Public Information Notice: IMF Executive Board Concludes 2010 Article IV Consultation with Malta
IMF News, January 28, 2011
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- Published: January 28, 2011
Background
- Malta weathered the global recession relatively well: output fell less than the euro area average and unemployment rose only modestly, partly reflecting government support.
- A cyclical upswing driven by external demand is underway; manufacturing and tourism have recovered, with tourism near pre-crisis record levels.
- Recovery is not yet broad based; construction and retail are lagging.
- Consumption growth slowed due to softer real estate prices, elevated unemployment, and higher uncertainty about job prospects, but was supported by very low interest rates.
- Investment, especially in construction, decelerated sharply and remains sluggish.
- Inflation has picked up as firms rebuild profit margins and pass on higher energy prices, but underlying inflation is expected to remain contained.
- Fiscal performance:
- Fiscal deficit rose to over 4 percent of GDP in 2008 from about 2 percent in 2007, reflecting substantial one-offs and slippages in current expenditure.
- Despite the 2009 recession, proceeds from a tax amnesty and relatively strong income tax performance by international companies helped narrow the overall deficit somewhat in 2009.
- The European Commission concluded in July 2009 that Malta had an excessive deficit and recommended bringing it below 3 percent of GDP by 2011.
- In 2010, revenue performance was boosted by another tax amnesty and relatively strong corporate profits; only few and targeted stimulus measures were executed (support for investment and tourism, household compensations for utility tariff rises, increases in childcare benefits).
- Financial sector:
- Maltese banks were relatively insulated from U.S. toxic assets and broader global spillovers due to conservative funding models and limited exposure.
- A long real estate boom increased private sector debt and domestic credit risk; real estate prices corrected and appear to have stabilized, but excess supply likely remains in segments.
- Household debt grew rapidly but remains somewhat below the euro area average.
- Non-financial corporate sector debt has risen to elevated levels, with a significant share in construction and real estate.
- Banks tightened lending policies; bank credit growth decelerated but remains strong compared to the euro area average.
- Growing exposure to debt securities, including to euro-area peripherals currently under stress, poses additional risk in parts of the banking sector.
Executive Board Assessment — Findings and Recommendations
- Directors commended authorities for effective policy actions that helped Malta weather the global crisis relatively well and noted signs of a robust cyclical upswing.
- Main challenge: achieve strong and sustainable growth through strategic fiscal consolidation, prudent risk management, and continued structural reforms to raise productivity and employment.
- Fiscal policy:
- Directors endorsed the government’s ambitious fiscal consolidation plans in response to increased public debt, guarantees, and implicit liabilities to relatively high levels.
- Although fiscal deficits remained contained, Directors recommended a more rigorous approach that spells out specific measures underpinning priorities for the next budget to raise credibility.
- Commended recent efforts to improve expenditure control.
- Recommended strengthening fiscal institutions, particularly by introducing a strong fiscal rule to improve long-term sustainability.
- Advised further pension reform to avoid a surge of age-related public spending.
- Financial supervision and banking sector:
- Noted sector resilience during the global crisis but warned that high credit risk after a long real estate boom and large exposures of a few banks to foreign securities, including euro-area peripherals, warrant heightened vigilance.
- Urged determined supervisory action, including encouraging banks to strengthen capital buffers preferably through equity injections and retained earnings.
- Called for enhancing supervisory and regulatory arrangements to better link macro and micro prudential regulation, in line with European-level developments.
- Structural reforms:
- Emphasized that further structural reforms are critical to increase competitiveness, productivity, and attractiveness to foreign direct investment.
- Recommended measures to enhance the education system and encourage women and older workers to participate in the labor market to raise employment.
- Further liberalization of regulated sectors was recommended to boost economic efficiency.
Malta: Selected Economic Indicators, 2006–11 (key statistics)
- Real economy (constant prices) (change in percent)
- Real GDP: 2006: 3.3; 2007: 3.9; 2008: 2.7; 2009: -1.9; 2010 (Est.): 3.1; 2011 (Proj.): 2.0
- Domestic demand: 2006: 0.5; 2007: -4.1; 2008: 1.2; 2009: 1.7
- CPI (harmonized, average): 2006: 2.6; 2007: 0.7; 2008: 4.7; 2009: 1.8; 2010 (Est.): 1.9; 2011 (Proj.): 2.1
- Unemployment rate (in percent) 1/: 2006: 7.1; 2007: 6.4; 2008: 6.0; 2009: 7.0; 2010 (Est.): 6.5
- Public finance (general government; in percent of GDP)
- Overall balance: 2006: -2.7; 2007: -2.3; 2008: -4.7; 2009: -3.7; 2010 (Est.): -3.9; 2011 (Proj.): -3.0
- Primary balance: 2006: 0.8; 2007: 1.0; 2008: -1.5; 2009: -0.6; 2010 (Est.): -0.8; 2011 (Proj.): 0.2
- Gross debt: 2006: 63.2; 2007: 61.3; 2008: 62.6; 2009: 67.7; 2010 (Est.): 67.8; 2011 (Proj.): 68.0
- Money and Credit 2/
- Broad money: 2006: 5.2; 2007: 11.1; 2008: …
- Credit to nonbank private sector 3/: 2006: 14.9; 2007: 9.4; 2008: 13.6; 2009: 7.6; 2010 (Est.): 5.8
- Interest rates (year average) (in percent)
- Interest rate for mortgage purposes: 2006: 5.3; 2007: 5.0; 2008: 3.4
- Ten-year government bond yield 4/: 2006: 4.3; 2007: 4.8; 2008: 4.5; 2009: 4.2
- Balance of payments (in percent of GDP)
- Current account balance: 2006: -9.2; 2007: -5.5; 2008: -5.7; 2009: -6.8; 2010 (Est.): -4.4; 2011 (Proj.): -4.6
- Trade balance (goods and services): 2006: -4.9; 2007: -1.0; 2008: 1.5; 2009: 0.9
- Goods balance: 2006: -18.8; 2007: -17.8; 2008: -21.2; 2009: -16.6; 2010 (Est.): -18.9
- Services balance: 2006: 13.8; 2007: 16.8; 2008: 18.3; 2009: 20.3; 2010 (Est.): 19.8
Fund position and Exchange rate (as reported)
- Fund position (as of November 30, 2010)
- Holdings of currency (in percent of quota): 79.6
- Holdings of SDRs (in percent of allocation): 100.5
- Quota (in millions of SDRs): 102.0
- Exchange rate
- Exchange rate regime: Joined EMU on January 1, 2008
- Nominal effective rate (2000 = 100) 4/: 2006: 109.5; 2007: 112.8; 2008: 116.4; 2009: 117.0; 2010 (for 2010, January-November average): 112.9
- Real effective rate, CPI-based (2000 = 100) 4/: 2006: 111.6; 2007: 113.2; 2008: 116.6; 2009: 118.9; 2010 (for 2010, January-November average): 114.6
- Real effective rate, ULC-based (2000 = 100) 5/: 2006: 116.0; 2007: 119.2; 2008: 123.6; 2009: 121.9; 2010 (for 2010, January-June average): 120.5
Public Information Notice (PIN) No. 11/11 — January 24, 2011. Executive Board concluded the 2010 Article IV consultation with Malta.