Malta: Staff Concluding Statement of the 2016 Article IV Mission
IMF News, December 16, 2016
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- Published: December 16, 2016
Growth outlook and macroeconomic projections
- Domestic demand-led GDP growth is projected to reach about 4 percent in 2016 and stabilize at a potential rate of 3 percent over the medium term.
- Strong job creation is expected to continue, keeping unemployment low.
- Inflation is set to increase modestly as import prices recover.
- Sizable services balances will continue to support current account surpluses.
External and domestic risks
- External downside risks predominate due to Malta’s high openness and global developments:
- Vulnerability to a weaker external environment and rising anti-globalization sentiment in large economies.
- Uncertainties surrounding the Brexit negotiations could weigh on economic activity through direct and indirect exposures.
- EU-wide corporate tax reform may impact unfavorably Malta’s economy.
- Domestic risks:
- Persistence of upward trends in mortgage lending and the housing market may lead to imbalances, amplifying risks to the financial system and the broader economy.
- Recent structural reforms could have a stronger-than-expected positive effect on growth.
Fiscal outlook and recommendations
- Near-term fiscal consolidation:
- The 2016 fiscal deficit is expected to be 0.7 percent of GDP, well below the budget target.
- The 2017 deficit is projected to decline modestly to 0.6 percent of GDP.
- The 2017 projection results in a structural adjustment of 0.4 percentage point of GDP.
- Public debt is expected to be reduced to below 60 percent of GDP.
- Policy priorities for medium-term consolidation:
- Better specification of policy measures supporting achievement of a structural fiscal balance.
- Priority to contain the fast-growing wage bill and intermediate consumption.
- Build on recommendations of recent in-depth spending reviews and conduct similar reviews for the broader public sector.
- Enhance tax collection efficiency to support fiscal adjustment and create space for growth-enhancing policies.
- State-owned enterprises and fiscal risks:
- Enemalta’s restructuring has led to efficiency gains and supported a return to profitability; however, Enemalta’s elevated government guaranteed debt calls for continued close monitoring.
- Air Malta’s recovery is lagging; the company continues to generate losses and needs faster restructuring to contain fiscal risks.
- Long-term spending pressures:
- Recent pension system reforms are commendable given long-term demographic pressures.
- Additional measures recommended: align effective retirement age with life expectancy, better link pensionable income to life-time earnings, and lengthen the contributory period.
- Continue efforts to incentivize voluntary long-term savings to ensure socially sustainable pensions.
Financial stability and access to finance
- Banking sector condition and challenges:
- Domestic banks report adequate capitalization and liquidity, and profitability above levels seen in peers.
- Challenges: protracted low interest rates, weak credit growth, legacy non-performing loans (NPLs) in the corporate segment.
- High and increasing exposure of banks to the property market may increase financial stability risks.
- Future regulatory changes and an uncertain external environment, including Brexit, may affect banks’ profitability and capacity to support growth.
- Strengthening resilience:
- Deploy targeted macro-prudential tools linked to mortgage lending to enhance banks’ and households’ resilience to property market swings.
- Close data gaps to calibrate macro-prudential measures.
- Review fiscal incentives related to the property market and address housing supply bottlenecks to avoid imbalances.
- Faster resolution of legacy NPLs would strengthen private sector balance sheets and unlock resources for growth.
- Recent regulatory changes require banks to submit time-bound plans to reduce their NPL ratios; efforts to streamline legal proceedings would foster resolution of distressed loans.
- Ensure adequate supervisory resources given the growing size of the financial sector.
- Malta Development Bank (MDB):
- MDB’s strategy aims to increase banks’ lending to credit-constrained SMEs and provide co-financing for large development and social projects.
- Critical safeguards: ensure MDB’s operations lead to new credit origination to viable firms rather than evergreening existing exposures; implement robust governance, prudent risk assessment, adequate supervision, and well-designed origination rules to mitigate contingent liability risk to public finances.
- Integrity risks:
- Ongoing vigilance needed given high demand for Malta’s Individual Investor Program and rapid growth of remote gaming and financial services.
- Continue close coordination between regulatory institutions, provide adequate resources for inspections and training, and robustly implement the Anti-Money Laundering/Combating the Financing of Terrorism framework in line with the 2012 Financial Action Task Force’s standards.
Structural reforms to boost productivity and inclusiveness
- Continued reform momentum aligned with the government’s national strategy would help address remaining structural impediments, close the income gap, and make growth more equitable.
- Priority reform areas:
- Increase labor force participation:
- Further integrate the inactive population, particularly women, into the labor market.
- Expand labor activation policies.
- Enhance education quality in line with the recently completed in-depth review to reduce skill mismatch.
- Further incentivize delayed retirement to boost labor force participation among the elderly.
- Enhance SMEs’ innovation:
- Higher R&D activity to boost productivity growth and competitiveness.
- Strengthen firms’ balance sheets and broaden SMEs’ non-bank and equity financing to alleviate financing constraints, including for innovative projects.
- Increase public R&D spending as a share of GDP towards the EU average.
- Promote close partnerships with education institutions and improved access to foreign markets.
- Streamline the legal process:
- Measures to speed up settlement of civil and commercial cases will strengthen the business environment.
- Complete ongoing work to address shortcomings of insolvency and bankruptcy frameworks to improve contract enforcement and allow faster resolution of balance sheet problems.
Source: Malta: Staff Concluding Statement of the 2016 Article IV Mission (December 16, 2016).