Staff Report for The 2012 Article IV Consultation—Informational Annex
Author: International Monetary Fund
Publication Date:
07 May 2012
eISBN:
9781475503388
Language:
English
Keywords:
ISCR; CR; debt; trade balance; deficit; real GDP; asset; net; household debt; debt stock; sustainability framework; real GDP growth; debt-creating flow; Real interest rates; Debt sustainability analysis; Current account deficits; U.S. dollar
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This Article IV Consultation reports that Malta’s economy continues to perform well amidst considerable turbulence in the euro area. While spillovers have remained contained to date, Malta’s large financial sector and highly open economy heighten contagion and financial stability risks. The government, which has a one-seat majority in Parliament, narrowly survived a vote of no confidence. The policy challenge is to maintain growth and employment while building buffers against a highly uncertain international environment.

Abstract

This Article IV Consultation reports that Malta’s economy continues to perform well amidst considerable turbulence in the euro area. While spillovers have remained contained to date, Malta’s large financial sector and highly open economy heighten contagion and financial stability risks. The government, which has a one-seat majority in Parliament, narrowly survived a vote of no confidence. The policy challenge is to maintain growth and employment while building buffers against a highly uncertain international environment.

ANNEX I. MALTA—FUND RELATIONS

(As of December 31, 2011)

Membership Status

Joined: September 11, 1968; Article VIII

General Resources Account

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SDR Department

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Outstanding Purchases and Loans

None

Financial Arrangements

None

Projected Obligations to Fund 1/

(SDR million; based on existing use of resources and present holdings of SDRs)

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Exchange Rate Arrangement

Member of the euro area since January 1, 2008.

Article IV Consultation

Malta is on the standard 12-month consultation cycle. The previous consultation discussions took place during November 11–22, 2010, and the staff report (Country Report No.11/29, 01/28/11) was discussed on January 28, 2011.

Technical Assistance

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Resident Representative

None

ANNEX II. MALTA—STATISTICAL INFORMATION

(As of February 1, 2012)

Data provision is adequate for surveillance purposes. Significant progress in improving macroeconomic statistics has been made in close cooperation with the European Central Bank (ECB) and Eurostat while upgrading statistical systems to meet the euro area standards1. Most macroeconomic statistics can now be accessed through Eurostat. The country has been a participant in the GDDS since September 11, 2000, with the metadata posted on the IMF’s Dissemination Standards Bulletin Board.

Real sector statistics: Data on retail and consumer prices, labor market indicators, and tourism arrivals are released monthly, usually with a short lag. These data are available through Eurostat and via the Internet at the Central Bank of Malta (CBM) and the National Statistical Office (NSO) websites. Presently the NSO releases national accounts data in euros with one quarter lag. However, national accounts data have remained subject to substantial revisions, often affecting several years. The reasons for revisions generally include (i) large statistical discrepancies (captured under stock building), particularly on the first release, (ii) changes in data classification for large shipments of oil exports and imports, and (iii) revisions of deflators. Furthermore, supply-side GDP estimates by type of economic activity are only available at current prices. The producer price index for manufacturing has been published, but that for services sector is still under discussion. National accounts imports and exports data are not disaggregated into goods and services. The harmonized index of consumer prices was first published in May 2004. It is recommended that the Maltese authorities start to compile the financial balance sheets and transactions by sectors, household debt, and saving rate.

Government finance statistics: Fiscal statistics meet basic requirements, with quarterly accrual-based data on general government operations compiled in accordance with the ESA95 methodology and disseminated with a one-quarter lag. The general government comprises data from the consolidated fund of government adjusted to include other accounts of government, the accruals elements, and the financial performance of the Extra Budgetary Units and of the Local Councils. The NSO also publishes monthly statistics on the cash operations of the central government, for which the authorities plan to utilize the targeted timeliness flexibility option in light of additional time required for the final month of the fiscal year.

Monetary and financial statistics: Monetary statistics are timely and of good quality. Since the entry into the euro area in January 2008, monetary data for IMF statistical publications are now obtained through a gateway arrangement with the ECB, thus reducing the reporting burden of the country. The country participated in the pilot project—Coordinated Compilation Exercise—for Financial Soundness Indicators and submitted indicators as of end-2005 along with metadata, which are now available to the public through the IMF’s website (http://fsi.imf.org).

External sector statistics: Summary data (merchandise trade, current account balance, and selected financial account data) are released on a quarterly basis with a lag of about three months. More detailed BOP and IIP data are released annually, the latter with a lag sometimes exceeding one year. The balance of payments data are usually subject to large revisions. Summary trade statistics are released monthly with a lag of about 40 days. The CBM also publishes the external debt templates in line with requirements of the SDDS, including both gross and net external debt.

Malta: Table of Common Indicators Required for Surveillance

(As of Feb 6, 2012)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis a vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Reflects the assessment provided in the data ROSC (published on August 18, 2006, and based on the findings of the mission that took place during June 2005) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

Same as footnote 7, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment, and revision studies

ANNEX III. MALTA—PUBLIC SECTOR DEBT SUSTAINABILITY ANALYSIS

General government debt has been on an increasing path, rising from 62 percent of GDP in 2007 to 69 percent of GDP in 2010 as the fiscal position has deteriorated. Under the baseline scenario, the debt-to-GDP ratio is expected to peak at 71.5 percent in 2012. In the medium term, expected primary surpluses are expected to put the debt ratio on a downward path reaching 62 percent by 2017.

A significant amount of contingent liabilities for the Maltese government, such a government debt guarantees emanating from the operation of public corporations, constitute additional risks. Government guaranteed debt amounted to 16.9 percent of GDP in 2011 Q3, a 2 percentage point increase from 2009, 60 percent of which relates to Enemalta debt. 1

In order to assess the sustainability of debt a number of adverse shocks are considered.

  • A permanent growth shock of ½ standard deviation, which brings growth permanently down for the whole forecast period, is expected to put debt on an increasing path reaching 72 percent by 2017.

  • A primary balance shock of ½ standard deviation would still set debt on a sustainable path, reaching 67 percent of GDP by 2017.

  • Given the magnitude of contingent liabilities and their importance in debt dynamics, a one-time shock of 10 percent of GDP has been considered. This would capture the case that some contingent liabilities would be called and would be recorded on-balance sheet. Given that this is a large but temporary shock, the debt–to-GDP ratio increases to 81 percent in 2013 (when the shock takes place) and then declines to 72 percent by 2017.

The structure of public debt (Figure 2) is predominantly in the form of long-term securities excluding financial derivatives and held by resident credit institutions and households.

Figure 1.
Figure 1.

Malta: Public Debt Sustainability: Bound Tests1/2/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2012, 105; 10.5089/9781475503388.002.A002

Sources: International Monetary Fund, country desk data, and IMF staff estimates.1/ Shaded areas representactua ldata. Individual shocksare permanentone-half standard deviaton shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated overthe ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occurin 2013, with real depreciation defined as nominaldepreciation (measured by percentage fall in dollar value of local currency) minus do mesticinflation (based on GDP deflator).
Figure 2.
Figure 2.

Malta: The Structure of Public Debt

Citation: IMF Staff Country Reports 2012, 105; 10.5089/9781475503388.002.A002

Sources: Ministry of Finance; and Eurostat.
Table 1.

Malta: Public Sector Debt Sustainability Framework, 2007-2017

(Percent of GDP, unless otherwise indicated)

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Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g +p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

ANNEX IV. MALTA—EXTERNAL DEBT SUSTAINABILITY ANALYSIS

Malta’s gross external debt is very large and rising. However, Malta’s ample external assets appear to comfortably cover its external liabilities. The external asset accumulation is likely to continue over the medium-term, resulting in further increases in net external assets. Overall, Malta’s external position is likely to remain robust and resistant to various types of shocks.

Malta’s gross external debt is very large and rising, while the accumulation of external assets increased significantly. As of September 2011, the gross external debt position recorded €33.7 billion or 525.4 percent of GDP, up from €29.8 billion at end-2009. The gross external debt is mostly originated from other monetary and financial institutions (OMFIs) 86.5 percent of total, mostly short-term non-resident deposits, and to lesser extent short-term and long-term loans. On the other hand, the net asset position doubled from €5 billion at end-2009 to about €10.5 billion or about 164 percent of GDP at end-September 2011. The financial transactions of OMFIs accounted for most of the changes. The Maltese OMFIs held net liabilities through short-term deposits and loans; at the same time, possessed substantial foreign assets through long-term loans and securities. It is important to note that this investment profile may, however, expose Malta to the risk of maturity mismatch, especially in the event of large short-term redemptions that would require large-scale asset liquidation.

A baseline scenario projects that the net external asset position would continue to increase throughout the medium-term. The external debt projections reflect planned external financing needs1 and the balance of payment developments, particularly the underlying financial transactions—foreign direct investment, portfolio and other investment. The continued narrowing in current account deficit is expected to contribute to stabilizing Malta’s external debt, while increasing the net asset position. By 2017, net external assets reprojected to reach 165.4 percent of GDP.

The Maltese external position remains robust to various shocks. Alternative scenarios assume a permanent ¼ standard deviation shock applied to real interest rates, growth rate, and current account balance, as well as a one-time real depreciation of 30 percent in 2013.

  • Interest rate and growth shocks are likely to have a positive impact on Malta’s external position. Given the large net external assets, the impact of a permanent ¼ standard deviation increase of about 150 basis points increase in real interest rate would increase the net asset position by about 13 percent of GDP from the baseline. Likewise, a permanent ¼ standard deviation decline in growth rate from 2.1 percent to 1 percent would increase the net asset position by approximately 11 percent of GDP.

  • An increase in the current account deficit would deteriorate the Maltese net asset position. An increase of non-interest current account deficit to 11.8 percent of GDP, from 9 percent of GDP in the baseline scenario, would lower the net asset position by 13 percent of GDP.

  • The real depreciation shock would significantly increase the net asset position by nearly 80 percent of GDP.

Table 1.

Gross and Net External Debt

(Billions of euros)

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Source: Central Bank of Malta.

The gross external debt illustrates only a fraction of the overall International Investment Position of Malta with countries abroad. Gross external debt data do not comprise Malta’s claims vis-à-vis foreign countries which act as a counter balance to Malta’s gross debts. Detailed data according to the International Investment Position can be found in the website and the Quarterly Review of the Central Bank of Malta.

Data are provisional.

A negative figure denotes a net asset position.

The debt of the OMFIs is fully backed by foreign assets.

Comprising the non-monetary financial institutions, insurance companies, non-financial corporations and NPISH.

Table 2.

Malta: External Debt Sustainability Framework, 2007-2017

(Percent of GDP, unless otherwise indicated)

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Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 1.
Figure 1.

Malta: External Debt Sustainability: Bound Tests 1/2/

(External debt, percent of GDP)

Citation: IMF Staff Country Reports 2012, 105; 10.5089/9781475503388.002.A002

Sources: International Monetary Fund; Country desk data; and IMF staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2013.
1

The 2007/08 Eurostat peer review on the implementation of the European Statistics Code of Practice found that the NSO had reached a remarkable compliance with large parts of the Code despite its small size, but underscored the need to improve adequacy of resources and data quality management.

1

According to ESA95, as long as the guarantee is not called (in the event of a default by a public corporation), it is a contingent liability, recorded off-balance sheet.

1

For public sector external financing, the amortization schedule and interest payments are from the Article IV 2012 questionnaire response. For private sector external financing, total amortization due assumes 20 percent of medium- and long-term external obligations and interest payments are derived from the projected net current income, of which net interest income on debt and other investment.

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Cover IMF Staff Country Reports
Malta: 2012 Article IV Consultation: Staff Report; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund
Volume/Issue:
Volume 2012: Issue 105
Publisher:
International Monetary Fund
ISBN:
9781475503388
ISSN:
1934-7685
Pages:
77
DOI:
https://doi.org/10.5089/9781475503388.002

Malta: Public Debt Sustainability: Bound Tests1/2/

(Public debt in percent of GDP)

Malta: The Structure of Public Debt

Malta: External Debt Sustainability: Bound Tests 1/2/

(External debt, percent of GDP)