.0", "3.7", "3.4", "3.3", "3.2", "3.2". - Nominal GDP (millions of euros) (2016–2025): "10,338.9", "11,284.4", "12,366.3", "13,208.5", "14,067.8", "14,899.6", "15,741.3", "16,619.3", "17,506.7", "18,438.2". - Public debt (Percent of GDP) projections (2016–2025): "55.5", "50.4", "45.6", "42.8", "39.8", "36.9", "33.7", "30.9", "27.7", "26.0". ### Financial sector soundness (selected FSIs, 2014–2019:H1) - Regulatory capital to risk weighted assets: "14.4", "15.0", "16.2", "17.3", "18.1", "19.1". - Regulatory Tier 1 capital to risk-weighted assets: "11.5", "12.2", "13.6", "15.2", "16.0", "16.7". - Non-performing loans to total gross loans: "7.6", "7.2", "5.4", "4.1", "3.4", "3.3". - Coverage ratio (total provisions to NPLs): "40.4", "43.5", "45.9", "45.2", "44.4", "44.2". - Return on assets: "0.7", "0.7", "0.8", "0.7", "0.5", "0.7". - Return on equity: "9.8", "9.8", "10.1", "9.2", "6.5", "8.0". - Loan-to-deposit ratio: around "60 percent" (2019:H1 referenced). - Banks’ total assets amounted to "467 percent of GDP (about €46 billion)" at 2016; core domestic banks account for "47 percent" of banking sector total assets. ### External sector and balance of payments (selected figures, 2016–2025) - Current account balance (Millions of euros): "394", "1,188", "1,289", "1,114", "1,023", "1,021", "1,049", "1,087", "1,104", "1,155". - Exports of goods and services (percent of GDP): "152.0", "149.7", "144.1", "139.8", "136.2", "134.0", "132.1", "130.4", "128.7", "127.1". - Gross external debt (Percent of GDP): "854.5", "817.3", "740.9", "702.1", "666.5", "636.2", "608.8", "583.2", "559.9", "537.9". - Net external debt (Percent of GDP): "-214.2", "-207.9", "-179.3", "-181.5", "-183.5", "-185.5", "-187.6", "-189.7", "-191.9", "-194.1". *Source: 1mltea2020001 - 38.* --- ### Implementation of IMF Recommendations (Annex I highlights) - Fiscal policy: - VAT grouping and tax consolidation for company groups introduced; revenue administration reforms ongoing. - Two EU Directives on Anti-Tax Avoidance being transposed. - Revisions to fiscal reports and NSO publication of general government pension entitlements. - Multi-year capital expenditure projections introduced in 2020 Financial Estimates. - Financial sector and housing market: - Remedy AML/CFT implementation deficiencies (see Annex II). - Guarantee MFSA long-term independence and increase supervisory capacity. - Enhance monitoring of non-bank financial sector and refine borrower-based macroprudential measures. - Address housing affordability via extended housing benefits, reduced stamp duties for first-time buyers, interest-free down-payment loans for buyers under "40", and expanded social housing plans. - Structural reforms: - Maternity leave fund facilitation, voluntary occupation pension scheme extension, applied/vocational learning in secondary school, Start-Up Malta Foundation, MDB partnerships with commercial banks. - Annex II — Main FSAP recommendations (selected): - Risk analysis: enhance stress testing and data management (CBM, MFSA). - Macroprudential: consider CBM powers with “comply or explain”; add financial stability objective to MFSA Act (article 3, Act VIII of 2019). - Supervisory resources: MFSA hired additional "80 staff members in 2019", target "450 by 2022". - AML/CFT: sector-specific risk assessments completed; FIAU increased resources; Malta Business Registry empowered to verify beneficial ownership. - Crisis management: adopt administrative bank insolvency regime; shift insolvency/ liquidation decisions to resolution function (recommendation under discussion). *Source: Annex I. Implementation of IMF Recommendations (content unit 1mltea2020001).* --- ### External sector assessment (Annex III selected findings) - Overall assessment: external position in 2019 moderately stronger than fundamentals and desirable policy settings; high uncertainty due to small financial center measurement issues. - NIIP and asset/liability positions: - NIIP steady at "63 percent of GDP" at end-2018 after doubling from 2016 to 2017. - Portfolio investment assets: over "900 percent of GDP". - Direct investment liabilities: around "1600 percent of GDP". - Current account: - CA surplus: "10.5 percent of GDP in 2017"; "10.4 percent of GDP in 2018"; preliminary 2019 estimate "8.4 percent of GDP". - CA surpluses averaged close to "6 percent of GDP" over 2013–18. - EBA-lite results (2019): - Large CA gap of "8.4 percent" in 2019; CA norm nearly "0 percent". - Policy gap: "1.8 percent". - Large unexplained residual "6.9 percent of GDP" partially attributed to idiosyncratic factors. - Adjustments: small financial center biases and IIP receipts adjustments applied (staff downward adjustment of CA by "3 percentage points" and partial IIP adjustment of "0.5 percentage points"; remittances proxy adjustment of "3 percentage points"). - REER: - ULC-based REER and CPI-based REER broadly stable in 2019. - EBA-lite REER model points to a modest REER undervaluation of about "1 percent". - Summary external assessment: CA gap about "2.0 percent of GDP"; implied undervaluation "2.1 percent"; REER model undervaluation "1.2 percent". *Source: Annex III — External Sector Assessment (content unit 1mltea2020001).* --- ### Risk Assessment Matrix (Annex IV — selected risks and policy responses) - Global risks: - Weaker-than-expected global growth — Relative Likelihood: "High (ST, MT)"; Impact: "Medium". - Policy response: allow automatic stabilizers; improve infrastructure; diversify trade; use fiscal policy to protect vulnerable groups. - Sharp rise in risk premia — Relative Likelihood: "Medium (ST, MT)"; Impact: "Medium/Low". - Policy response: reduce fiscal/financial vulnerabilities; close supervision gaps; enhance crisis management; stand ready to provide liquidity support. - Coronavirus outbreak disruptions — Relative Likelihood: "Medium (ST)"; Impact: "Medium". - Policy response: allow automatic stabilizers; infrastructure improvements; fiscal support for vulnerable groups. - Rising protectionism — Relative Likelihood: "High (ST, MT)"; Impact: "Medium". - Policy response: coordinated European response; allow automatic stabilizers; structural reforms; diversify trade. - Domestic risks: - Slow progress on structural weaknesses — Likelihood: "Medium (MT)"; Impact: "Medium/Low". - Policy response: sustain and monitor implementation of reforms; safeguard fiscal sustainability. - Slow AML/CFT implementation — Likelihood: "Medium (ST, MT)"; Impact: "High/Medium". - Policy response: effectively and swiftly implement/enforce AML/CFT; address supervisory capacity; improve NCA collaboration. - Sharp correction in housing prices — Likelihood: "Medium (ST, MT)"; Impact: "Medium". - Policy response: monitor and refine macroprudential measures; limit bank exposure to property loans; ensure fiscal measures do not exacerbate imbalances; enforce rental market regulation. - Changes in international corporate/personal taxation — Likelihood: "Medium/Low (MT)"; Impact: "High/Medium". - Policy response: diversify economy; accelerate structural reforms; strengthen public finances and revenue collection. *Source: Annex IV. Risk Assessment Matrix, IMF staff.* --- ### Debt sustainability and stress scenarios (selected findings) - Financial contingent liability shock: - Scenario assumptions include a one-time increase in non-interest expenditures equivalent to "10 percent" of banking sector assets; slower real GDP growth (one standard deviation reduction over 2020–21); inflation decreases by "0.25 percentage points" for every one percentage point reduction in growth; interest rate spread rising by "0.25 basis points" for every one percent of GDP deterioration in primary balance; revenue-to-GDP ratio stays baseline. - Findings: primary balance deteriorates to "minus 26 percent of GDP" in 2020; debt ratio rises sharply to around "70 percent of GDP" near term, then declines to "63 percent of GDP" at end of projection horizon. - Government guarantee shock: - One-time increase in expenditures equivalent to "50 percent" of SOE liabilities plus same secondary shocks. - Findings: debt-to-GDP ratio increases to "49 percent" in 2020, about "10 percentage points" higher than baseline, then declines to "39 percent of GDP" at end of projection period. - IIP proceed shock: - Excluding IIP proceeds from non-interest revenues and modest interest spread increases. - Findings: pace of debt decline decelerates; debt ratio still declines to "31 percent of GDP" at end of projection horizon, "3 percentage points" higher than baseline. *Source: 1mltea2020001 - 4. Debt sustainability could be materially affected by some sources of fiscal vulnerability,* --- ### External position and external debt sustainability (selected figures) - Gross external debt: "740 percent of GDP" in 2018; large external assets more than cover gross debt. - Total net external debt about "minus 179 percent of GDP" at end-2018; projected to fall gradually. - Net external debt (baseline, percent of GDP 2014–2024): "-300.2", "-237.1", "-214.2", "-207.9", "-179.3", "-181.5", "-179.6", "-181.2", "-183.3", "-185.4", "-187.6". - Identified external debt-creating flows and components reported (2014–2024 series presented). - Public DSA baseline (selected): - Nominal gross public debt (percent of GDP) sequence: "64.5", "50.4", "45.6", "42.8", "39.8", "36.9", "33.7", "30.9", "27.7". - Public gross financing needs (percent of GDP): "20.5", "5.8", "10.3", "11.4", "4.5", "4.1", "3.5", "2.2". - Real GDP growth (percent) baseline: "4.3", "6.5", "7.3", "4.4", "4.0", "3.7", "3.4", "3.3". - Effective interest rate (percent): "4.7", "3.6", "3.3", "3.4", "3.1", "3.1", "2.9", "2.9", "3.0". - Stress tests show resilience to many shocks but large shocks (real depreciation, contingent liabilities) materially affect indicators. *Source: IMF staff (contents extracted from the Malta: Public DSA, External Debt Sustainability Framework, and Staff Report excerpts).* --- ### Data and statistics, standards, and coverage - Producer Price Index (PPI) does not currently cover services activities. - Government finance statistics compiled on an accrual basis in accordance with ESA2010; quarterly data disseminated with one-quarter lag. - Monetary statistics timely and of good quality; IMF publications use data via ECB gateway since euro adoption in January 2008. - Malta reports Financial Soundness Indicators from 2005 up to 2019:Q3. - BOP and IIP released quarterly with about three months lag; summary trade statistics monthly with about 40 days lag. - Transitioned to BPM6 with back-casting of BOP to 2004 and IIP to 2008; SPEs and coverage improvements affected primary incomes and financial account. - Malta has subscribed to SDDS since "December 1, 2009". - Table of Common Indicators (As of February 27, 2020) lists latest observation/receipt frequencies for key series (exchange rates, reserves, central bank balance sheet, banking consolidated balance sheet, interest rates, CPI, fiscal data, external current account, trade, GDP/GNP, gross external debt, IIP). *Source: 1mltea2020001 - 2015. The PPI does not currently cover services activities.* ### 2020. It focuses on Malta’s near and medium-term challenges and policy priorities and was ### 1mltea2020001 - 2020. It focuses on Malta’s near and medium-term challenges and policy priorities and was ### Executive Board assessment and context - On April 8, 2020 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malta and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis. - The staff report reflects discussions with the Maltese authorities in February 2020 and is based on information available as of February 28, 2020. It was prepared before COVID-19 became a global pandemic and does not reflect the implications of pandemic-related developments. - Malta sustained several years of strong economic performance: average real GDP growth was above 7 percent in 2013–18. By 2018 Malta nearly closed its per-capita income gap with the EU average. Unemployment and inflation remain low, public-debt ratio is on a declining path, and the current account surplus is sizable. ### COVID-19 developments and near-term policy response - Timeline and public health response: - Since the beginning of March, when the first COVID-19 case was identified in Malta, contagion increased rapidly. - As of April 1, 188 people have been diagnosed with COVID-19 in Malta. Two patients have already recovered and none has died. - Travel restrictions were tightened progressively, leading to a full suspension of inbound flights to Malta starting March 21. - Social distancing measures escalated from cancelation of mass activities and shutdown of schools, childcare centers, bars, restaurants, sport centers, non-essential shops and services, to, since March 28, full lockdown of the most vulnerable population. - Before the first case (March 7) authorities dedicated hospital facilities and accelerated purchases of protective and respiratory equipment and training. - Fiscal and support package (announced March 18 and subsequent measures): - One-off measures amounting to 1.8 billion euros (about 12 percent of GDP). - Components: - 210 million euros (about 1.5 percent of GDP) of direct injection to the economy (allowances to support businesses and workers, social assistance schemes, and 35 million euros for healthcare spending). - 700 million euros of tax deferrals for affected firms (about 4.5 percent of GDP). - 900 million euros of loan guarantees (6 percent of GDP). - On March 24, additional fiscal support raised wage subsidies for hardest-hit sectors, retroactive to March 9, estimated to cost up to about 61 million euros (0.5 percent of GDP) per month. - Healthcare spending revised upwards to more than 100 million euros (0.8 percent of GDP). - Altogether, the full package amounts to roughly 15 percent of GDP, including about 4½ percent of GDP of direct support. ### Outlook and risks - The outbreak has greatly amplified uncertainty and downside risks around the outlook; the risk to the outlook is undoubtedly skewed to the downside and the extent of the downturn will depend on duration of pervasive disruptions related to the COVID-19 pandemic. - Despite the crisis, staff’s appraisal thrust remains unchanged: economic activity will be affected but the impact is highly uncertain and depends on the duration and depth of the outbreak domestically and globally, as well as on policy responses. - Staff strongly supports the authorities’ prompt and resolute response to the crisis, with near-term efforts rightly focused on limiting and containing harmful human and economic effects. ### Key vulnerabilities and priority challenges - Financial integrity and AML/CFT: - Main medium-term challenge: mitigate financial integrity risks by continuing to address deficiencies identified in the anti-money laundering and combating the financing of terrorism (AML/CFT) framework. - Urgent focus: improving and demonstrating effectiveness of the AML/CFT regime. - Specific sectors and programs requiring strengthened monitoring and supervision: banks and other higher-risk sectors and programs—such as remote gaming, VFAs, and the IIP. - Need to enhance AML/CFT enforcement actions, including timely and adequate sanctions in case of breaches. - Financial supervision and crisis management: - The MFSA remains under strain due to the large number of financial institutions under supervision, evolving regulatory environment, and challenges associated with new and complex products. - Recommendations: guarantee operational and financial independence of the financial supervisor; enhance supervisory capacity; update and streamline legal framework for bank insolvency; introduce an administrative regime for orderly closure and liquidation of a failing bank to avoid undue delays through judicial appeal. - Nonbank financial risks: - Inter-company lending is gradually displacing bank lending as the main source of corporate funding, posing new supervisory challenges. - Need for better understanding of flow of funds between corporates and their risk-management practices to identify potential financial risks and contagion channels. - Recommendation to avoid over-exposure to large, indebted and interconnected corporates and to monitor housing market developments; stand ready to tighten recently introduced borrower-based macroprudential measures if warranted. - Fiscal vulnerabilities: - Maintain prudent fiscal policy and gradual consolidation excluding proceeds from the IIP due to fiscal vulnerabilities from contingent liabilities, age-related spending pressures, and heavy reliance on corporate income tax revenues. - Current-expenditure control is necessary to preserve fiscal space for public investment in transport, health, education, the environment, and additional expenses targeted at improving social inclusion. - Further enhance public investment management as public investment rises: adopt general guidelines for project appraisal and selection, implement cost-benefit analysis for major projects, and address weaknesses in public procurement. - Reduce fiscal risks: implement new legal framework for managing government guarantees; complete work to release statements on financial performance of public corporations; adopt sound strategies to put financially vulnerable public corporations on a stronger footing. - To address long-term age-related spending pressures: prioritize measures that increase the effective retirement age and further encourage enrollment in voluntary savings schemes; complete institutionalization of the CSRs. - To diminish vulnerability to international taxation regime changes: explore options to strengthen and diversify revenues outside of CIT. - Structural and governance reforms: - Continue pursuing structural reforms to sustain growth and promote social inclusion: encourage female and elderly participation in the labor market; upskill the labor force; stimulate innovation. - Safeguard the business climate by addressing governance shortcomings without delay, including stepping up the fight against corruption and increasing efficiency of the judicial system while ensuring its independence. - Improving access to affordable housing remains a key priority for greater inclusion. - Political context: - Recent political events (change in ruling Labor Party leadership after previous prime minister stepped down in January) call for faster implementation of governance reforms; thrust of economic policies not expected to change but urgent efforts needed to improve governance in light of political turmoil. ### Staff recommendations (policy priorities) - Financial sector: - Immediately tackle shortcomings in implementation of the AML/CFT framework. - Guarantee long-term operational and financial independence of the supervisor and enhance its capacity. - Address limitations in the crisis management framework. - Strengthen understanding of financial risks outside the banking sector and close remaining data gaps. - Fiscal policy: - Maintain gradual consolidation to ensure a balanced structural budget excluding proceeds from the IIP. - Continue addressing infrastructure needs while upgrading public investment efficiency. - Improve fiscal risk analysis and management. - Address long-term spending pressures related to pensions and healthcare. - Ensure sustainability of tax revenues which are heavily reliant on corporate income tax proceeds. - Structural reforms: - Encourage labor market participation of female and elderly workers. - Close skill gaps and improve housing affordability. - Foster innovation through stronger public investment in human capital and research and development (R&D). - Sustain attractiveness for foreign investment by improving the governance framework. *Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mltea2020001.pdf* ### 4. The Maltese economy grew at a strong but slower pace in 2019. After surging to ### The Maltese economy grew at a strong but slower pace in 2019. After surging to ### Recent macroeconomic performance - Real GDP growth: "7.3 percent in 2018", slowed to "4.4 percent in 2019". - Demand drivers: Domestic demand remained the main driver; weaker private consumption partly offset by a one-off pick-up in business investment and strong increase in public consumption. - Inflation and labor market: - Headline and core inflation have slightly eased after exceeding "2 percent" around late-2018. - Unemployment rate: "3.4 percent" in the fourth quarter of 2019. - Foreign workers now account for nearly "one quarter of total employment". - Labor costs and core inflation shown as year-on-year percent change; labor costs include wages and salaries, employer social contributions plus taxes less subsidies received. ### External position and current account - Current account surplus: - Surged to "10.5 percent of GDP in 2017", held broadly steady in 2018. - Preliminary estimates suggest narrowing to "8.4 percent in 2019", largely due to slower export growth and weaker external demand. - Assessment: Staff assesses Malta’s external position was moderately stronger than medium-term fundamentals in 2019 (see Annex III in original). - Services exports: Strong services exports underlie the current account surplus; tourism deceleration (notably from the U.K.) contributed to 2018 dynamics. ### Fiscal position and public debt - Fiscal balance: Set to remain in surplus in 2019 for the fourth consecutive year, expected to reach "1.3 percent of GDP" in 2019. - This outcome is moderately above the authorities’ projection (2019 Stability Program Update), partly explained by higher consumption-related tax revenue. - Structural balance: Estimated to be around "1 percent of GDP", exceeding the medium-term objective of a balanced budget in structural terms. - Excluding IIP proceeds, a slight structural deficit is expected for 2019. - Public debt and fiscal balance trends are reported (percent of GDP) in the source charts. ### Financial sector developments and vulnerabilities - Banks’ exposure: - Increased exposure to the housing sector; banks increasingly focus on mortgage lending amid rapidly rising house prices and rents. - Credit to nonfinancial corporates (NFCs) slowed in 2019 following a short-lived pickup, reflecting increased reliance on inter-company lending and cross-border loans. - Non-performing loans (NPLs): - NPLs declined further in 2019:H1 but legacy NPLs in the construction and manufacturing sectors remain high. - Total NPLs and NFC NPLs series and coverage ratios are presented in source charts. - Bank soundness: - Liquidity and capitalization of core domestic banks remained at healthy levels in 2019:H1. - Loan-to-deposit ratio hovering around "60 percent". - Profitability dropped from its peak in 2012 due to low-interest environment, shrinking corporate loan portfolio, higher regulatory compliance costs, and higher loan-loss provisioning and write-offs of legacy NPLs. - Corporate insolvency: Improving efficiency of the corporate insolvency process is key to safeguarding banking sector profitability and facilitating legacy NPL reduction. ### AML/CFT weaknesses and correspondent banking relationships (CBRs) - Moneyval assessment: A July 2019 report by Moneyval noted significant deficiencies in Malta’s AML/CFT framework, particularly on effectiveness of supervision, investigation, prosecution and confiscation. - Malta received “low” ratings for supervision, ML investigations and prosecutions and confiscations; “moderate” ratings for understanding of risks and related policy and coordination, preventive measures, legal persons and arrangements, financial intelligence, and TF-related measures (per source footnote). - FATF risk: Failure to address shortcomings could result in Malta being identified by the FATF as a country with strategic AML/CFT deficiencies by early "2021" (the FATF “grey list”). - Actions taken: - National Coordinating Committee for AML/CFT (NCC) coordinating implementation of authorities’ detailed action plan. - FIAU and MFSA developed a risk-based automated tool to identify institutional risk and introduced a new supervisory strategy and methodology; recruiting new staff for supervision; created a financial crimes compliance function within MFSA. - An Asset Recovery Bureau has been set up to strengthen confiscation processes. - Sectoral risk assessments conducted for legal entities, virtual financial assets (VFAs), and non-governmental organizations. - MFSA has licensed several VFA agents to assist VFA issuers and service providers during registration; no licenses for VFA service providers have been granted yet. - Fifth EU AML directive transposed into national law. - Pressures on CBRs: - Decrease in volume of payment flows: volume dropped by "10 percent between 2012 and 2017". - Pressures intensified in 2019: one global bank announced complete withdrawal from offering correspondent banking services to Maltese banks in late 2019; one core domestic bank may lose its direct CBR for US dollar transactions by "March 2020". - Risks: CBR pressures can lead to higher concentration risk, higher transaction costs, de-risking strategies by banks, terminated accounts for clients without substantive local links, and spillovers via intermediary banking relationships. - Link to AML/CFT: Risk perceptions related to AML/CFT shortcomings may magnify pressures on CBRs; banks’ AML/CFT process deficiencies and jurisdictional risk concerns likely contributed. ### Outlook and risks - Growth projections: - Growth projected to moderate from "4.4 percent in 2019" to "4.0 percent in 2020", reflecting weaker domestic demand. - Over the medium run, growth projected to gradually converge to potential rate of slightly above "3 percent". - Inflation: Expected to hover around "2 percent" as the output gap closes and unemployment approaches long-term equilibrium. - Short-term shock: The Coronavirus outbreak expected to temporarily dampen foreign demand, particularly in tourism, and delay export recovery; baseline reflects preliminary estimated effects but situation remains highly uncertain. - Downside risks: - Prolonged weak growth in advanced economies, rising protectionism, a limited-deal Brexit, changes in international corporate and personal taxation could delay private investment and reduce exports and FDI. - A generalized, sharper and longer-lasting coronavirus shock could significantly affect foreign demand and consumption beyond the short term. - Continued pressures on CBRs and unresolved AML/CFT shortcomings could impact the business environment. - A sharp correction in house prices could trigger adverse macro-financial spillovers. - Slow progress on structural reforms may limit potential growth, hurt competitiveness, and deter foreign workers. - Upside possibility: Malta could attract more firms from the U.K. seeking to serve the EU market. ### Policy agenda — Financial Sector: Speeding Up Reforms to Safeguard Financial Stability - Priority: Urgently address deficiencies in the AML/CFT framework to reduce financial integrity and reputational risks. - Recommended focus areas (paraphrased from staff advice; wording preserved where possible): - Continue to build understanding of risks: - Monitor incoming and outgoing flows closely, particularly those associated with non-resident clients and higher-risk sectors such as remote gaming, VFAs and source of funds for the IIP. - Continue to build on recent sectoral risk assessments. - Strengthen AML/CFT supervision for banks and other higher-risk sectors: - Increase frequency and intrusiveness of supervisory inspections of banks, build on enhanced supervisory tools and processes, and provide timely feedback. - Ensure banks apply appropriate customer due diligence measures. - Strengthen supervision of higher-risk sectors such as remote gaming and VFAs in line with sector-specific risk assessments. - Take timely actions to impose dissuasive and proportionate sanctions for AML/CFT breaches. - Continue to explore regional options for strengthening AML/CFT supervision. - Enhance use of preventive measures: - Ensure banks implement appropriate customer due diligence measures for non-resident clients and verify beneficial ownership information of companies, including information in the Malta Business Registry. - MFSA should continue to enhance implementation of licensing controls (i.e., fit and proper tests). - Enhance AML/CFT enforcement actions: - Prioritize carrying out ML investigations, prosecutions and related confiscations in line with Malta’s risk profile, including for investigations of high-level and complex ML cases. - Monitor and engage on CBRs: - Closely monitor ongoing pressures on CBRs, demonstrate effectiveness of AML/CFT framework, ensure alternative solutions are sustainable, and engage with correspondent banks and their regulators. *Source: IMF staff calculations and related IMF analysis as presented in the provided content.* ### 17. Continuing efforts to enhance supervisory capacity and improve the regulatory ### 17. Continuing efforts to enhance supervisory capacity and improve the regulatory framework ### Strengthening supervisory capacity and crisis management - Significant progress made since the 2019 FSAP, but further actions needed to ensure adequate and stable recruitment of qualified staff. - Important gaps persist in the crisis management framework (see Annex II). - Policy recommendations: - Take prompt actions to improve the crisis management framework. - Provide greater clarity regarding the bank insolvency regime—which should be led by the resolution arm of the MFSA—and provide explicit powers to transfer assets or liabilities in liquidation. - Guarantee long-term financial and operational independence of the MFSA and further increase its resources. - Implement the MFSA’s new business plan—which envisages a reform of the supervisory fee structure—as it provides room for steady capacity increase and grants the supervisor full financial independence by 2024. - Ensure sufficient resources and appropriate expertise for effective implementation of the new regulations regarding the licensing of VFA companies and supervision of higher-risk sectors. ### Banking sector profitability and performance (selected metrics referenced) - Return-on-equity Ratios (percent) and Maltese Domestic Banks: Profits and Losses (Percent of assets) data referenced (sources: European Banking Authority, IMF Staff Calculations, European Central Bank and IMF staff). - RoA is based on a four-quarter moving average. ### Macroprudential policy and housing market - Standard house price valuation analysis suggests housing was only slightly over-valued at the end of 2018; real-time gap may be underestimated because some fundamental drivers (e.g., population growth) may be partly procyclical in Malta. - Rapidly rising house prices and increasing bank exposure to property-related credit motivated borrower-based macroprudential measures introduced in July 2019. - Initial measures (Malta: Borrower-Based Macroprudential Measures): - LTV-O/DSTI-O/Maturity - 1st year: 85 percent LTV-O cap with a “speed limit” of 20 percent on the volume of loans. - 2nd+ year: 75 percent LTV-O cap with a “speed limit” of 20 percent on the volume of loans. - Category I Borrowers (primary residential property) 1/: - 90 percent LTV-O cap with a “speed limit” of 10 percent on the volume of loans, for loans with a market value in excess of €175,000. - A stressed DSTI-O of 40 percent for loans with a market value in excess of €175,000 with a shock to interest rates of 150 bps. - Category II Borrowers (secondary and buy-to-let properties) 1/: - A stressed DSTI-O of 40 percent with a shock to interest rates of 150 bps. - A maturity term of 40 years or the official retirement age, whichever occurs first. - For Category I a maturity term of 25 years or the official retirement age, whichever occurs first. - Notes: - 1/ Category I comprises borrowers purchasing their primary residential property and Category II comprises borrowers purchasing their second or additional residential property or buy-to-let properties. - 2/ LTV-O refers to the Loan-to-Value-at-Origination ratios. DSTI-O refers to the Debt-Service-to-Income-at-Origination ratios. - Refinements recommended when more data become available: - Lower the speed limits for loans against secondary and buy-to-let properties (category II) to eventually match speed limits on loans for the purchase of primary residential property (category I). - Define category I limits in terms of the total value of new loans, not the number of new loans. - Continue close monitoring and stand ready to further tighten LTV/DSTI limits if housing market trends continue unabated and systemic vulnerabilities build up. - House price valuation models referenced: - Baseline model (uses traditional demand factors and Global Property Guide Price Index). - Model using advertised prices from CBM. - Model using actual market transaction prices from NSO. - House Price Valuation, 2018Q4: Baseline 1/Baseline + credit / Baseline + supply 2/ Baseline + supply 3/ (Deviation from equilibrium price, in percent). ### Nonfinancial corporations (NFCs) and non-bank finance - NFCs increasingly rely on non-bank finance; inter-company lending has gradually displaced bank lending as the main source of corporate financing. - While this diversification is beneficial, it raises macro-financial risk concerns because: - NFC leverage is high. - Construction and manufacturing sectors could be possible sources of contagion through inter-company linkages (see Annex V). - Data and monitoring needs: - Deeper understanding of flow of funds between companies and their risk-management practices, especially within business groups where inter-company lending predominates. - Collect information on inter-sectoral exposure, credit conditions, maturity, concentration and costs to identify potential financial risks and contagion early. - Policy recommendations: - Continue incentivizing equity financing. - Avoid over-concentration of banks’ exposure to large indebted and interconnected corporates. - Enhance data collection on intercompany and NBFI lending. ### Authorities’ views on financial stability and supervision - Authorities committed to safeguard financial stability and integrity and recognize need to address drivers of pressures on CBRs such as AML/CFT-related concerns. - Actions underway: - Implementing a detailed action plan to address deficiencies identified in the Moneyval report. - Demonstrating effective implementation of AML/CFT controls, with attention to higher-risk sectors. - MFSA’s new business plan expected to help achieve funding and operational independence in the medium term. - A working group is being set up to analyze progress in improving the bank insolvency framework. - Analytical work to address gaps in the deposit compensation scheme, emergency liquidity assistance framework and crisis management planning. - Plans to step up monitoring of potential risks outside the banking sector and continued enhancement of data collection on intercompany and NBFI lending. --- ### B. Fiscal Policy: Enhancing Management and Addressing Risks ### Fiscal stance and projections - Given material fiscal risks, gradual structural adjustment recommended to build buffers while supporting inclusion. - 2019 Stability Program Update envisaged further reduction in the public debt ratio by maintaining a headline fiscal surplus at around 1 percent of GDP over the next few years (similar to staff’s forecast). - Staff projects the structural balance to be neutral in the near term, and to improve by a cumulative 0.7 percent of potential GDP over 2019–2024, excluding IIP proceeds. - Maintaining a gradual consolidation path net of IIP is warranted because of fiscal vulnerabilities from contingent liabilities, age-related pressures and heavy reliance on corporate income tax revenues. - Staff projections (Percent of GDP): - Revenue: 2019 Est. 38.7 | 2020 38.1 | 2021 37.6 | 2022 37.3 | 2023 37.1 | 2024 37.0 - Expenditure: 2019 Est. 37.5 | 2020 37.0 | 2021 36.8 | 2022 36.5 | 2023 36.2 | 2024 36.2 - Overall balance: 2019 Est. 1.3 | 2020 1.1 | 2021 0.8 | 2022 0.8 | 2023 0.9 | 2024 0.8 - Structural balance: 2019 Est. 0.9 | 2020 0.9 | 2021 0.8 | 2022 0.8 | 2023 0.9 | 2024 0.8 - Structural balance, excl. IIP proceeds: 2019 Est. -0.2 | 2020 -0.1 | 2021 0.0 | 2022 0.1 | 2023 0.4 | 2024 0.4 - Public debt: 2019 Est. 42.8 | 2020 39.8 | 2021 36.9 | 2022 33.7 | 2023 30.9 | 2024 27.7 ### Public investment and efficiency - Renewed focus on public investment began in 2018; 2019 public investment-to-GDP ratio estimated around 4 percent of GDP, well above recent average. - Major spending areas: road infrastructure, waste and natural resource management, health and education. - Public investment set to gradually decline but remain relatively high over the medium term as projects complete. - Recommendations to boost efficiency (see IMF Country Report No. 18/20 and 2018 FTE): - Adopt general guidelines for project appraisal and selection. - Apply and disclose cost-benefit analysis to all major projects. - Strengthen framework for public-private partnerships (PPPs) given broad lack of policies/guidelines and absence of legal limit to accumulated PPP stock. - Address weaknesses in public procurement to enhance public investment management. ### Fiscal risk analysis, contingent liabilities and public corporations - Contingent liabilities remain material: - Stock of government guarantees was almost 10 percent of GDP in 2017. - Total liabilities of nonfinancial public corporations stood at 15 percent of GDP. - Recommendations: - Implement new legal framework for managing guarantees that would require limits on guarantees and risk assessments. - Complete plans to release statements on public corporations’ financial performance. - Adopt strategies to strengthen financially vulnerable public corporations. - Establish a common framework for exercising ownership functions and monitoring public corporations’ performance. ### Long-term age-related spending and pensions - Long-term age-related spending projected to increase significantly and faster than in most EU countries; demographic trends could stress the pension system particularly after 2030. - Recent measures encourage longer work lives and voluntary saving; some initiatives have had limited impact so far. - Next periodic review expected by December 2020 should address long-term pension challenges. - Potential reform options: - Reassess the contributory period. - Automatic indexation of the statutory retirement age to changes in life expectancy. - Use penalties and enhanced incentives to further increase the effective retirement age. - Automatic enrollment in supplementary saving plans with the ability to opt out (see IMF Country Report No. 16/21). - To improve healthcare spending efficiency, advance monitoring of implementation of recent spending reviews’ recommendations. - Age-related spending projections (Percent of GDP) referenced for 2016-2070 (source: European Commission, The 2018 Ageing Report). Note that recent upward revisions to Malta's population statistics for 2016 would likely yield lower projected age-related spending. ### Tax revenues and revenue policy - Malta’s tax revenues as a share of GDP are below the EU average and disproportionately rely on corporate income tax revenues, making them vulnerable to international corporate taxation changes. - Measures already implemented to broaden tax base, simplify tax system, and address tax evasion/avoidance. - Recommendations: - Continue enhancing revenue institutions, complete consolidation of revenue departments and increase use of e-services. - Report estimated foregone revenues from tax expenditures and set budgetary targets to control them. - Consider options to diversify beyond CIT proceeds, including introducing a recurrent tax on immovable property and removing exemptions to the property-transaction tax. ### Environmental investment and sustainability - Malta performs relatively well on greenhouse gas emissions but lags on waste management, renewable energy, multi-modal freight transport, and sustainability innovations. - Authorities have schemes to promote energy efficiency in buildings, but national 2020 targets are likely to be missed and road congestion improvements remain limited (see EC Country Report 2019). - Recommendation: More investment needed to upgrade environmental outcomes, particularly waste management and renewable energy production. ### Authorities’ views on fiscal policy - Authorities emphasize prudent fiscal policy and prioritize upgrading public investment efficiency. - Medium-term objective: balanced budget in structural terms; intermediate target: expenditure growth should not exceed the economy’s potential growth. - Authorities view higher public investment as contributing to social development and environmental upgrades. - Authorities note diminished fiscal risk due to decline in contingent liabilities and plan to enhance Airmalta’s revenues and publish public corporations’ financial-performance statements. - Ongoing revenue administration reforms (including IT applications) and institutionalization of Comprehensive Spending Reviews are in progress. - Authorities acknowledge uncertainty about the nature and impact of international taxation reforms. --- ### C. Growth-Enhancing Structural Reforms and Policies for Greater Inclusion ### Labor force participation and inclusion - Priorities: - Sustain efforts to increase labor force participation rates, particularly among females and the elderly. - Ongoing measures: free childcare, in-work benefits, tapering of benefits for those entering employment, promotion of flexible working arrangements—these have helped sustain rapid increases in female labor force participation. - Initiatives to finance maternity leave in the private sector and measures to encourage later retirement (lifelong learning, increased pension benefits for delayed retirement). ### Skills, education and productivity - Upskilling and reskilling workers to meet labor market needs and upgrade potential growth are essential. - Survey evidence indicates availability of skilled staff or experienced managers remains a pressing problem for Maltese firms. - Education observations: - Malta invests a higher share of GDP in education than EU average but students—particularly in socio-economically disadvantaged schools—perform below EU average in international assessments. - Recent curriculum updates and expansion of apprenticeship and vocational training could improve outcomes and reduce early school leaving. - On-the-job training schemes by Malta Enterprise Association, Jobsplus and others should be monitored to identify and scale effective initiatives. ### Innovation and R&D - Total R&D expenditure at 0.55 percent of GDP, below government target of 2 percent of GDP. - Contributing factors: prevalence of SMEs and decline in public spending on R&D. - Initiatives to promote innovation: - Partnerships between Malta Development Bank (MDB) and commercial banks. - National Strategy for Artificial Intelligence. - Start-Up Malta Foundation. - Recommendation: Continuous monitoring, evaluation, and attention to risk management and governance to ensure effective allocation of resources. ### Affordable housing and social inclusion - Poverty risk increasing among the elderly, low-skilled, and female single earners who do not own their home. - Government measures: housing benefit for low income tenants and expanded remit of Malta Housing Authority to regulate private rental market. - Recommendations for sustainable affordability improvements: - Complement transfers with policies to expand supply of affordable and social housing. - Prioritize planned construction of new units and conversion of dilapidated housing into social housing. *Source: IMF staff report excerpt (Content unit: 1mltea2020001).* ### 29. Addressing shortcomings in governance would help safeguard Malta’s business ### 29. Addressing shortcomings in governance would help safeguard Malta’s business ### Governance and corruption - Relative to EU peers, Malta underperforms in governance indicators related to perceptions and control of corruption, and such indicators appear to have deteriorated in recent years. - Survey evidence (Eurobarometer) indicates that private investment would benefit from enhancing the fight against corruption. - Previous staff analysis found that tackling inefficiencies in the judicial system would help support potential growth (IMF Country Report No. 16/21). - Recommended actions (areas to be pursued): - Fight against corruption: - Legislation completed to separate the Attorney General’s prosecutorial and advisory roles (as recommended by the Council of Europe’s Venice Commission). - Continue pursuing GRECO and Venice Commission recommendations to strengthen the anti-corruption framework and the capacity of the Maltese Police Force, and ensure independence of the judiciary. - Judicial efficiency: - Increased use of ICT technologies, including “E-Justice” initiatives to reduce bureaucracy and delays in civil courts. - Continue efforts to further reduce the length of proceedings for administrative and commercial cases as well as for insolvency procedures. ### Financial integrity and specific program risks - IIP risk mitigation: - Residence and citizenship schemes are subject to reputational and ML risks if due-diligence procedures are not sufficiently rigorous. - In the context of the revision of the parameters of Malta’s IIP scheme, deficiencies identified by Moneyval and the FSAP should be addressed. - Sectors requiring strengthened monitoring and supervision: - Remote gaming - VFAs - The IIP program ### Authorities’ views (paragraph 30) - Authorities highlighted progress in efforts to address structural challenges. - Expectations and initiatives: - Further drops in skills gaps, labor shortages and early school leaving rates expected as recent government initiatives (increasing professional training, improving school curriculums, fostering vocational training and apprenticeship) bear fruit. - Ongoing review of the pension system: reassess projections of age-related spending and aim to further incentivize longer working lives. - Governance initiatives emphasized by authorities: - Improving administrative autonomy of the Courts by setting up a new Court Services Agency to modernize judicial services. - Separating advisory and prosecutorial roles of the Attorney General and appointing a State Advocate as primary government legal consultant. - New process for appointing the police commissioner (more independent from the Prime Minister) currently being reviewed by Parliament. - Reviewing the IIP program to enhance due diligence and improve communication strategy. ### Staff appraisal: macroeconomic and financial stability assessment (paragraphs 31–37) - Growth and outlook: - The Maltese economy has continued to overperform European peers. - Growth remained strong in 2019, even though it weakened from 2018. - Domestic demand is expected to remain the main engine of growth as the economy gradually reaches cruising speed and the large current account surplus declines. - Risks to the outlook are skewed to the downside and depend on disruptions related to the Coronavirus epidemic. - Financial integrity and stability priorities: - Continue to address deficiencies identified with the AML/CFT system and focus on improving and demonstrating effectiveness of the AML/CFT framework. - Strengthen understanding of risks and monitoring/supervision of banks and higher-risk sectors/programs (remote gaming, VFAs, and the IIP). - Enhance AML/CFT enforcement actions, including timely and adequate sanctions in case of breaches. - Supervisory capacity and crisis management: - Assure operational and financial independence of the financial supervisor. - MFSA remains under strain due to the large number of financial institutions under supervision, the evolving regulatory environment, and challenges from new and complex products. - Update and streamline the legal framework for bank insolvency. - Introduce an administrative regime for the orderly closure and liquidation of a failing bank to avoid undue delays from judicial appeal. - Nonbank risks and macroprudential vigilance: - Inter-company lending is gradually displacing bank lending as the main source of corporate funding, posing new supervisory challenges. - Improve understanding of flow of funds between corporates and their risk-management practices to identify potential financial risks and contagion channels. - Avoid over-exposure to large, indebted and interconnected corporates and monitor developments on the housing market; be ready to tighten recently introduced borrower-based macroprudential measures if needed. - Fiscal policy and public finance management: - Prudent fiscal policy needs to be maintained; maintaining gradual consolidation excluding the proceeds from the IIP is warranted due to fiscal vulnerabilities from contingent liabilities, age-related spending pressures, and heavy reliance on corporate income tax revenues. - Current-expenditure needs to be kept in check to ensure budget space for public investment in transport, health, education, the environment and additional expenses targeted at improving social inclusion. - Enhance public investment management as public investment rises: - Adopt general guidelines for project appraisal and selection. - Implement cost-benefit analysis for major projects. - Address weaknesses in the public procurement system. - Reduce fiscal risks: - Implement the new legal framework for managing government guarantees. - Complete ongoing work to release statements on financial performance of public corporations. - Adopt sound strategies to put financially vulnerable public corporations on a stronger footing. - To address long-term age-related spending pressures: - Prioritize measures that increase the effective retirement age and further encourage enrollment in voluntary savings schemes. - Complete the institutionalization of the CSRs. - To diminish vulnerability to international taxation regime changes, explore options to strengthen and diversify revenues outside of CIT. - Structural reforms and inclusion: - Pursue structural reforms to sustain growth and promote social inclusion: - Encourage female and elderly participation in the labor market. - Upskill the labor force and stimulate innovation. - Address remaining governance shortcomings without delay by stepping up the fight against corruption and increasing judicial efficiency while ensuring independence. - Improve access to affordable housing as a key priority to support greater inclusion. *Source: 1mltea2020001 - 29. Addressing shortcomings in governance would help safeguard Malta’s business* ### 38. It is recommended that the next Article IV consultation be held in the usual 12-month ### 1mltea2020001 - 38. It is recommended that the next Article IV consultation be held in the usual 12-month cycle. ### Recommendation - It is recommended that the next Article IV consultation be held in the usual 12-month cycle. ### Economic indicators and growth - Growth remained strong, but slowed in 2019. - Contribution to growth: decline in the contribution of net exports in 2019. - Real GDP (Year-on-year percent change): historical series shown for Malta and Euro area (figures through 2019). - Contribution to Growth (Percentage points) components shown for 2019: Private cons., Public cons., Investment, Inventories, Net exports, GDP. - Potential GDP growth: 7.4, 7.0, 6.3, 5.1, 4.6, 3.8, 3.4, 3.3, 3.2, 3.2 (2016–2025 from Table 1). - Output gap (% potential GDP): 0.8, 0.4, 1.3, 0.6, 0.1, 0.1, 0.0, 0.0, 0.0, 0.0 (2016–2025). ### Prices, wages, and labor market - Wage Growth (Year-on-year percent change) series shown for Business economy and Public admin. through 2019Q2. - HICP (period average) projections: 0.9, 1.3, 1.7, 1.5, 1.6, 1.7, 1.9, 2.0, 2.0, 2.0 (2016–2025). - GDP deflator: 1.5, 2.5, 2.1, 2.3, 2.4, 2.1, 2.2, 2.2, 2.1, 2.1 (2016–2025). - Employment growth: 3.2, 14.0, 7.5, 5.0, 3.9, 2.8, 2.3, 2.1, 2.0, 2.0 (2016–2025). - Unemployment rate EU stand.: 4.7, 4.0, 3.7, 3.5, 3.7, 4.0, 4.4, 4.5, 4.6, 4.6 (2016–2025). - Labor participation and unemployment: figures indicate female labor force participation remained below euro area averages among middle-aged and older cohorts; unemployment declined to a record-low (2019Q3). ### Short-term sentiment and activity - Economic Sentiment Indicator: Malta and Euro area series (long-term average=100) through Jan-20. - Consumer confidence indicators and sectoral confidence (Construction, Services, Industry) series shown through Jan-20. - New orders, Export expectations, Capacity utilization in industry: series through 2019Q4. - Industrial Production (Index, 2010=100) components (Capital Goods, Consumer Goods, Intermediate Goods) shown through Dec-19. - Tourist Arrival (Year-on-year percent change): series through Dec-19; volume of tourism continued to increase but at a relatively slower pace than in 2016-17. ### Fiscal developments and public debt - Headline fiscal surpluses achieved in recent years helped by IIP proceeds. - General government balance (Percent of GDP) series shown for 2007–2018; Malta and Malta (excl. IIP proceeds). - Government Debt (Percent) and short-term share of total debt (rhs) series shown for 2007–2018. - Structural and primary balance: primary balance continued to record a surplus in 2018, structural balance showed a deterioration in 2018. - Over the long term, demographic trends may put significant pressure on age-related spending; note: "Recent upward revisions to Malta's population statistics for 2016 would likely yield lower projected age-related spending." - Malta's reliance on corporate income tax revenues remains well above the EU average. Key fiscal figures (Table 2, percent of GDP unless otherwise indicated): - Revenue: 37.5, 39.3, 38.5, 38.7 (2016–2019 est.); projections 38.1, 37.6, 37.3, 37.1, 37.0, 36.9 (2020–2025). - Taxes: 25.7, 26.5, 26.2, 26.4; projected steady at 26.4 through 2025. - Social contributions: 6.2, 6.2, 6.2, 6.2; projected 6.2 through 2025. - Expenditure: 36.5, 35.9, 36.6, 37.5; projected 37.0, 36.8, 36.5, 36.2, 36.2, 36.2 (2020–2025). - Gross Operating Balance: 3.4, 5.7, 4.8, 5.2; projected 4.6, 4.4, 4.3, 4.1, 4.0, 4.0 (2020–2025). - Net lending/borrowing (overall balance): 0.9, 3.4, 1.9, 1.3; projected 1.1, 0.8, 0.8, 0.9, 0.8, 0.8 (2020–2025). - Public debt: 55.5, 50.4, 45.6, 42.8; projected 39.8, 36.9, 33.7, 30.9, 27.7, 26.0 (2016–2025). - Structural balance (As a percentage of Nominal Potential GDP): 0.5, 3.5, 1.2, 0.9; projected 0.9, 0.8, 0.8, 0.9, 0.8, 0.8 (2016–2025). - Structural balance excl. IIP proceeds: -1.1, 1.3, -0.3, -0.2; projected -0.1, 0.0, 0.1, 0.4, 0.4, 0.4 (2016–2025). Selected national accounts and external sector projections (Table 1): - Real GDP (Year on year percent change): 5.8, 6.5, 7.3, 4.4, 4.0, 3.7, 3.4, 3.3, 3.2, 3.2 (2016–2025). - Domestic demand: 1.2, -1.5, 8.2, 5.6, 5.0, 3.6, 3.0, 2.8, 2.7, 2.7 (2016–2025). - Exports of goods and services: 4.5, 4.8, 3.5, 1.7, 1.8, 2.2, 2.2, 2.2, 2.2, 2.2 (2016–2025). - Imports of goods and services: 1.6, -0.5, 3.4, 2.1, 2.0, 1.9, 1.8, 1.7, 1.7, 1.7 (2016–2025). - Gross national savings (percent of GDP): 27.7, 29.8, 29.5, 28.4, 27.6, 27.2, 26.9, 26.6, 26.2, 26.1 (2016–2025). - Gross capital formation (percent of GDP): 23.9, 19.2, 19.1, 20.0, 20.3, 20.3, 20.2, 20.0, 19.9, 19.8 (2016–2025). - Nominal GDP (millions of euros): 10338.9, 11284.4, 12366.3, 13208.5, 14067.8, 14899.6, 15741.3, 16619.3, 17506.7, 18438.2 (2016–2025). - Nominal GDP growth: 7.4, 9.1, 9.6, 6.8, 6.5, 5.9, 5.6, 5.6, 5.3, 5.3 (2016–2025). ### Financial sector soundness - Banking system remains well capitalized; profitability remained healthy. - Non-performing loans have stabilized as a percent of total loans with adequate coverage. - Loan-to-deposit ratio stabilized as deposit growth moderated. - Banks' exposure to the real estate market has remained high. Key FSIs and trends (selected figures, as presented): - Regulatory capital to risk weighted assets: 14.4, 15.0, 16.2, 17.3, 18.1, 19.1 (2014–2019H1). - Regulatory Tier 1 capital to risk-weighted assets: 11.5, 12.2, 13.6, 15.2, 16.0, 16.7 (2014–2019H1). - Non-performing loans to total gross loans: 7.6, 7.2, 5.4, 4.1, 3.4, 3.3 (2014–2019H1). - Coverage ratio (total provisions to NPLs as per BR/09): 40.4, 43.5, 45.9, 45.2, 44.4, 44.2 (2014–2019H1). - Return on assets: 0.7, 0.7, 0.8, 0.7, 0.5, 0.7 (2014–2019H1). - Return on equity: 9.8, 9.8, 10.1, 9.2, 6.5, 8.0 (2014–2019H1). - Loan-to-value ratios: Residential 73.9, 77.8, 75.1, 73.5, 72.7, 75.8 (2014–2019H1); Commercial 64.5, 56.9, 67.5, 65.1, 56.7, 62.5 (2014–2019H1). - Banks’ total assets amounted to 467 percent of GDP (about €46 billion) at 2016. Core domestic banks account for 47 percent of the banking sector’s total assets. ### External sector and balance of payments - Current account surplus held broadly steady in 2018. - Services surplus and goods deficit little changed in 2018. - Share of services rose considerably in recent years, resulting in a higher export market share. - REER CPI based slightly appreciated in 2018. - Large net IIP surplus held broadly steady in 2018. Selected balance of payments figures (Table 3): - Current account balance (Millions of euros): 394, 1,188, 1,289, 1,114, 1,023, 1,021, 1,049, 1,087, 1,104, 1,155 (2016–2025). - Trade balance (Goods and services, Millions of euros): 1,429, 2,404, 2,560, 2,617, 2,729, 2,924, 3,151, 3,406, 3,652, 3,912 (2016–2025). - Exports of goods and services (percent of GDP): 152.0, 149.7, 144.1, 139.8, 136.2, 134.0, 132.1, 130.4, 128.7, 127.1 (2016–2025). - Imports of goods and services (percent of GDP): 138.2, 128.4, 123.4, 119.9, 116.8, 114.4, 112.1, 109.9, 107.9, 105.9 (2016–2025). - Services balance (percent of GDP): 32.8, 34.5, 33.4, 34.9, 35.5, 35.0, 35.1, 35.3, 35.2, 35.2 (2016–2025). - Primary income, net (percent of GDP): -8.9, -9.5, -9.0, -10.1, -10.9, -11.5, -12.1, -12.7, -13.3, -13.7 (2016–2025). - Gross external debt (Percent of GDP): 854.5, 817.3, 740.9, 702.1, 666.5, 636.2, 608.8, 583.2, 559.9, 537.9 (2016–2025). - Net external debt (Percent of GDP): -214.2, -207.9, -179.3, -181.5, -183.5, -185.5, -187.6, -189.7, -191.9, -194.1 (2016–2025). ### Labor market and income distribution - Unemployment Rate (Percent): series shows decline to record-low by 2019Q3. - Employment levels and part-time share: Employment (Thousands) and share of part-time employment series presented through 2019Q2. - Income inequality (Gini coefficients): Before social transfers and After social transfers series for Malta and Euro area through 2018; market inequality remained elevated compared to pre-crisis levels but lower than euro area peers. - At-risk-of-poverty rate (share of population with equivalised disposable income below 60 percent of national median after social transfers): data as of 2017. ### Tables and projections coverage - Table 1: Selected Economic Indicators, 2016–2025 (includes population, quota, macro aggregates, projections). - Table 2: Fiscal Developments and Projections, 2016–2025 (detailed revenue, expenditure, balance, debt projections). - Table 3: Balance of Payments, 2016–2025 (millions of euros and percent of GDP series). - Table 4: Financial Soundness Indicators, 2014–2019:H1 (detailed FSIs by bank group and totals). *Source: 1mltea2020001 - 38.* ### Annex I. Implementation of IMF Recommendations ### Annex I. Implementation of IMF Recommendations ### Fiscal Policy - Continue building fiscal buffers, strengthening revenue collection and broadening the tax base. - The medium-term fiscal strategy envisages gradual structural adjustment. - VAT grouping and tax consolidation regulations for company groups were introduced. - Revenue administration reforms continue. - Two EU Directives on Anti-Tax Avoidance are being transposed into national laws. - Improve fiscal risk analysis and management; reduce long-term fiscal risks. - Revisions to fiscal reports are underway; for instance, the latest Stability Program Update included details on changes relative to previous year’s forecast and the NSO published general government pension entitlements. - Shift the balance of expenditure towards infrastructure and improve public investment management. - Public investment rose in 2018–19 partly due to improved absorption of EU funds. - Multi-year projections of capital expenditure were introduced in the 2020 Financial Estimates. ### Financial Sector and Housing Market - Remedy deficiencies in the implementation of the AML/CFT framework. - See the AML/CFT section in Annex II. - Guarantee long-term financial and operational independence of the financial supervisor and increase supervisory capacity. - See the Financial Sector Supervisory Resources and Independence section in Annex II. - Enhance monitoring of the non-bank financial sector. - See the Macroprudential Policy section in Annex II. - Consider refining the new borrower-based macroprudential measures. - See the Macroprudential Policy section in Annex II. - Address affordability issues for vulnerable households. - Housing benefit for tenants were extended and expanded to middle-income individuals and households. - Stamp duties for first time home buyers, other residential buyers and those inheriting homes for residence were reduced. - Interest-free loans to cover down-payments for homebuyers under 40 years old were introduced. - Plans for social housing were expanded. ### Structural Reforms - Further increase female and elderly participation in the labor force; address skills gap problem. - Facilitation in setting up a maternity leave fund for private sector employment. - Extension of voluntary occupation pension schemes to incentivize delayed retirement. - Introduction of applied and vocational learning subjects in secondary school. - Offering of occupational licenses for specialized jobs are underway. - Foster innovation, including by improving SME’s access to financing. - The Maltese Development Bank has partnered with commercial banks to provide SME financing. - A National Strategy for Artificial Intelligence was published. - The Ministry of Education has launched the Start-Up Malta Foundation to assist start-ups and entrepreneurs. ### Annex II — Main FSAP Recommendations (Selected items) - Risk Analysis - Strengthen the risk analysis by incorporating new dimensions in liquidity stress testing, conducting regular sensitivity analysis on selected vulnerabilities, and enhancing data management (CBM, MFSA). - Timing: NT. Progress: In progress. The CBM enhanced stress testing frameworks by considering severe adverse scenarios and sensitivity analyses in the Macro Stress Testing framework and including in complementary liquidity measures. Both the CBM and the MFSA invested in improving the data management system. New dimensions such as asset concentration and cross-border exposures need to be considered. - Macroprudential Policy - Consider providing the CBM with powers to recommend actions to be taken by a public authority or public institution, with a “comply or explain” mechanism, and to issue warnings and opinions. Amend the MFSA Act to add a financial stability objective (Government, MFSA). - Timing: NT. Progress: In progress. A financial stability objective has been added to the MFSA Act (article 3, Act VIII of 2019). The CBM powers are still being assessed by the government. - Close remaining data gaps, and enhance analytical tools (CBM, NSO, MFSA). - Timing: NT/MT. Progress: In progress. Efforts to improve data quality of NBFIs, loans, and commercial and residential real estate. Further efforts needed for granular data on inter-company loans and cross-border lending. - Refine and introduce the planned borrower-based instruments to address possible buildup of vulnerability in the housing and household sectors. (CBM) - Timing: I. Progress: In progress. CBM Directive No. 16 defining borrower-based macro prudential measures became effective on July 1, 2019. Further refinements should be considered when concerns about possible market disruptions dissipate. - Financial Sector Supervisory Resources and Independence - Ensure stable funding for the MFSA, grant it full autonomy over its recruitment and maintain a dedicated statutory committee on supervisory issues. (MFSA, Government) - Timing: I. Progress: In progress. Amendments and a new Act XXVI in 2019 allow MFSA’s recruitment independence and separation of enforcement decisions from the Chief Officer. A Regulatory Committee was established. The MFSA has finalized its business plan but it remains to be implemented. - Address the significant gap in supervisory and enforcement capacity by increasing staff and broadening the skill set. (MFSA) - Timing: I. Progress: In progress. The MFSA has hired additional 80 staff members in 2019, moving towards the goal of 450 by 2022. Competitive packages and training should be provided to recruit and retain skilled experts, including IT, credit risk experts, supervisors, statisticians. - Banking Regulation and Supervision - Increase the number and risk orientation of onsite inspections of LSIs. Enhance supervision of third country branches. (MFSA) - Timing: ST. Progress: In progress. The MFSA carried out two on-site inspections to Turkish credit institutions in 2019, but more are needed for adequate supervision of third-country branches and high priority LSIs. Authorities should address gaps between the related-parties framework and the Basel Core Principles. - Take timely supervisory actions (including for ML/TF) and increase the use of monetary fines. Ensure supervisory action is not delayed through judicial appeal, including by amending the law, if needed. (MFSA, FAIU, Government) - Timing: ST. Progress: In progress. The FIAU increased human resources, separation of functions, and improved its risk-based supervision approach. In Feb 2020, the FIAU acquired the legal power to publish notification of administrative sanctions that have been issued, even if these are still undergoing judicial review. Judicial system improvements are recommended to ensure greater effectiveness of the sanctions policy. - Insurance and Securities Regulation and Supervision - Strengthen conduct supervision and enhance the sectoral risk-based supervision framework. (MFSA) - Timing: MT. Progress: In progress. The MFSA’s financial stability function has been conducting more comprehensive analysis of the insurance and funds sectors. On conduct supervision, the MFSA plans more on-site inspections in 2020 and to launch off-site thematic reviews. - AML/CFT - Improve the authorities’ assessment and understanding of ML/TF risks and strengthen the national coordination. (National Coordination Committee) - Timing: I. Progress: In progress. Sector specific risk assessments (legal entities, VFAs, voluntary organizations) and a thematic risk assessment on TF have been completed, and the NCC has developed targeted action plans. The FIAU acquired new tools and is dedicating further resources. Authorities should continue to focus on risks related to banking, remote gaming, VFAs, the IIP, connected sectors, and foreign and cross-border flows. - Adopt a multi-prong strategy that includes: (i) ensuring that banks appropriately apply preventive measures; (ii) fully implementing a risk-based AML/CFT supervision; and (iii) applying timely, dissuasive, and proportionate sanctions and effective fit-and-proper tests. (MFSA, FIAU, ROC, Government) - Timing: I. Progress: In progress. The MFSA set up the Financial Crime Compliance function, enhanced risk-ranking model, and updated single shareholder/risk appetite policy. The FIAU increased supervisory inspections of credit institutions and adopted a methodology to ensure all credit institutions will be subject to an on-site examination within a four-year supervisory cycle. The Malta Business Registry was established and is empowered by law to verify beneficial ownership information and can refuse registration if violations are identified; more efforts needed for timely verification and robust sanctions. - Support establishing an EU-level arrangement responsible for AML/CFT supervision. (Government) - Timing: MT. Progress: In progress. Malta is supporting the EU-level initiative of a harmonized higher-level AML regulation and supervision. - Safety Nets and Crisis Management - Adopt an administrative bank insolvency regime with explicit powers to transfer assets/liabilities. Clarify the creditor hierarchy. (Government) - Timing: I. Progress: In progress. Malta is following the EU level initiative on a harmonized insolvency law applicable to credit institutions. Authorities should react more promptly as this process could take considerable period of time. - Shift responsibility for decisions on bank insolvency and liquidation, post-license revocation, from the MFSA’s supervisory function to its resolution function (MFSA) - Timing: I. Progress: Not done. The recommendation is currently under discussion. - Review the adequacy of the Resolution Unit’s staffing and increase its resources accordingly (MFSA) - Timing: I. Progress: Not done. Increasing staff in the Resolution Unit of MFSA is under consideration. ### Annex III — External Sector Assessment (Selected findings and statistics) - Overall assessment - The external position of Malta in 2019 was moderately stronger than fundamentals and desirable policy settings, though this assessment is subject to high uncertainty due to measurement issues related to Malta being a small financial center and hosting captive financial institutions and money lenders. - Foreign Asset and Liability Position - NIIP remained steady at 63 percent of GDP at end-2018 after almost doubling from 2016 to 2017. - Gross assets and liabilities are very large: - Portfolio investment assets: over 900 percent of GDP. - Direct investment liabilities: around 1600 percent of GDP (mostly in the form of equity). - The NIIP is expected to remain highly positive over the medium term, in line with projected current account surpluses. - A better understanding of ultimate ownership of captive financial institutions and money lenders, and other multinational firms, would help improve measurement of associated income flows. - Current account (CA) - CA surplus: 10.5 percent of GDP in 2017; 10.4 percent of GDP in 2018. - Preliminary estimates for 2019: CA surplus narrowed to 8.4 percent of GDP, largely due to slower export growth reflecting weaker external demand. - CA surpluses have been sustained since 2012, averaging close to 6 percent of GDP over 2013–18. - Continued surpluses, though gradually declining, are expected over the medium term. - EBA-lite CA model results (2019) - Large CA gap of 8.4 percent in 2019. - CA norm: nearly 0 percent. - Policy gap: 1.8 percent. - Large unexplained residual of 6.9 percent of GDP could be partially explained by idiosyncratic factors. - Staff adjustments and rationales: - Small financial center biases (retained earnings and inflation distortions) used to adjust Malta’s CA balance down by 3 percentage points. - Government’s Individual Investor Program (IIP) receipts estimated roughly 1 percent of GDP over 2015–2017; staff makes a partial downward adjustment of 0.5 percentage points to the CA balance. - Remittances proxy in EBA-lite contributes minus 3 percent of GDP to the norm; for Malta this is adjusted by adding 3 percentage points to the CA norm. - Real Effective Exchange Rate (REER) and valuation - ULC-based REER and CPI-based REER remained broadly stable in 2019. - EBA-lite REER model points to a modest REER undervaluation of about 1 percent. - Summary external assessment: - CA gap estimated at about 2.0 percent of GDP. - Implied undervaluation of 2.1 percent. - REER model undervaluation estimated at 1.2 percent. - Staff assess that the external position in 2019 was moderately stronger than fundamentals and desirable policy settings, with considerable uncertainty due to idiosyncratic factors and measurement challenges. - Financial flows - Gross and net financial flows tend to be large relative to GDP, strongly influenced by ownership structures and cross-border transactions of internationally-oriented firms, including captive financial institutions and money lenders. - Net FDI inflows and net portfolio investment outflows are particularly sizable; in recent years net outflows from portfolio investment and other investment have exceeded net FDI inflows. *Source: Annex I. Implementation of IMF Recommendations (content unit 1mltea2020001).* ### Annex IV. Risk Assessment Matrix ### Annex IV. Risk Assessment Matrix ### Global Risks — Likelihood, Horizon, Impact, and Policy Responses - Weaker-than-expected global growth. - Relative Likelihood and Time Horizon: High (ST, MT) - Impact if Realized: Medium - Description: As a small and very open economy, Malta can be vulnerable to changes in foreign demand. Weaker external demand, accompanied by lower FDI inflows, would have adverse effects on domestic growth prospects. However, domestic demand is becoming a key driver of growth and large-scale infrastructure projects as well as healthy household balance sheets may mitigate adverse spillovers. - Policy response: - Allow automatic stabilizers to operate in the short run if growth disappoints. - Improve infrastructure quality and maintain structural reform momentum to remove supply-side bottlenecks, spur investment, and promote higher productivity growth. - Continue diversifying trade activities. - Fiscal policy could be used to mitigate the impact on vulnerable groups. - Sharp rise in risk premia that exposes financial vulnerabilities. - Relative Likelihood and Time Horizon: Medium (ST, MT) - Impact if Realized: Medium/Low - Description: An abrupt reassessment of market fundamentals triggers widespread risk-off events that expose vulnerabilities building up in a period of low interest rates and a search for yield. Malta should be relatively insulated from direct international financial market contagion given the public and private sector’s high reliance on domestic financing. However, it is still vulnerable to weaker external demand, lower FDI inflows and potential indirect financial contagion through cross-sectoral interlinkages. Loss of market confidence could lead to asset price declines, valuation losses and higher funding costs. - Policy response: - Continue to reduce fiscal and financial vulnerabilities to ensure stability, and further diversify trade activities. - Continue close financial supervision and further improve banks’ asset quality to increase the banking system’s loss absorption capacity, and further enhance crisis management framework. - Authorities should stand ready to provide liquidity support to solvent financial institutions if needed. - Remove remaining structural impediments to growth. - Coronavirus outbreak causes widespread disruptions and global spillovers through tourism and confidence effects on investment. - Relative Likelihood and Time Horizon: Medium (ST) - Impact if Realized: Medium - Description: Tourism is an important sector for the Maltese economy in terms of both gross value-added and employment. A shock to this sector, as well as shocks to trade and investment, would hurt output and employment in Malta. - Policy response: - Allow automatic stabilizers to operate in the short run if growth disappoints. - Improve infrastructure quality and maintain structural reform momentum to remove supply-side bottlenecks, spur investment, and promote higher productivity growth. - Continue diversifying trade activities. - Fiscal policy could be used to mitigate the impact on vulnerable groups. - Rising protectionism and retreat from multilateralism. - Relative Likelihood and Time Horizon: High (ST, MT) - Impact if Realized: Medium - Description: In the near term, escalating and unpredictable protectionist actions imperil the global trade system, and additional new actions or the threat thereof reduce growth. In the medium term, protracted tensions lead to further fragmentation with adverse effects on investment, growth, and stability. As a small open economy, Malta is vulnerable to external shocks through trade linkages. In the short term, escalating trade tensions, including an unanticipated Brexit outcomes, and the threat of new trade actions could reduce growth both directly and through adverse confidence effects and financial market volatility. Direct financial spillovers should be limited given the relatively high reliance of government and core domestic banks on domestic funding. Possible increases in the relocation of firms that service the EU from the UK to Malta may also support FDI inflows over the medium term. - Policy response: - Participate in a coordinated policy response at the European level. - Allow automatic stabilizers to operate. - Maintain structural reform momentum and improve infrastructure to remove impediments to growth. - Continue diversifying trade activities. - Fiscal policy could be used to mitigate the impact on vulnerable groups. ### Domestic Risks — Likelihood, Impact, and Policy Responses - Slow progress in addressing structural weaknesses (infrastructure and labor market). - Relative Likelihood and Time Horizon: Medium (MT) - Impact if Realized: Medium/Low - Description: The persistence of structural bottlenecks in infrastructure and the labor market could deter investment and harm growth. While the positive impact of recent structural reforms is likely to persist over the medium term, delayed implementation of the planned initiatives, including on infrastructure and labor market, would negatively affect competitiveness and long-term growth, and increase long-term fiscal risks. - Policy response: - Sustain and monitor the implementation of structural reforms, particularly in education, labor market and infrastructure, while safeguarding long-term fiscal sustainability and improving the quality of public finances. - Slow progress in effectively implementing and enforcing the AML/CFT framework. - Relative Likelihood and Time Horizon: Medium (ST, MT) - Impact if Realized: High/Medium - Description: Failure to timely address the shortcomings identified in the Moneyval September 2019 report would result in grey-listing by the FATF, placing greater pressure on correspondent banking relationships (CBRs). Malta has already lost key CBRs as a result of large international banks de-risking strategies. Failure to effectively implement the AML/CFT framework would weaken Malta’s attractiveness as a financial and business location, with adverse effects on tax revenues, foreign investment, jobs, and the external position. - Policy response: - Effectively and swiftly implement and enforce the AML/CFT framework, address supervisory capacity constraints, and further improve collaboration between the National Competent Authorities (NCAs). - Sharp correction in housing prices. - Relative Likelihood and Time Horizon: Medium (ST, MT) - Impact if Realized: Medium - Description: A sharp decline in housing prices could affect financial stability with adverse effects on lending and growth. Property-related loans account for a significant fraction of the loan portfolio of core domestic banks, thus increasing their vulnerability to possible property market shocks. Significantly lower house prices could weaken bank and household balance sheets—and lead to widespread distress through an adverse feedback loop of decreased lending and investment affecting financial stability and growth. Mitigating factors include banks’ strong capital and liquidity positions as well as households’ high financial wealth, low default rates, and the low share of population with mortgages and negative equity. - Policy response: - Monitor risks and further refine existing macro-prudential measures. - Limit exposure of banks to property-related loans if a bubble begins to emerge. - Ensure that fiscal measures related to the property market, including the Individual Investor Program and the reduce tax rate on income rental, do not exacerbate imbalances, and address potential constraints to housing supply. - Ensure proper enforcement of new regulation of the rental market. - Possible changes in international corporate and personal taxation. - Relative Likelihood and Time Horizon: Medium/Low (MT) - Impact if Realized: High/Medium - Description: International reforms could reduce Malta’s attractiveness as a low tax jurisdiction. Malta’s attractiveness as a financial and business location may weaken, and demand for its Individual Investor Program (IIP) could decrease, with adverse effect on tax revenues, foreign investment, and the external position. - Policy response: - Continue diversifying the economy and accelerate structural reform implementation to remove impediments to growth, boost productivity and enhance competitiveness. - Strengthen quality of public finances, improve spending efficiency, and enhance revenue collection to reduce the heavy reliance on CIT and IIP revenues. ### RAM Methodology Note - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - Relative likelihood categories: “low” indicates a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent. - “Short term” and “medium term” indicate the risk could materialize within 1 year and 3 years, respectively. - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. *Source: Annex IV. Risk Assessment Matrix, IMF staff.* ### 4. Debt sustainability could be materially affected by some sources of fiscal vulnerability, ### 4. Debt sustainability could be materially affected by some sources of fiscal vulnerability, especially contingent liabilities. ### Financial contingent liability shock - Scenario assumptions: - One-time increase in non-interest expenditures equivalent to 10 percent of the size of the banking sector’s assets. - Slower real GDP growth: a one standard deviation reduction in the growth rate over 2020–21. - Inflation decreasing by 0.25 percentage points for every one percentage point reduction in growth. - Interest rate spread rising by 0.25 basis points for every one percent of GDP deterioration in the primary balance. - Revenue-to-GDP ratio assumed to remain the same as the baseline. - Findings: - The shock would deteriorate the primary balance to minus 26 percent of GDP in 2020, largely reflecting the effect of bank assets. - The debt ratio is projected to rise sharply to around 70 percent of GDP in the near term. - The debt ratio would then decline to 63 percent of GDP at the end of the projection horizon. ### Government guarantee shock - Scenario assumptions: - One-time increase in expenditures equivalent to 50 percent of SOE liabilities to capture contingency liability risk from SOEs and other government guaranteed debt. - Additional shocks follow the same assumptions as for the financial contingent liability shock (slower growth, higher inflation and higher interest rate spreads). - Findings: - With these shocks combined, the debt-to-GDP ratio would increase to 49 percent in 2020, about 10 percentage points higher than the baseline scenario. - The debt ratio would resume a declining trend afterwards, reaching 39 percent of GDP at the end of the projection period. ### IIP proceed shock - Scenario assumptions: - Completely excluding proceeds from the IIP from non-interest revenues. - Assuming modest increases in interest rate spreads. - Findings: - The pace of decline in the debt ratio would decelerate relative to the baseline. - The debt ratio still declines to 31 percent of GDP at the end of the projection horizon, 3 percentage points higher compared to the baseline. *Source: 1mltea2020001 - 4. Debt sustainability could be materially affected by some sources of fiscal vulnerability,* ### 5. Malta’s external position remains strong with large holdings of external assets. Gross ### 5. Malta’s external position remains strong with large holdings of external assets. Gross ### External position overview - Gross external debt was large at 740 percent of GDP in 2018, but this was more than covered by large amount of external assets. - On the back of current account surpluses, very large and positive NIIP positions are projected to continue boosting external assets over the medium term. - External debt continues to largely represent stable intercompany lending and liabilities of offshore financial institutions that have limited links to the domestic economy. - Total net external debt was about minus 179 percent of GDP at end-2018, and is projected to fall gradually over the medium term with expected current account surpluses. - Standard tests suggest that Malta’s external position would be robust to most adverse shocks. ### External debt sustainability (IMF staff analysis and projections) - Baseline: Net external debt (in percent of GDP) - 2014: -300.2 - 2015: -237.1 - 2016: -214.2 - 2017: -207.9 - 2018: -179.3 - 2019: -181.5 - 2020: -179.6 - 2021: -181.2 - 2022: -183.3 - 2023: -185.4 - 2024: -187.6 - Change in external debt (2014–2024 projection) - 2014: 74.9 - 2015: 63.1 - 2016: 22.9 - 2017: 6.2 - 2018: 28.6 - 2019: -2.2 - 2020: 1.9 - 2021: -1.6 - 2022: -2.1 - 2023: -2.2 - 2024: -2.2 - Identified external debt-creating flows (2014–2024) - 2014: -53.2 - 2015: -63.9 - 2016: -32.0 - 2017: 19.8 - 2018: 5.4 - 2019: -18.4 - 2020: -15.0 - 2021: -14.7 - 2022: -14.7 - 2023: -14.4 - 2024: -14.0 - Key components (selected series, percent of GDP) - Current account deficit, excluding interest payments (2014–2024): 0.7; 3.8; 1.3; -; 6.0; -5.5; -3.7; -2.1; -1.4; -1.2; -1.0; -0.7 - Deficit in balance of goods and services (2014–2024): -11.9; -9.7; -13.8; -21.3; -20.7; -19.8; -19.0; -19.2; -19.6; -20.0; -20.4 - Exports (2014–2024): 147.9; 154.2; 152.0; 149.7; 144.1; 139.8; 133.3; 130.9; 129.1; 127.4; 125.9 - Imports (2014–2024): 136.0; 144.5; 138.2; 128.4; 123.4; 119.9; 114.3; 111.7; 109.5; 107.4; 105.5 - Net non-debt creating capital inflows (negative) (2014–2024): -82.6; -43.7; -43.8; 8.4; -10.8; -17.8; -14.8; -14.3; -13.9; -13.6; -13.3 - Automatic debt dynamics (2014–2024): 28.8; -24.1; 10.6; 17.4; 21.6; 3.1; 1.9; 1.0; 0.4; 0.3; 0.1 - Contribution from nominal interest rate (2014–2024): -9.4; -6.6; -5.1; -4.5; -4.9; -4.7; -5.0; -5.2; -5.3; -5.4; -5.5 - Contribution from real GDP growth (2014–2024): 29.6; 34.5; 12.9; 12.4; 13.3; 7.8; 6.9; 6.2; 5.7; 5.6; 5.5 - Contribution from price and exchange rate changes (2014–2024): 8.6; -51.9; 2.8; 9.4; 13.3; ... - Residual, including change in gross foreign assets (2014–2024): 128.0; 127.0; 54.9; -13.5; 23.2; 16.3; 17.0; 13.1; 12.6; 12.2; 11.8 - External debt-to-exports ratio (in percent) (2014–2024): -203.0; -153.7; -140.9; -138.9; -124.5; -129.9; -134.7; -138.4; -141.9; -145.5; -149.0 - Gross external financing need (in billions of US dollars) (2014–2024): 7.7; 17.9; 15.0; 5.4; -3.6; -5.1; -5.3; -5.8; -6.3; -6.8; -7.2 - Gross external financing need (in percent of GDP) (selected): 68.0; 167.8; 131.0; 42.7; -24.7; ... ### Public debt and fiscal projections (Public DSA baseline scenario, selected figures) - Nominal gross public debt (in percent of GDP) - 2017: 64.5 - 2018: 50.4 - 2019: 45.6 - 2020: 42.8 - 2021: 39.8 - 2022: 36.9 - 2023: 33.7 - 2024: 30.9 - (table also shows 27.7 for a later label) - Public gross financing needs (in percent of GDP) - 2017: 20.5 - 2018: 5.8 - 2019: 10.3 - 2020: 11.4 - 2021: 4.5 - 2022: 4.1 - 2023: 3.5 - 2024: 2.2 - Net public debt mirror figures reported equal to nominal gross public debt series in the table. - Real GDP growth (in percent) in baseline projections: - 2017: 4.3 - 2018: 6.5 - 2019: 7.3 - 2020: 4.4 - 2021: 4.0 - 2022: 3.7 - 2023: 3.4 - 2024: 3.3 - Inflation (GDP deflator, in percent): 2.4; 2.5; 2.1; 2.3; 2.4; 2.1; 2.2; 2.2; 2.1 (2017–2024 sequence) - Nominal GDP growth (in percent): 6.8; 9.1; 9.6; 6.8; 6.5; 5.9; 5.6; 5.6; 5.3 (2017–2024) - Effective interest rate (in percent): 4.7; 3.6; 3.3; 3.4; 3.1; 3.1; 2.9; 2.9; 3.0 (2017–2024) - Change in gross public sector debt (percent of GDP, annual) - 2017: -0.7 - 2018: -5.2 - 2019: -4.7 - 2020: -2.8 - 2021: -3.0 - 2022: -3.0 - 2023: -3.1 - 2024: -2.8 - Cumulative (2019–2024): -17.9 - Identified debt-creating flows (percent of GDP) - 2017: -1.9 - 2018: -8.1 - 2019: -6.3 - 2020: -4.0 - 2021: -3.7 - 2022: -3.1 - 2023: -3.0 - 2024: -2.9 - Cumulative (2019–2024): -19.3 - Primary deficit (percent of GDP): -0.7; -5.2; -3.4; -2.6; -2.3; -2.1; -2.0; -2.0; -1.9 (2017–2024 sequence) - Primary (noninterest) revenue and grants (percent of GDP): 38.7; 39.3; 38.5; 38.7; 38.1; 37.6; 37.3; 37.1; 37.0 (2017–2024) - Primary (noninterest) expenditure (percent of GDP): 38.1; 34.1; 35.1; 36.2; 35.8; 35.6; 35.3; 35.0; 35.0 (2017–2024) - Automatic debt dynamics contribution (percent of GDP): -1.2; -2.8; -2.9; -1.5; -1.4; -1.0; -1.0; -0.9; -0.7 (2017–2024) - Real interest rate component (percent of GDP): 1.4; 0.5; 0.5; 0.4; 0.3; 0.3; 0.2; 0.2; 0.2 (2017–2024) - Real GDP growth contribution (percent of GDP): -2.6; -3.3; -3.4; -1.9; -1.6; -1.4; -1.2; -1.0; -0.9 (2017–2024) - Residual, including asset changes (percent of GDP): 1.1; 2.9; 1.6; 1.2; 0.7; 0.1; -0.2; 0.1; -0.6 (2017–2024) ### Stress tests, scenarios, and robustness - External Debt Bound Tests (Net external debt in percent of GDP) - Historical scenario average values and baseline averages are shown; historical average for net external debt reported as -379 (historical) and baseline -188 (box figures). - Individual shocks applied include: - Permanent one-half standard deviation shocks (various macro variables). - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent applied in 2017 for a specific shock. - Selected stress test outcomes (net external debt in percent of GDP, illustrative): - Interest rate shock: -191 (scenario) vs -188 (baseline) - Growth shock: -206 (scenario) vs -188 (baseline) - Current account shock: -165 (scenario) vs -188 (baseline) - Combined shock: -187 (scenario) vs -188 (baseline) - Real depreciation shock (30%): -278 (scenario) vs -188 (baseline) - Macro-fiscal stress tests for public debt include scenarios for: - Primary Balance Shock - Real GDP Growth Shock - Real Interest Rate Shock - Real Exchange Rate Shock - Combined Macro-Fiscal Shock - Contingent Liability Shock - Additional tests: government guarantee shock, IIP revenue shock ### Key statistics and assumptions (selected) - Gross external debt: 740 percent of GDP (2018) - Total net external debt: minus 179 percent of GDP (end-2018) - Public sector nominal gross public debt (percent of GDP): 64.5; 50.4; 45.6; 42.8; 39.8; 36.9; 33.7; 30.9; 27.7 (2017–2024 sequence as presented) - Public gross financing needs (percent of GDP): 20.5; 5.8; 10.3; 11.4; 4.5; 4.1; 3.5; 2.2; 2.7 (2017–2024 sequence) - Real GDP growth (percent): see Public DSA section for year-by-year values - Effective interest rate (percent): see Public DSA section for year-by-year values *Source: IMF staff (contents extracted from the Malta: Public DSA, External Debt Sustainability Framework, and Staff Report excerpts).* ### 2015. The PPI does not currently cover services activities. ### 2015. The PPI does not currently cover services activities. ### Producer Price Index (PPI) - The PPI does not currently cover services activities. ### Government finance statistics - Fiscal statistics meet requirements, with quarterly accrual-based data on general government operations compiled in accordance with the ESA2010 methodology and disseminated with a one-quarter lag. - The general government comprises data from the consolidated fund of government adjusted to include other accounts of government, the accruals elements, and the financial performance of the Extra Budgetary Units and of the Local Councils. - The NSO also publishes monthly statistics on the cash operations of the central government with a lag of one month, for which the authorities plan to utilize the targeted timeliness flexibility option in light of additional time required for the final month of the fiscal year. ### Monetary and Financial Statistics - Monetary statistics are timely and of good quality. - Since the entry into the euro area in January 2008, monetary data for IMF statistical publications on central bank and other depository corporations balance sheet have been obtained through a gateway arrangement with the ECB. - Malta reports data on several series and indicators of the Financial Access Survey (FAS), including gender disaggregated data on the use of financial services and the two indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults) adopted by the UN to monitor Target 8.10 of the Sustainable Development Goals (SDGs). ### Financial Sector Surveillance - Malta has reported Financial Soundness Indicators beginning from 2005 up to 2019:Q3 along with metadata, which are available on the IMF’s website. ### External sector statistics - BOP and IIP data are released quarterly, with a lag of about three months. - Summary trade statistics are released monthly with a lag of about 40 days. - The CBM publishes the external debt templates in line with requirements of the SDDS, including both gross and net external debt. - In line with the European regulation, Malta has transitioned to BPM6 and has revised the BOP and IIP estimates back to 2004 and 2008, respectively. - In line with the BPM6 requirements, the new data include estimates for the SPEs and other coverage improvements, affecting in particular the primary incomes and the financial account (direct and portfolio investments), as well as position data (IIP). - The BPM6 implementation and data back casting entailed a series of data revisions recently. ### Data Standards and Quality - The country has subscribed to the SDDS since December 1, 2009, with the metadata posted on the IMF’s Dissemination Standards Bulletin Board. - A data ROSC was published in August 2006. ### Malta: Table of Common Indicators Required for Surveillance (As of February 27, 2020) - Exchange Rates — Date of latest observation: Current; Date received: Current; Frequency of Data7/: D; Frequency of Reporting7/: D; Frequency of Publication7/: D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities1/ — Date of latest observation: Dec 2019; Date received: Feb 2020; Frequency of Data7/: M; Frequency of Reporting7/: M; Frequency of Publication7/: M - Central Bank Balance Sheet — Date of latest observation: Dec 2019; Date received: Feb 2020; Frequency of Data7/: M; Frequency of Reporting7/: M; Frequency of Publication7/: M - Consolidated Balance Sheet of the Banking System — Date of latest observation: Dec 2019; Date received: Feb 2020; Frequency of Data7/: M; Frequency of Reporting7/: M; Frequency of Publication7/: M - Interest Rates2/ — Date of latest observation: Dec 2019; Date received: Feb 2020; Frequency of Data7/: M; Frequency of Reporting7/: M; Frequency of Publication7/: M - Consumer Price Index — Date of latest observation: Dec 2019; Date received: Jan 2020; Frequency of Data7/: M; Frequency of Reporting7/: M; Frequency of Publication7/: M - Revenue, Expenditure, Balance and Composition of Financing3/ – General Government4/ — Date of latest observation: 2019Q3; Date received: Jan 2020; Frequency of Data7/: Q; Frequency of Reporting7/: Q; Frequency of Publication7/: Q - Revenue, Expenditure, Balance and Composition of Financing3/ – Central Government — Date of latest observation: 2019Q3; Date received: Jan 2020; Frequency of Data7/: M; Frequency of Reporting7/: M; Frequency of Publication7/: M - Stocks of General Government and General Government-Guaranteed Debt5/ — Date of latest observation: Sep 2018; Date received: Jan 2019; Frequency of Data7/: Q; Frequency of Reporting7/: Q; Frequency of Publication7/: Q - External Current Account Balance — Date of latest observation: Sep 2019; Date received: Jan 2019; Frequency of Data7/: Q; Frequency of Reporting7/: Q; Frequency of Publication7/: Q - Exports and Imports of Goods and Services — Date of latest observation: Sep 2019; Date received: Jan 2019; Frequency of Data7/: Q; Frequency of Reporting7/: Q; Frequency of Publication7/: Q - GDP/GNP — Date of latest observation: Sep 2019; Date received: Feb 2020; Frequency of Data7/: Q; Frequency of Reporting7/: Q; Frequency of Publication7/: Q - Gross External Debt — Date of latest observation: Sep 2018; Date received: Dec 2018; Frequency of Data7/: Q; Frequency of Reporting7/: Q; Frequency of Publication7/: Q - International Investment Position6/ — Date of latest observation: Sep 2019; Date received: Jan 2019; Frequency of Data7/: Q; Frequency of Reporting7/: Q; Frequency of Publication7/: A - Footnotes preserved from source: - 1/ Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means. - 2/ Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. - 3/ Foreign, domestic bank, and domestic nonbank financing. - 4/ The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - 5/ Including currency and maturity composition. - 6/ Includes external gross financial asset and liability positions vis-à-vis nonresidents. - 7/ Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA). *Source: 1mltea2020001 - 2015. The PPI does not currently cover services activities.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mltea2020001.pdf_