Malta- 2013 Article IV Consultation Concluding Statement
IMF News, May 15, 2013
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- Published: May 15, 2013
Macroeconomic outlook and challenges
- Malta has shown "remarkable resilience" in the face of a major crisis in Europe; average growth (relative to historical average) has been the best in the euro area since the beginning of the crisis, and the unemployment rate remains one of the lowest.
- Strengths noted:
- Robust export growth.
- Sound banking system.
- Current account balance improved gradually, turning into surplus in 2012.
- Shortfalls and risks:
- Economic growth slowed to about ¾ percent in 2012 and remains below potential, reflecting a weak external environment and subdued domestic demand.
- Fiscal position has deteriorated and the level of public debt is described as "uncomfortably high," constraining fiscal space.
- Short-term risks largely external: protracted slower growth in Europe, re-emergence of euro area financial stress, and spillovers via banking and financial market channels.
- Longer-term risk: regulatory and tax reform at the European or global level could erode Malta’s competitiveness, affecting employment, output, and fiscal revenues.
- Projection and outlook:
- Domestic demand expected to become a larger contributor to growth.
- Mission projects a moderate acceleration in real GDP growth in 2013-15, with Malta continuing to outperform the euro area average.
- Pick-up is predicated on recovery of private consumption and improved confidence; current account projected to remain slightly positive despite some increase in imports.
- Policy objectives:
- Maintain macroeconomic and financial stability, safeguard fiscal sustainability, and enhance growth potential.
- Mission’s key recommendations to the authorities:
- In the banking sector, improve coverage of bank nonperforming loans through higher provisioning requirements;
- Stand ready to take action if the international banks’ business model changes or spillovers from abroad become imminent;
- Increase the resources of the deposit compensation scheme at least to the level implied by the draft EU proposal on the harmonization of the deposit insurance;
- Pursue a credible adjustment of fiscal policy until the budget is balanced and debt is put on a sustainable path;
- Continue restructuring large public corporations with a view to restore their viability, enhance their efficiency, and reduce contingent liabilities of the government;
- Persevere with the structural reform agenda to boost potential growth and competitiveness.
Financial sector
- Perceptions and containment:
- Recent events in Europe heightened perceptions about risks of hosting a large banking sector in a small country; in Malta these risks are contained because the large international banking segment has limited balance sheet exposures to the Maltese economy and negligible contingent claims on the deposit compensation scheme.
- Authorities should continue close monitoring of all banks, including links between foreign parent banks and their Maltese entities, and stand ready to act if spillovers become imminent or internationally-oriented banks increase domestic exposure.
- Mission supports more frequent monitoring of banks’ liquidity.
- Domestic bank conditions:
- Near-term risks related to core domestic banks are described as "contained."
- Banks report adequate capitalization, liquidity, and profitability and are well positioned to transition to the Basel III regime.
- Deposits and credit to the private sector continued to increase in 2012, albeit at a slower pace than in 2010-11.
- Banks are heavily exposed to the local property market; non-performing loans are on the rise, reflecting subdued conditions in construction and real estate.
- A significant decline in house prices, while "not likely in the short term," could have a sizeable impact on the domestic banking sector.
- Areas for further action:
- Provisioning and nonperforming loans:
- Coverage of nonperforming loans by provisions is relatively low.
- Authorities should tighten provisioning rules to increase available buffers, taking into account slow judicial procedures and historical recovery rates.
- Current efforts by the Malta Financial Services Authority (MFSA) and the Central Bank of Malta (CBM) are welcome.
- Crisis preparedness and resolution:
- Strengthen crisis preparedness and management frameworks in line with forthcoming European reforms.
- Boost resources of the deposit insurance scheme and improve the legal framework for bank resolution.
- Recent amendments to deposit insurance regulations are a step in the right direction, but more is needed given sizeable contingent liabilities (relative to the size of the economy) and potential large increase in deposits covered by the forthcoming EU directive.
- Supervision and reputation:
- Largest banks to be under direct oversight of the ECB from 2014; MFSA should work closely with the ECB to ensure supervisory capacity is maintained.
- Maintain an effective anti-money laundering framework amid rapid growth in online gaming and financial sector activities to preserve the reputation of the Maltese financial sector.
- Institutional recommendations:
- Strong financial sector oversight is critical; mission welcomes establishment of the Joint Financial Stability Board to conduct macro-prudential policy.
- Mission encourages the authorities to undertake an IMF Financial Sector Assessment Program.
Public finances
- Recent developments:
- After notable progress in 2011, the fiscal deficit widened to 3.3 percent of GDP in 2012 amid the election cycle, triggering a reassessment under the EU Excessive Deficit Procedure.
- Discretionary measures in the 2013 budget are described as expansionary and tax revenues appear optimistic given the moderate growth outlook.
- Fiscal recommendation and targets:
- Mission urges authorities to adopt additional measures to ensure the deficit falls below 3 percent of GDP in 2013 and public debt is put back on a sustainable path.
- Suggested design of measures: contain fast growth in current spending while preserving capital spending.
- Policy focus areas:
- Tightening controls on the growth of health spending;
- Greater use of means-testing for government benefits;
- Containing the wage bill through prudent collective wage agreements and compression of public sector employment through attrition.
- Public corporations:
- Restoring profitability and viability of large public corporations (Enemalta and Airmalta) is crucial to alleviate fiscal pressures.
- High level of government-guaranteed debt and delicate financial positions heighten concerns about fiscal sustainability.
- Progress:
- Restructuring of Airmalta appears on track.
- Restructuring plan of Enemalta was approved in December 2012.
- Budget assistance to Enemalta needs to be phased out as it crowds out priority public spending.
- Mission supports government objective to reduce energy costs (one of the highest in the EU) and diversify energy sources, but any reduction in electricity tariffs should be contingent on success in restoring Enemalta’s financial health.
- Fiscal governance:
- Further progress needed to strengthen fiscal governance framework to meet EU requirements under the six-pack and fiscal compact by end of 2013.
- Recommendation: establish a clear rule-based multi-year fiscal policy framework and an independent fiscal council to guide and assess consolidation efforts.
Structural reforms
- Importance and priorities:
- Steady implementation of structural reforms is critical to boost potential growth and ensure sustainability of public finances.
- Mission welcomes adoption of the National Reform Program with specific measures.
- Pension reform:
- Pension reform remains a priority to ease long-term fiscal pressures.
- Specific recommendations:
- Align retirement age with life expectancy;
- Introduce second and third pension pillars, requiring appropriate legal framework to support development of local capital market and allow households to diversify sources of savings.
- Labor, education, competitiveness:
- Strengthen female labor participation and educational attainment.
- Continue incentives and support for job search.
- Education reforms should promote greater social inclusion and link vocational training more closely with labor market needs.
- With growth increasingly dependent on financial and niche services, measures to broaden competitiveness would help diversify the economy:
- Ensure better alignment of wages and productivity at the enterprise level;
- Promote foreign investment;
- Improve the judicial system;
- Promptly implement structural reforms.
- These reforms would make the economy less vulnerable to sectoral setbacks and more resilient to potential harmonization of tax rates at the EU level.
Closing
- The mission expresses gratitude to the authorities and interlocutors for "excellent cooperation, open discussions, and warm hospitality."
Malta- 2013 Article IV Consultation Concluding Statement, May 15, 2013.