Malta—Concluding Statement of the 2019 Article IV Mission
IMF News, January 16, 2019
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- Published: January 16, 2019
Key policy recommendations
- Financial sector
- Safeguard financial integrity by continuing the reforms and swiftly remedying identified deficiencies in the implementation of the anti-money laundering and countering the financing of terrorism (AML/CFT) framework.
- Guarantee the long-term independence of the supervisor and increase supervisory capacity.
- Enhance monitoring of the non-bank financial sector and close remaining data gaps.
- Housing market
- Consider gradually narrowing the exemptions to the envisaged new borrower-based macroprudential measures.
- Ensure that fiscal incentives do not amplify house price cycles.
- Ensure measures to make housing more affordable remain targeted on low-income families and consider stepping up the provision of social housing.
- Fiscal policy
- Continue with prudent policy that aims at fiscal balance excluding proceeds from the Individual Investor Program (IIP) in the medium term.
- Shift the balance of expenditure towards infrastructure and contain long-term fiscal risks by addressing age-related spending pressures and further restructuring financially vulnerable state-owned enterprises (SOE).
- Improve public investment management and risk analysis.
- Continue to strengthen revenue collection and broaden the tax base.
- Structural reforms
- Encourage further participation of women and elderly workers in the labor market and strengthen human capital.
- Increase productivity by fostering innovation, including through more spending on research and development (R&D) and easier access to financing for small and medium enterprises (SMEs).
Economic outlook and risks
- Recent performance and near-term projections
- Real GDP growth was very high in the first three quarters of 2018.
- Growth is projected at close to 6.5 percent in 2018.
- Growth is projected at above 5 percent in 2019, mainly driven by buoyant domestic demand.
- The current account surplus likely peaked in 2017 but is expected to remain large, reflecting continued trade surplus in services.
- Emerging constraints and pressures
- Mounting pressure on infrastructure, rapidly rising housing costs, and shortages of labor and skills increasingly pose challenges.
- Despite tight labor market conditions, generalized wage and price pressures are yet to materialize.
- Risks to the outlook (broadly balanced)
- Downside risks: a disruptive Brexit, rising global protectionism, a sharp tightening in global financial conditions, possible changes in international corporate taxation, slow progress in closing infrastructure gaps, failure to implement AML/CFT effectively, and a sharp correction in housing prices.
- Upside risks: continued strength in employment growth and private consumption, and faster or stronger execution of investment plans.
Safeguarding financial stability and integrity
- Banking system
- The banking system remains well-capitalized, liquid, profitable and resilient, but faces challenges from low interest rates, increased competition from non-bank finance, heightened compliance costs, and inefficiencies in the corporate insolvency process that inhibit faster resolution of non-performing loans (NPLs).
- Non-bank financial sector and corporate financing
- Intercompany loans have become the main source of funding for firms.
- Direct issuance of debt securities and credit from non-bank financial institutions have grown rapidly, albeit from a low base.
- Strengthening data quality and management is needed to enable in-depth monitoring of contagion risks.
- Enhance analytical tools for risk assessment of the non-bank financial sector to mitigate financial stability risks.
- Macroprudential and housing-related measures
- Planned introduction of loan-to-value (LTV), and debt-service-to-income (DSTI) limits, as well as amortization requirements, is appropriate given rising bank exposure to real estate risks.
- To improve effectiveness, refine measures over time, including narrowing exemptions from LTV and DSTI limits for loans against secondary and buy-to-let properties.
- Align tax treatment of rental income with that of other sources of income to avoid amplifying house price cycles.
- Supervisory capacity and crisis management
- The Malta Financial Services Authority (MFSA) is under strain due to increasing numbers of financial entities, rapid product development, evolving regulation, and a tightening labor market.
- Ensure long-term financial and operational independence of the MFSA and keep resources in line with MFSA’s hiring requirements.
- Avoid delay of supervisory actions through judicial appeals and adopt an administrative insolvency regime for banks.
- AML/CFT implementation
- Large and internationally connected financial and remote gaming sectors, strong demand for the IIP, and envisaged expansion of blockchain-related activities create significant ML/TF risks.
- Measures to implement the recently-enacted 50-point action plan (based on the latest National Risk Assessment) are steps in the right direction; the mission supports its full implementation without delay.
- Immediate action required to close gaps in supervisory and enforcement capacity, improve understanding and identification of risks through intrusive, risk-based supervision, and ensure timely and adequate sanctions for breaches.
- Guarantee that virtual asset service providers implement AML/CFT requirements effectively and are monitored in line with the Financial Action Task Force standards.
Fiscal policy: prudence and investment
- Fiscal stance and targets
- Outturns as of November 2018 suggest another year of fiscal surplus – above the initial government target of 0.5 percent of GDP – owing to buoyant tax revenues and IIP proceeds.
- Public debt is declining fast and is projected to drop below 40 percent of GDP by 2021.
- In the short to medium term, the government aims for a positive structural balance, which the mission deems appropriate given the favorable cyclical position and contingent liabilities.
- Reducing fiscal risks and reorienting spending
- Identify structural measures to strengthen the fiscal position and create space for infrastructure investment.
- Pursue restructuring of financially vulnerable SOEs.
- Strengthen public investment management and risk analysis, notably by introducing cost-benefit analysis and publishing annual fiscal risk statements.
- Institutionalize comprehensive spending reviews to identify further savings.
- Explore further incentives to deter early retirement and increase take-up of private pension schemes.
- Reduce reliance on IIP and corporate tax by broadening the tax base; recent measures to combat tax evasion and avoidance and increase VAT compliance are positive steps.
Structural reforms to sustain high and inclusive growth
- Address infrastructure gaps
- Recent focus on upgrading road infrastructure is appropriate to alleviate severe traffic congestion and its impact on productivity and the environment.
- Continue efforts to avoid overlapping responsibilities and improve planning to enhance implementation of projects co-financed by EU funds or the private sector through public-private partnerships.
- Labor market, skills, and participation
- Labor shortages and the availability of skilled staff remain pressing problems.
- Recent initiatives to strengthen the vocational and training system and make it more inclusive should help bridge the skills gap; continuous monitoring and evaluation is warranted.
- Sustained efforts to “make work pay” and delay retirement, including through lifelong learning, should support rising female labor force participation and increase the effective retirement age.
- SMEs, financing, and innovation
- Malta’s spending on R&D remains low compared to other EU countries.
- Increase financial support for startups and strengthen links between academia and the private sector.
- The Malta Development Bank’s (MDB) planned financing schemes for SMEs and education infrastructure could importantly contribute to lending for investment and boosting innovation, while ensuring prudent risk assessment and robust governance for MDB operations.
- Housing affordability and social protection
- Rapidly rising housing costs increasingly affect vulnerable households.
- Recent relaxation of eligibility requirements for rent subsidies is a step in the right direction; periodic review is recommended to ensure targeting on low-income households.
- Further efforts should be envisaged to accelerate the provision of social housing.
Source: Malta—Concluding Statement of the 2019 Article IV Mission (January 16, 2019), IMF Communications Department