Malta: Staff Concluding Statement of the 2017 Article IV Mission
IMF News, November 17, 2017
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- Published: November 17, 2017
Growth outlook and macroeconomic context
- Real GDP growth is projected at 5.8 percent in 2017 and 5.1 percent in 2018, and to gradually converge towards a potential rate of about 3 percent over the medium term.
- Growth drivers and trends:
- Growth will be driven largely by domestic demand backed by rising incomes and historically-low unemployment.
- Buoyant services exports will continue to sustain current account surpluses.
- Inflation is expected to pick up gradually, reflecting an increase in import prices and tighter labor market conditions.
- Principal vulnerabilities:
- As a small and highly open economy, Malta is vulnerable to growth fluctuations and policy uncertainty in key trading partners.
- Possible international corporate taxation reforms could adversely affect the economy.
- Domestically, wage pressures, infrastructure constraints, rising housing prices, and shortages of labor and skills pose challenges.
Risks to the outlook
- Broad assessment: Risks to the outlook are broadly balanced.
- Specific upside and downside risks:
- Upside: Robust implementation of infrastructure plans and improved SMEs’ access to credit—including due to the new Malta Development Bank—could result in higher-than-projected investment growth.
- Downside: An increase in inward-looking policies abroad and possible international corporate taxation reforms could adversely affect Malta.
- Domestic risks: Slow progress in addressing remaining structural weaknesses could undermine growth prospects and erode competitiveness.
- Housing: Strong increases in housing prices may raise financial stability risks and deter the inflow of foreign workers.
Fiscal position, risks, and policy recommendations
- Recent fiscal performance:
- Malta achieved its medium-term objective (MTO) of a structural balance in 2016, three years ahead of schedule.
- Public debt fell to below 60 percent of GDP.
- The 2017 overall balance is expected to reach 1.3 percent of GDP, exceeding the budget target.
- Fiscal risks and structural issues:
- High share of corporate tax revenues implies vulnerability to international corporate taxation reforms.
- Contingent liabilities from state-owned enterprises (SOEs), although receding, remain high and require close monitoring.
- Age-related spending pressures remain significant, requiring better alignment of contributory period with life expectancy and pensionable income with life-time earnings.
- IIP revenues are temporary and hard to predict.
- Policy recommendations:
- Broaden the tax base and strengthen revenue collection; recent measures to combat tax evasion and increase Value-Added Tax compliance are positive steps.
- Advance restructuring of financially weak SOEs to contain contingent liability risks.
- Identify further structural measures to reduce reliance on IIP revenues and put the fiscal position on a stronger footing.
- Maintain the government’s plan to keep a medium-term surplus of 0.5 percent of GDP in 2018-20 and comply with the MTO, given the economy’s favorable cyclical position and remaining fiscal risks.
- Consider a budget-neutral public investment push to upgrade road network and public transportation, by:
- Strengthening revenue collection.
- Making best use of public-private partnerships and EU funds.
- Increasing public spending efficiency, including through extension of the in-depth reviews to the broader public sector.
Financial stability and financial sector oversight
- Banking sector conditions and challenges:
- Domestic banks remain well-capitalized and profitable but face headwinds from subdued lending to the non-financial corporate sector, low interest rates, and upcoming regulatory changes.
- Elevated, albeit declining, legacy corporate non-performing loans (NPLs) and a high concentration of property-related loans are additional challenges.
- NPLs and resolution:
- NPLs stood at 4.6 percent for core domestic banks in the second quarter of 2017.
- Corporate NPLs remained elevated at about 10 percent.
- Continued resolution efforts, enhanced supervisory oversight, an expected increase in the provision coverage ratio, and further improvements of the insolvency process are recommended.
- Maintain prudent collateral valuation practices amid persistent real estate appreciation.
- Diversification of corporate financing and oversight:
- Intercompany loans have become the main funding source for firms; direct issuance of debt securities and credit from nonbank financial institutions have grown rapidly from a low base.
- Authorities should address data gaps and enhance oversight of nonbank lending.
- Malta Development Bank could improve SMEs’ access to finance, but requires robust governance and well-designed origination rules to contain contingent liability risks to public finances.
- Supervisory capacity:
- Growing size and complexity of the financial sector have put the Malta Financial Services Authority (MFSA) under strain despite recent expansion.
- Tight labor market conditions have contributed to high MFSA staff turnover.
- Ensuring that the MFSA has adequate resources is critical to preserve operational independence, retain experienced staff, and maintain effective supervision.
- Anti-money laundering (AML) and integrity:
- Robust implementation and effective enforcement of the AML framework is critical given fast-growing remote gaming activity and high demand for the IIP.
- Finalizing the National Risk Assessment and transposing the EU’s 4th AML Directive into national law would support these efforts.
Housing market pressures
- Current assessment:
- Household balance sheets are generally sound, yet persistent strength in mortgage lending and demand for properties may lead to imbalances.
- Housing prices appear to have entered a modest overvaluation territory by several metrics.
- The mission does not see immediate financial stability risks but sees need for pre-emptive measures.
- Recommended measures to reduce housing risks:
- Deploy targeted macroprudential limits for mortgages to enhance resilience of bank and household balance sheets to possible housing price corrections and increases in interest rates.
- Close data gaps on borrower characteristics to calibrate macroprudential measures effectively.
- Ensure fiscal incentives do not amplify the housing cycle by aligning the tax rate on rental income with tax rates on other sources of income.
- Introduce periodic reviews of the scope and parameters of the IIP, including the minimum real estate investment or leasing values, to help curb housing demand pressure and improve predictability of fiscal revenues.
- Reduce supply bottlenecks by accelerating corporate balance sheet repair in the construction sector.
- Social housing and affordability:
- Accelerate delivery of social housing to mitigate impact of rising housing prices on the poor.
- Measures such as financial incentives for homeowners to make property available to low-income households are welcome.
- Consider relaxing eligibility requirements for rent subsidies and social loans while ensuring eligibility criteria are prudently assessed and means-tested.
Structural reforms to sustain high and inclusive growth
- Key priorities:
- Closing the infrastructure gap: Malta’s public capital stock per capita is the lowest in the EU; high density of car ownership and weak road quality have led to severe congestion. Government’s medium-term strategy to improve road quality and increase utilization of alternative means of transport is a step in the right direction.
- Strengthening labor supply: Upskilling and reskilling, increasing female labor force participation, boosting incentives to work, and delaying retirement to address scarcity of skilled staff.
- Strengthening innovation: Implementation of the National Research & Innovation Action Plan to develop research infrastructure, upscale financial support for innovation activities, and improve links between academia and the private sector.
- Policy instruments and initiatives:
- Recent government initiatives to enhance training and education systems will help contain the skill gap.
- Continued steps to boost incentives to work and delay retirement would sustain upward trend in female labor force participation.
- Better use of public investment, targeted reforms, and improving business productivity through reduced congestion are emphasized.
Source: Malta: Staff Concluding Statement of the 2017 Article IV Mission (November 17, 2017).