On behalf of the Maltese authorities, we thank staff for very constructive consultations in the context of the Article IV and of the Financial System Stability Assessment missions. Drawing on the two missions, staff have produced a fair and consistent set of reports on the health of the Maltese economy and financial system. The authorities welcome staff’s overall favorable assessment. They broadly agree with their policy recommendations, many of which are aligned with measures already being considered or implemented. The authorities appreciate the mutual trust developed through open dialogue during past consultations and value the Fund’s expert advice.
Macroeconomic outlook and risks
Malta has been one of the fastest growing economies in Europe since the global financial crisis and the outlook remains favorable, supported by rising export-oriented services, notably remote gaming, business and professional services, information and communication, and tourism. Going forward, growth is expected to gradually converge to its potential rate, which the authorities estimate solidly above 4 per cent.
As staff note, risks to the outlook are mainly external, notably rising global protectionism, a disorderly Brexit, and further tightening of global financial conditions. As a small open economy, Malta is highly exposed to external shocks and to mitigate these risks, the country has long been proactively promoting a well-diversified and competitive economy, together with fiscal prudence. With regard to Brexit, the authorities note that the overall impact on Malta may not necessarily be adverse, as the well-developed and internationally oriented financial sector might remain attractive and even benefit from relocating financial services providers.
Regarding domestic risks, the authorities are fully aware of the significance of reputational risks. Following some cases of weak implementation of the AML/CFT framework, they are taking prompt remedial action to preserve the attractiveness of Malta as an international financial center and a place to conduct business. Contrary to staff’s assessment, the authorities are less concerned about the risk of a sharp downward correction in housing prices, as their recent rise, although rapid, has been largely driven by economic fundamentals, including sustained inflows of foreign workers and rising disposable income.
Safeguarding Stability, Integrity, and Innovation in the Financial System
Despite its large size, complexity, and linkages with the rest of the world, the Maltese financial system remains sound and well insulated from external shocks, as foreign-linked intermediaries have limited domestic exposures. The authorities welcome the strong resilience underscored by the solvency and liquidity stress tests carried out in the context of the FSAP mission, which were based on quite severe adverse scenarios.
The authorities remain vigilant over banks’ asset quality, focusing on remaining pockets of vulnerabilities in the construction and real estate sectors. Since 2016 they have started to collect more granular data on loans and established a central credit registry for monitoring emerging risks closely. Moreover, the Central Bank of Malta will be imminently introducing borrower-based measures to prevent the buildup of vulnerabilities.
The FSAP found some gaps in the supervisory framework, which the authorities are addressing decisively. They agree that the operational capacity for the supervision and the crisis management functions has not kept pace with the rapid development of the financial system. The Malta Financial Services Authority (MFSA) has already upgraded the compensation package for its staff and started hiring new resources. In addition, the authority will be exempt from the regulation on public employment, which required the government’s approval of the size of the staff complement, thereby ensuring that the MFSA’s recruiting process is more efficient. The MFSA’s operational autonomy will further benefit from the ongoing review of the regulatory fees, and by the adoption of a medium-term budget, with government contributions closing any shortfall of projected regulatory revenues. The authorities are also working on bringing the insolvency regime in line with international standards.
Similarly, the authorities have taken corrective action to safeguard financial integrity and maintain trust in the system, after the events which led to the revocation of Pilatus bank’s license. This incident did not affect the stability of the financial system, as the bank was solvent and had no exposure to residents, but it raised reputational risks that required immediate action. The authorities have performed a thorough National Risk Assessment, which informed a detailed 50-point action plan, which they are implementing.
The authorities welcome staffs assessment that the plan goes in the right direction by, amongst other measures:
〉 adding resources to both the MFSA and the Financial Intelligence Analysis Unit (FIAU);
〉 fostering their collaboration though an already agreed Memorandum of Understanding;
〉 improving the understanding of risks among all competent authorities;
〉 enhancing the application of preventive measures, and of timely corrective measures, including dissuasive penalties.
Staff also recommended establishing a regional approach for the supervision of the AML/CFT framework. While noting that this recommendation should be elevated at the regional level, the authorities think that a regional supervisory framework would not be feasible and effective absent deeper and broader harmonization of national legislations.
The authorities intend to encourage the diffusion of advanced and innovative technologies. The government is developing a multipronged approach to facilitate a variety of applications of blockchain and artificial intelligence and has created a regulatory framework for the digital ledger technology and its application in the financial services industry. This new framework aims at enabling innovation and competition, while mitigating the related financial stability and integrity risks, and ensuring adequate protection of consumers and investors.
A Prudent Fiscal Policy oriented to Sustained and Inclusive Growth
The strong economic performance and the high take-up of the Individual Investor Program (IIP) boosted again revenues in 2018 and, together with lower than anticipated spending, contributed to a fiscal surplus well above the initial government target of 0.5 per cent of GDP (exclusive of IIP proceeds). The budget for 2019 aims a smaller surplus to allow for higher capital spending and some targeted tax relief for the most vulnerable, in part offset by savings in current and interest outlays.
Malta is facing the challenging task of managing its own success. Robust and rapid growth have inevitably run into capacity constraints and increased the need for upgrading the physical and human capital. This requires large infrastructure projects to improve road quality and waste management, boost the supply and affordability of housing as well as health and education facilities and services.
The authorities are taking important steps to enhance the availability of financial and technical capacity to address structural bottlenecks and support actual and potential growth.
First, the authorities have completed and followed up on comprehensive spending reviews covering social security, health services, and education, as well as established an institutional framework for the comprehensive spending reviews process, including ad-hoc training of staff.
Second, the authorities are taking steps to improve the reporting of tax expenditures, public investment management and risk analysis, and the framework for managing fiscal risks. In this respect, they appreciate Fund’s technical advice received during the recent Fiscal Transparency Evaluation.
Third, the authorities have already initiated major projects targeting road and maritime infrastructure, hospitals, laboratories, and waste management. These projects will be financed by public and private resources and managed by Infrastructure Malta, a public agency responsible for the entire procurement process, thereby avoiding delays resulting from necessary government’s approval for each stage of the process.
Fourth, two specialized public agencies, Malta Enterprise and Malta Development Bank have explored several initiatives to enhance access to finance for SMEs, with a special focus on start-ups and more generally innovative sectors.
Finally, the authorities are focusing on measures to reduce absolute and relative poverty and improve social inclusion. They appreciate staffs analysis and valuable technical contribution to the policy debate, that supports current measures to boost women labor participation, lengthen working lives by rewarding late retirement, and upskill the local and foreign-sourced labor force.