IMF Executive Board Concludes 2017 Article IV Consultation with Malta
IMF News, January 29, 2018
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Bibliographic details
- Published: January 29, 2018
Summary of the consultation
- Press Release No. 18/28; January 29, 2018. IMF Communications Department.
- The Executive Board concluded the 2017 Article IV consultation with Malta on January 26, 2018, and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
- Key recent outcomes: Output is estimated to have expanded by 6.8 percent in 2017, accompanied by dynamic job creation and record-low unemployment. The fiscal balance is estimated to have registered a surplus for the second consecutive year in 2017.
Economic performance and drivers
- Output and labor:
- Real GDP growth (2017 Est.): 6.8 percent.
- Dynamic job creation brought unemployment to a record-low.
- Strong inflows of foreign workers and rising labor force participation kept wage pressures contained in most sectors.
- Inflation and external sector:
- Low inflation despite a positive output gap.
- The 2017 current account is estimated to have remained in surplus, driven largely by a sizable balance of services.
- Structural pressures:
- Rapid economic expansion and growing population have put pressure on physical infrastructure.
- Continued housing market appreciation.
Executive Board assessment and policy guidance
- Overall assessment:
- The Maltese economy remains on a strong growth trajectory. Risks to the outlook are broadly balanced, and the external position is assessed to be broadly in line with fundamentals.
- Fiscal policy recommendations:
- Reduce remaining fiscal risks and build larger fiscal buffers.
- Ensure fiscal policy is geared towards addressing infrastructure challenges while avoiding unwarranted stimulus as the economy operates above potential.
- Continue complying with the MTO and identify further structural measures to attain the MTO, net of IIP proceeds.
- Broaden the tax base and strengthen revenue collection.
- Advance restructuring of financially-weak SOEs and address age-related spending pressures.
- Consider a budget-neutral public investment push to narrow Malta’s infrastructure gap.
- Financial sector and oversight recommendations:
- Continue resolution of legacy corporate NPLs with enhanced supervisory oversight to promote investment and resilience.
- Increase provision coverage ratio and further improve the insolvency process.
- Address data gaps and enhance oversight of nonbank lending, including intercompany lending.
- Ensure robust governance and well-designed origination rules of the MDB’s operations to contain contingent liability risks.
- Ensure the MFSA has adequate resources to preserve operational independence and effective supervision.
- Financial integrity and AML:
- Robust implementation and effective enforcement of the Anti-Money Laundering framework is critical given the size of Malta’s financial sector, fast-growing remote gaming activity, and high demand for the IIP.
- Continue strengthening collaboration between competent supervisors and regulators and finalize the related National Risk Assessment.
- Housing market measures:
- Introduce targeted macroprudential limits for mortgages to strengthen resilience of bank and household balance sheets to possible housing price corrections and higher interest rates.
- Close data gaps on borrower characteristics to calibrate macroprudential measures effectively.
- Align 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 curb housing demand pressure.
- Accelerate corporate balance sheet repair in the construction sector to improve housing supply response to price signals.
- Structural and inclusion policies:
- Reduce severe congestion by improving road quality and increasing utilization of alternative means of transport.
- Upskill and reskill the labor force to better align education with business needs.
- Increase female labor force participation further, particularly among older cohorts.
- Strengthen innovation by developing research infrastructure, increasing financial support for research and innovation, and improving links between academia and the private sector.
Outlook and risks
- Growth outlook:
- Growth is expected to decelerate gradually and converge to about 3 percent over the medium term.
- Short- to medium-term projections: Growth driven largely by domestic demand, backed by rising incomes and historically-low unemployment; buoyant services exports will continue to sustain current account surpluses.
- Inflation and fiscal outlook:
- Inflation is set to pick up gradually, reflecting an increase in import prices and tighter labor market conditions.
- Headline fiscal surpluses are forecast to continue and contribute to a further moderation of public debt.
- Staff recommendation on consultation cycle:
- Staff proposes that the next Article IV consultation with Malta follow the standard 12-month cycle.
Financial sector details and concerns
- Banking sector:
- Domestic banks remain profitable and well-capitalized.
- High legacy corporate non-performing loans represent a persistent challenge despite continued improvement in banks’ asset quality.
- Bank lending remains focused on mortgages; concentration of property-related loans continued to grow.
- Nonbank financing:
- Non-financial corporate sector has increased reliance on nonbank financing, particularly on intercompany lending.
- Supervisory priorities:
- Enhance oversight of nonbank lending and close data gaps.
- Ensure MFSA resourcing to maintain effective supervision.
Malta: Selected Economic Indicators (2014–2019) — key figures
- Per Capita GDP (2016): €22.8 thousands
- Quota: 168 million SDR, .04% of total
- Real economy (Percent change year on year)
- Real GDP: 2014: 8.2; 2015: 7.2; 2016: 5.5; 2017 Est.: 6.8; 2018: 5.7; 2019: 4.6
- Domestic demand: 2014: 2.9; 2015: 12.4; 2016: 1.4; 2017 Est.: 1.8; 2018: 5.4; 2019: 4.0
- CPI (harmonized, average): 2014: 0.8; 2015: 1.2; 2016: 0.9; 2017 Est.: 1.3; 2018: 1.7
- Unemployment rate (percent): 2014: 5.8; 2015: 4.7; 2016: 4.2; 2017 Est.: 4.4
- Public finance (General government, percent of GDP)
- Overall balance: 2014: -1.8; 2015: -1.1; 2016: 1.1; 2017 Est.: 0.7
- Primary balance: 2014: 1.0; 2015: 3.3; 2016: 3.4; 2017 Est.: 2.6; 2018: 2.4
- Structural balance 1/: 2014: -2.3; 2015: -2.1; 2016: 0.6; 2017 Est.: 0.1; 2018: 0.2
- Gross debt: 2014: 63.9; 2015: 60.3; 2016: 57.7; 2017 Est.: 54.2; 2018: 50.1; 2019: 47.3
- Financial sector
- Credit to nonfinancial private sector 2/: 2014: 3.8; 2015: …
- Credit to the private sector (percent GDP): 2014: 95.9; 2015: 90.8; 2016: 87.9
- Interest rates (year average) (Percent)
- Interest rate for mortgage purposes: 2014: 3.5; 2015: 3.1
- Ten-year government bond yield: 2014: 1.5
- Balance of payments (Percent of GDP)
- Current account balance: 2014: 8.8; 2015: 6.6; 2016: 10.3; 2017 Est.: 9.6; 2018: 9.2
- Trade balance (goods and services): 2014: 12.0; 2015: 7.4; 2016: 11.3; 2017 Est.: 16.0; 2018: 16.2; 2019: 16.7
- Exchange rate
- Exchange rate regime: Joined EMU on January 1, 2008.
- Nominal effective rate (2010=100): 2014: 101.6; 2015: 97.7; 2016: 97.9
- Real effective rate, CPI-based (2010=100): 2014: 101.0; 2015: 98.4
Executive Board endorsement of staff appraisal; press release dated January 29, 2018.
