Malta: Staff Report for the 2013 Article IV Consultation
Author:
International Monetary Fund. European Dept.
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Publication Date:
12 Jul 2013
eISBN:
9781475553093
Language:
English
Keywords:
ISCR; CR; liquidity position; government; authority; Malta; bank; government asset; consolidation effort; General government debt; energy reform plan; manageable government financing; government debt-to-GDP ratio
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This staff report on Malta’s Article IV Consultation highlights economic development and policies. Risks from the large international bank sector appear contained given limited balance-sheet exposure to the Maltese economy, though continued vigilance is warranted. Regulatory changes to increase loan loss provisions, and the funding of the deposit compensation scheme would help contain risks in the domestic banking sector. The main challenges for fiscal policy are to reverse the deterioration of public finances, and to strengthen the governance framework. Additional measures are needed to ensure that the fiscal deficit falls below 3 percent of GDP in 2013 and that public debt remains on a sustainable path.

Abstract

This staff report on Malta’s Article IV Consultation highlights economic development and policies. Risks from the large international bank sector appear contained given limited balance-sheet exposure to the Maltese economy, though continued vigilance is warranted. Regulatory changes to increase loan loss provisions, and the funding of the deposit compensation scheme would help contain risks in the domestic banking sector. The main challenges for fiscal policy are to reverse the deterioration of public finances, and to strengthen the governance framework. Additional measures are needed to ensure that the fiscal deficit falls below 3 percent of GDP in 2013 and that public debt remains on a sustainable path.

Context

1. Compared with its euro area peers, Malta has shown remarkable macroeconomic resilience. Average growth of the Maltese economy (relative to historical average) has been the best in the euro area since the beginning of the crisis. Malta suffered lower output and employment losses than most advanced economies, and none of its financial institutions required solvency or liquidity assistance. As a result, real GDP is now 2½ percent above pre-crisis level (compared with 2¼ percent below for the euro area) and unemployment is close to historical lows (Appendix I). However, economic growth slowed in 2012 to about ¾ percent, from 1¾ percent in 2011, reflecting a weak external environment and subdued domestic demand. In addition, the fiscal deficit widened by ½ percent to 3.3 percent of GDP and government and guaranteed debt is uncomfortably high (90 percent of GDP), constraining the fiscal space in the event of further shocks.

uA01fig01

Average Growth 2007-2012, Relative to Historical Average

(Percent)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01fig02

Real GDP1/

(t=100)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: IMF, World Economic Outlook; and IMF staff calculations.1/ t denotes first quarter of recession.

2. Robust exports have been the main source of growth, bringing the current account into surplus in 2012. The sizeable improvement in the trade balance (10 percent of GDP since 2006) reflected successful export diversification and depreciation of the real effective exchange rate, which is broadly in line with fundamentals (Box 1). As a result, Malta’s export market share in services increased rapidly, driven by strong growth in the traditional tourism sector and some new high value-added activities, including financial and business services, online gaming, and ICT. Indeed, Malta’s track record of innovation and finding export-oriented opportunities has been remarkable (see Appendix II).

uA01fig03

Change in Trade Balance, 2006-2012

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: Eurostat

Malta’s Competitiveness Developments

Malta’s price competitiveness measures have improved over the last few years. The CPI-based real effective exchange rate depreciated by 9.5 percent between 2009 and 2012, fully offsetting the appreciation that followed Malta’s accession to the EU in 2004. The improvement of the real effective exchange rate based on unit labor cost has been smaller but also substantial. Owing to the relative size of Malta’s trade with the United Kingdom, Asia, and the United States, the depreciation of the euro against the UK pound, US dollar, Singaporean dollar and yen between 2009 and 2012 has contributed to this improvement. In contrast, Malta has lost price competitiveness within the euro area given its higher rate of inflation and stronger labor cost growth.

uA01fig04

Real Effective Exchange Rate

(2005=100)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: IMF, Information Notice System.

The estimates of exchange rate valuation are broadly in line with fundamentals. The correction of the equilibrium real exchange rate has been almost 15 percent since the 2009 Article IV consultation. The macro balance and external sustainability approaches also show very small deviations from the equilibrium.

Estimates of Exchange Rate Valuation 1/

(Percent)

article image
Sources: IMF article IV staff reports; and IMF staff estimates.

+/- indicates exchange rate over/undervaluation; see IMF Occassional Paper No. 261 for details on the methodology underlying the estimates in this table.

3. Despite the slowdown in growth, inflation remained elevated in 2012. The HICP inflation inched up to 3.2 percent in 2012 from 2.5 percent in 2011. The main reason, however, was higher prices and some methodological changes related to tourist services, which are mainly oriented towards foreigners and therefore have little impact on domestic consumption. That being said, inflation moderated to 0.8 percent in May 2013.

4. Financial spillover from the euro area crisis has so far remained contained reflecting limited reliance on external finance by core domestic banks and the government.

  • The core domestic banking sector is largely funded by resident deposits, while the large international banking segment has limited balance sheet exposures to the Maltese economy (Box 2). Unlike many other EU countries, Malta has not experienced any deleveraging pressures, deposits and credit to the private sector continued to grow in 2012, albeit at a slower pace than in 2010-11, and Maltese banks outperformed European peers in terms of profitability (Box 3). Since developments in Cyprus, the fluctuation of bank liabilities has remained within the historical average.

  • The Maltese sovereign bond market weathered the storm in other euro area debt markets unscathed, with yields declining on strong domestic demand and manageable government financing needs. In contrast with other advanced economies, 96 percent of Maltese government debt is held by residents, limiting financial spillovers.

uA01fig05

Ten-year Government Bond Spreads

(Over 10-year German bunds, basis points)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01fig06

Nonresident Holding of General Government Debt, 2012

(Percent of total)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Datastream; Bloomberg; country authorities; and IMF staff calculations.

5. Balance sheet vulnerabilities of the non-financial private sector remain contained. Household debt has increased rapidly since EU accession and reached 63 percent of GDP by end-2011 (latest data available), broadly catching up with the EU average. Despite this increase, households’ net financial assets remain positive, standing at 170 percent of GDP, which is among the highest in the euro area. The corporate debt stands at 140 percent of GDP in 2012, which is relatively high. However, this reflects to some extent the presence of foreign firms, resulting in a large share of intra-group loans matched by intra-group claims on the asset side. Furthermore, around half of this debt is in the form of long-term loans, and the corporate sector also has sizeable assets.

uA01fig07

Household Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01fig08

Non-financial Corporations Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: Eurostat; and IMF staff calculations.

Structure of the Banking Sector

Malta has a large and sharply segmented banking sector. While total banking sector assets exceed 8 times GDP, the largest part of the sector has no balance sheet exposure to the Maltese economy and transactions are exclusively with non-residents. The Central Bank of Malta (CBM) classifies banks in three different categories according to the extent of their involvement in business with residents. Core domestic banks provide around 97 percent of bank lending to residents in Malta, and collect around 94 percent of resident deposits. At the other end of the spectrum, international banks have no balance sheet exposure to the Maltese economy.

uA01fig09

Total Assets

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Central Bank of Malta; and European Central Bank.

Banks’ disparate balance sheet structures imply different risk profiles.

  • Core domestic banks have a traditional business model: they are largely funded by resident deposits and most of their assets represent claims on residents. This segment is dominated by two banks (HSBC and Bank of Valletta). Their main vulnerability is credit risk stemming from high exposure to the property market and collateral in the form of real estate.

  • International banks rely mostly on equity, wholesale (including intra-group) funding and non-resident corporate deposits of relatively long maturities. These banks lend these funds abroad and operate with a very small physical presence in Malta. Their main risk is liquidity risk. Two branches from Turkey have combined assets exceeding 300 percent of GDP. The largest subsidiaries are Deutsche Bank and Commbank Australia, with combined assets of about 100 percent of GDP.

  • Non-core domestic banks have a more diverse asset and liability structure, and about 10 percent of their balance sheet is linked to the domestic economy in the form of resident deposits and domestic loans and securities. The main risks stem from potential claims on the deposit compensation scheme and from cross-border deleveraging pressures.

uA01fig10

Banking sector assets

(Percent of total assets)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01fig11

Banking sector liabilities

(Percent of total liabilities)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: Central Bank of Malta

Performance of the Banking Sector

Despite turbulence in the euro area, the performance of Maltese banks has been relatively good.

  • Banks are adequately capitalized, profitable, and liquid. The aggregate capital adequacy ratio of all bank peer groups is well above the required minimum. The return on assets and return on equity ratios have actually improved in 2012 underpinned by higher non-interest income. The liquid assets cover substantial part of short-term liabilities, and the reliance on Eurosystem funding is very low.

  • The share of nonperforming loans (NPLs) has slightly increased in 2012, mainly due to subdued conditions in the construction and real estate sectors. Just under one third of all loans to the construction companies are classified as nonperforming.

  • Banks continued to expand their balance sheets in 2012 albeit at a slower pace than in 2010-11. Resident customer deposits and nonresident customer deposits increased during 2012, while the amount of wholesale funding remained broadly unchanged. Loans to residents have also marginally increased, driven primarily by mortgage lending and (to a lesser extent) loans to the manufacturing sector operating across a range of activities. The exposure of Maltese banks to EU sovereign debt is very low and diversified.

Key Financial Soundness Indicators, Dec 2012

(Percent, unless otherwise indicated)

article image
Sources: Central Bank of Malta; and European Central Bank.

Percent of GDP

Outlook and Risks

A. Staff’s Views

6. Despite good performance overall, GDP growth remains below potential and uncertainties abound. Domestic demand has remained lackluster, reflecting sluggish investment and private consumption and headwinds from a soft real estate market. Going forward, staff projects a moderate acceleration in real GDP growth in 2013-15, which means that Malta would continue to outperform the euro area average. The pick-up in activity to 1¼ percent in 2013 (from ¾ percent in 2012) is predicated on the recovery of private consumption and improved confidence, as policy uncertainty related to the electoral cycle decreases. While this would lead to some increase in imports, the current account balance is projected to remain slightly positive.

7. Short-term risks to this scenario are largely related to the external environment. A protracted period of slower growth in Europe or re-emergence of euro area financial stress if policy momentum is not sustained, would negatively affect the economy through the trade channel. In addition, close financial integration with the euro area entails a spillover risk via banking and financial markets channels (see Risk Assessment Matrix). However, relatively strong fundamentals in Malta, including a comfortable external position, very small reliance on external financing by the government, and relatively healthy balance sheets of households and nonfinancial corporates limit the vulnerability against these risks.

8. Recent events in Europe have heightened perceptions about risks of hosting a large banking sector in a small country. In the case of Malta these risks are contained because the large international banking segment (with assets about 5 times GDP) has limited balance sheet exposures to the Maltese economy and negligible contingent claims on the deposit compensation scheme. The sharp segmentation of the Maltese banking sector implies that the nature of potential threats to financial stability differs substantially across the various institutions.

  • The main risk facing the core domestic banks is credit risk, particularly related to the significant concentration of loans to the real estate and construction sectors and loans backed by real estate as collateral. The real estate market risk is contained by the very high share of owner-occupied properties, prudent loan-to-value ratios, and fair market valuations. However, the real estate market is particularly sensitive to shifts in confidence linked to the external environment and it could act as a channel that amplifies the impact of external risks. Furthermore, the over-reliance on immovable collateral may pose risks if the property market were to slow significantly.

  • A few non-core domestic and international banks could be exposed to liquidity risk. A change in perceptions of the risks facing creditors may lead to an increase in funding costs of these banks, particularly those which rely significantly on wholesale funding. However, given the insubstantial balance sheet links of these banks with residents, the effects on the economy are likely to be small in the near to medium term (see Appendix III).

9. In the longer term, regulatory and tax reform at the European and global level could adversely affect Malta’s attractiveness as a financial and business location. The Maltese economy has greatly benefitted from a business-friendly tax regime (see Appendix III). Although these gains are hard to quantify, the large increase experienced in financial services and other niche activities since 2004 are likely related to Malta’s accession to the EU, its macroeconomic stability, and relatively favorable tax regime. Over the last ten years, more than half of the growth in value added is explained by the growth in financial services, ancillary activities (legal, accounting, and consulting), remote gaming, and ICT. These sectors alone account for a quarter of total value added and 12 percent of employment. It is possible that greater fiscal integration of EU member states and a potential harmonization of tax rates could erode some of these benefits, with consequences on employment, output and fiscal revenues.

uA01fig12

Financial Services and Other Niche Activities

(Percent of total gross value added)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01fig13

Gross Value Added by Financial Sector, 2012Q41/

(Percent of total)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: Eurostat.1/ Ireland data is from 2012Q1, latest available.

The Authorities’ Views

10. The authorities broadly agreed with the outlook. Official projections of GDP growth and inflation in 2013-16 are very similar to those of staff. The authorities concurred that the main risk to growth comes from abroad, given continuing weakness in the euro area. The authorities are concerned about possible reputational risks to Malta following events in Cyprus, but expressed confidence that the Maltese banking sector is robust and stable. They also noted that the banking sector in Malta differs substantially from that of banks in some other EU countries affected by the crisis. In particular, the authorities emphasized that the size of Malta’s domestic banking system is below the euro area average. The rest of Malta’s banking sector is made of non-core and international banks with limited or no links to the domestic market. The authorities were also of the view that an EU-wide tax harmonization would not happen in the short or medium term.

Policy Discussions

A. Maintaining Financial Sector Stability

Staff’s Views

11. Malta has made progress in strengthening the oversight over its financial sector. To enhance monitoring of systemic risks a Joint Financial Stability Board (JFSB) was established by the Central Bank of Malta (CBM) and the Malta Financial Services Authority (MFSA) in January 2013. The JFSB was set up following the recommendations of the European Systemic Risk Board to EU member states and is having monthly meetings. In March 2013, following the intensification of the crisis in Cyprus, the authorities adequately strengthened supervision and introduced extraordinary monitoring of banks through daily reporting of liquidity. The authorities should continue monitoring closely developments in all banks, including links between foreign parent banks and their Maltese entities in the context of the existing colleges of supervisors. The authorities should also stand ready to take action if spillovers from abroad become imminent or the internationally-oriented banks increase their exposure to the domestic economy. In particular, the emerging trend by some small non-core banks of attracting resident deposits—often accompanied by aggressive interest rate policies—to finance assets outside of Malta, requires closer monitoring, though magnitudes are currently small.

12. Further efforts are still needed to shore up the resilience of Maltese banks and ensure financial stability. The ratio of provisions to nonperforming loans for core domestic banks has been hovering around 20 percent in recent years, which is the lowest among the EU countries. Despite ample availability of collateral, the authorities should tighten provisioning rules in order to increase the available buffers to cover loan losses. To this effect, the MFSA could issue guidelines, which would set common parameters for impairment triggers, forbearance measures, and homogeneous collateral valuation practices. In this context, the planned revisions to Banking Rule 09 should ensure that the incurred loan losses are recognized as early as possible, ensuring a more conservative approach to the measurement of provisions within the context of IFRS and providing a level playing field for provisioning in the banking sector. It would also be important to conduct a review of the judiciary procedures related to the foreclosure of the seized properties, which are currently very slow, impacting recovery values.

13. Work should also continue to strengthen crisis preparedness and management frameworks. The authorities could start strengthening the bank resolution framework in line with forthcoming reforms at the EU level. It might also be useful to conduct a crisis simulation exercise, given that the bank resolution framework in Malta is untested (there have been no bank failures in Malta in the past decade, and no bank required liquidity or solvency assistance since the beginning of the European financial crisis in 2008). Of particular importance is the need to boost the available resources of the Deposit Compensation Scheme (DCS). Recent amendments to the regulations to increase the size of the DCS to 1 percent of eligible deposits (from 0.77 percent) within the next 3 years are a step in the right direction. However, more needs to be done in view of sizeable contingent liabilities (relative to the size of the economy) and a potential large increase in eligible deposits covered by the scheme—as foreseen in the EU draft directive on the harmonization of the deposit insurance among EU countries.

Maximum Recourse on the Deposit Compensation Scheme, as of March 2013

(Percent of GDP)

article image
uA01fig14

Insured (Covered) Deposits, March 2012

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: Central Bank of Malta; and European Central Bank.

14. Looking ahead, like other EU countries, Malta will have to implement EU-level initiatives relating to the bank regulatory and supervisory frameworks. These include:

  • Basel III and Capital Requirement Directive IV (CRD IV). Although the Maltese banks have strong capitalization, the higher capital adequacy requirements of CRD IV may pose difficulties for individual banks facing the need to form additional provisions to deal with higher nonperforming loans. Therefore, these banks should be encouraged to further enhance capital buffers through higher profit retention, in line with the timeline proposed under Basel III. Tougher liquidity standards seem unlikely to create any challenges for banks. While an ample transition period for liquidity standards is envisaged, the Maltese authorities should continue to ensure that banks remain well prepared for the implementation of new requirements.

  • Single Supervisory Mechanism (SSM). As a result of the EU Council agreement on SSM of December 2012, Malta’s two largest domestic banks (Bank of Valetta and HSBC) and possibly CommBank Europe, will be placed under the direct oversight of the ECB from 2014. The MFSA should work closely with the ECB to ensure a smooth transition in the supervision of these banks. While the new framework is expected to result in a more efficient supervision over a longer term, efforts should be made to ensure no reduction in the supervisory capacity of these banks during the transition period.

15. Staff recommends a prompt and an in-depth examination of the financial sector under the IMF Financial Sector Assessment Program (FSAP). The MFSA is commended for its self-imposed quality controls of commissioning regular independent assessments against international standards. In line with previous staff recommendations, the MFSA is also undertaking a review of the consumer protection and business conduct functions with a view to enhance the integrity of the financial system. An FSAP would report progress since the 2003 assessment and point to areas where further efforts may be needed.

16. In light of the rapid growth in financial sector activities and online gaming, all relevant institutions should maintain an effective anti-money laundering framework. Malta has become an active destination for small international banks and non-bank financial intermediaries, such as re-insurance companies and various investment funds, whose activities are mostly outside Malta. While Malta has a comprehensive legal system to combat money laundering and has increased the resources devoted to the Financial Intelligence Analysis Unit (FIAU), the increasing complexity of the Maltese financial sector warrants closer AML/CFT related monitoring. The FSAP would be an opportunity to conduct a detailed AML/CFT assessment. The ongoing practices of joint inspections carried out by the MFSA and FIAU is a welcome step, but the number of on-site visits remains low and is not commensurate with the size of the financial sector (see Appendix III). To strengthen human resources, consideration should be given to hiring experts from abroad, financed by non-punitive levies on the financial sector.

17. The intention of the authorities to establish a development bank has merits, but requires careful evaluation. Development banks play an important role in many countries in extending the outreach of credit and other financial services to customers, who may not have easy access to commercial banks. However, the international experience with development banks has been mixed, as these banks have sometimes been subject to undue political pressure and weak supervision, which resulted in substantial losses to taxpayers. The authorities should ensure that the conditions required for successful operation of a development bank are in place (Box 4).

The Conditions Required for Successful Operation of a Development Bank

Recently, the Central Bank Governor has expressed interest in creating a development bank (DB) to address the national financing gaps not met by the commercial banks. The purpose of the DB would be to provide long-term financing for public projects in infrastructure and social sectors, such as education, communications, and environmental protection and rehabilitation. While the market failure to obtain finance and the positive externalities of such projects provide a rationale for the establishment of a DB, state intervention in the banking sector should be carefully crafted to mitigate the risks of political interference, poor governance, uncontrollable fiscal contingent liabilities, and unfair advantages of the DB over private banks. Some of the steps that can be taken to ensure that the social rate of return from the DB’s activities exceeds the private and fiscal costs are listed below:

  • Establish a clear mandate: The DB mandate should aim at filling the financing gaps arising from market failures. The mandate should specify the DB’s objectives, the time period required for implementing and achieving the objectives, and the provisions for transparent accountability.

  • Relationship with the private banks: The objective should be to act complementarily with respect to private banks, not compete with them.

  • Financial sustainability: The DB should be financially sustainable over time. However, the objective should not be to maximize profit but generate the resources required for the completion of mandated projects. The DB should be regulated and supervised as a commercial bank.

  • Instruments used: The mandate should be clear, specific and direct about the instruments used to correct the market failure.

  • Accountable and efficient governance: Good and accountable governance is critical to prevent government interference in credit decisions. One possible option could be to organize the DB as a corporation comprising shareholders, board of directors and management with each group clearly informed about its rights and responsibilities

The Authorities’ Views

18. The authorities agreed with the staff’s assessment. The Financial Stability Report of the CBM has encouraged banks to increase loan loss provision, strengthen capital buffers through higher profit retention, and ensure higher funding for the deposit compensation scheme. The MFSA is working on imposing additional capital requirements via Pillar II to account for concentration risk and heightened levels of non-performing loans. The authorities noted that the work on Basel III and SSM is under way, and the Joint Financial Stability Board has already met several times since its inception in January 2013. The Domestic Standing Group, composed of representatives of the CBM, MFSA, and Ministry of Finance, remains another forum for discussion of systemic risks. The daily monitoring of liquidity position of individual banks has not revealed any signs of excess volatility or abnormal capital inflows or outflows. The authorities plan to request an FSAP and think that it could validate the findings of the recent independent assessment of Malta’s regulatory and supervisory frameworks. The authorities support the establishment of a development bank in Malta to channel the excess liquidity in the system to infrastructure, social, and environmental projects and to deploy government assets (e.g. underutilized real estate) more efficiently. Their view is that commercial banks cannot fill this gap because of the medium to long-term nature of the projects. In turn, budget financing is constrained by the high level of public debt.

B. Ensuring Fiscal Sustainability

Staff’s Views

19. The fiscal consolidation path was reversed in 2012 amid the election cycle. After notable progress in 2011, the fiscal deficit widened by ½ percent to 3.3 percent of GDP in 2012 and government debt rose to 72.1 percent of GDP, or almost 90 percent of GDP including guaranteed debt (Box 5). This has triggered a reassessment of Malta’s public finances under the EU Excessive Deficit Procedure (EDP), which Malta had exited in 2012. In late May 2013, the European Commission recommended to initiate the first steps towards re-opening of the EDP, with the deadline to achieve a durable correction of the deficit set for 2014. The fiscal slippage in 2012, which amounted to 1 percentage point of GDP relative to the budget target, was the result of overruns in all components of current spending and lower-than-expected revenues.

  • Revenues improved relative to 2011, albeit by less than anticipated by the government. Direct tax revenues increased substantially driven by higher income tax receipts from firms and households. However, the ratio of indirect taxes to GDP fell, reflecting weaker than expected consumption growth because of increased uncertainty surrounding the elections.

  • Overruns in current expenditure reflect the fast growth of health care spending and pension outlays. In addition, new collective wage agreements and settlement of arrears from previously acquired wage commitments resulted in a large increase in the wage bill. The increase in current expenditure more than offset the impact of a significant amount of deficit-reducing one-off measures (close to 1 percent of GDP). Since 2009, recourse to such one-off and temporary measures to reduce the deficit has averaged more than ¾ percent of GDP per year.

20. The government’s objective to balance the budget over the medium term remains essential, but it requires credible and sustainable consolidation efforts. On April 8, the newly elected government and the opposition agreed to approve the 2013 budget rejected by Parliament in December 2012, with only minor modifications. The budget proposed a fiscal deficit of 2.7 percent of GDP in 2013 and a moderate structural adjustment of about ½ percent of GDP per year over the medium-term. However, the discretionary measures announced for 2013 are expansionary and tax revenue projections appear optimistic in light of the moderate growth outlook and developments so far. On a cash basis, the deficit through March 2013 already exceeds the authorities’ deficit target for the year. Therefore, in the absence of additional measures, staff projects the deficit to widen further to 3.5 percent points of GDP in 2013, and to remain above 3 percent of GDP in the near to medium term. As a result, the government debt-to-GDP ratio is expected to continue to rise over the next three years.

uA01fig15

General Government Deficit

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01fig16

General Government Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; Malta Ministry of Finance; and IMF staff calculations.

21. Staff urges the Maltese authorities to adopt additional measures to ensure the deficit falls below 3 percent of GDP in 2013 and public debt remains on a sustainable path. These measures should be designed to contain the fast growth in current expenditures, particularly intermediate consumption and social transfers, which show an unsustainable upward trend, and compensation of employees, which is one of the highest in the EU. The focus should be on tightening controls on the growth of health spending, greater use of means-testing of government benefits, and containing the wage bill through prudent collective wage agreements and compression of public sector employment through attrition. On the other hand, there is a need to preserve capital spending and to increase absorption capacity of EU funds. There is also a need to reduce reliance on one-off and temporary measures to ensure a sufficient and sustainable improvement of the structural balance.

uA01fig17

Government Current Spending, Selected Items

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01fig18

Wage Bill, Average 2010–12

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; and IMF staff calculations.

Malta: General Government Debt Decomposition

Since 2008 public debt has been rising continuously. The debt-to-GDP ratio increased by 11.4 percentage points between 2008 and 2012, reaching a level of 72.1 percent at the end of 2012. This box identifies the main drivers of public debt accumulation during this period, by means of a debt decomposition exercise that uses data from the financial and non-financial government accounts.

uA01fig19

Debt Decomposition

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Central Bank of Malta; National Statistics Office of Malta; and IMF staff calculations.1/ Mainly EFSF contributions in 20122/ ESM contributions and capital injections to Malita
uA01fig20

Deficit Decomposition

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Persistent deficits have contributed to the increase in public debt, but intergovernmental loans to support euro area countries have also been an important contributor in recent years.

  • Interest payments represent the largest component of the government deficit. The structural primary deficit played an important role in 2008, 2010, and to a lesser extent in 2012.

  • The government has tended to rely on one-off measures to reduce the deficit, as evidenced by the negative contribution of the cyclical primary balance, which includes one-offs, on the deficit in four out of the five years considered.

  • In 2012, cash and deposits of the government fell significantly to finance the deficit, contributions to the EFSF, and an accumulation in net receivables.

  • This is consistent with the trend observed in the government’s balance sheet data. While the cash position declined significantly in 2012, non-cash financial assets increased substantially in 2012.

uA01fig21

General Government’s Balance Sheet Components

(Millions of euro)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Central Bank of Malta; National Statistics Office of Malta; and IMF staff calculations.

22. Restoring the profitability and viability of large public corporations is crucial to alleviate fiscal pressures. The high level of government-guaranteed debt and delicate financial position of Enemalta (the public utilities corporation) and Airmalta heighten concerns about Malta’s fiscal sustainability. Progress on the restructuring of Airmalta appears on track and the restructuring plan of Enemalta was recently approved. In this context, budget assistance to Enemalta needs to be phased out. Staff supports the government’s objective to reduce energy costs—one of the highest in the EU—and to diversify energy sources. However, any reduction in electricity tariffs should be contingent on the success of the government’s strategy to reduce costs and restore Enemalta’s financial health (see Appendix IV). It would also be important to make Enemalta’s financial reporting more timely and enhance transparency by issuing progress reports on Enemalta’s restructuring and the government’s energy reform plan.

23. Further progress is needed to strengthen the fiscal governance framework. The authorities need to undertake the necessary reform to ensure that its fiscal governance framework meets the EU requirements under the six-pack and fiscal compact by end 2013 (Box 6)1. A clear rule-based multi-year fiscal policy framework would reinforce the linkage between annual budget laws and the medium-term target. Fiscal discipline and governance should also be strengthened by establishing an independent fiscal council to guide and assess the government’s consolidation efforts. The fiscal council should have a comprehensive mandate, which includes the provision of unbiased macroeconomic estimates and an assessment of consistency between fiscal outcomes and the government’s targets derived from the fiscal rules.

The Authorities’ Views

24. The authorities were more optimistic than staff regarding the fiscal outlook. The authorities emphasized their commitment to reduce the budget deficit to 2.7 percent of GDP in 2013. With regards the 2013 budget, the authorities highlighted that small changes had been made to the budget proposed by the previous government, largely because of the need to honor previously acquired commitments. They also noted that their revenue projections were less optimistic than those of the previous government and that improvements in tax collection could yield substantial revenues. The authorities agreed with staff about the need to achieve a sustainable fiscal consolidation and to tackle the risks posed by the fast growth of certain current expenditure items. The government is committed to strengthening the governance framework and is considering various options for the mandate and responsibilities of a fiscal council.

Malta: Fiscal Governance Framework

In order to prevent the build-up of fiscal imbalances, the six-pack and fiscal compact require EU member countries to reform their fiscal frameworks by making changes to their legislation. This set of directives, regulations and agreements, establish that the necessary elements to build a strong fiscal framework are: fiscal rules, fiscal councils, medium term budgetary planning, budget coordination, and budget monitoring.

Member States should have clearly defined numerical fiscal rules that promote compliance with the Stability and Growth Program (SGP). Fiscal rules may target the deficit, public debt or government expenditure, and should be reflected in the annual budget. These rules must be effectively monitored, and non-compliance should only be allowed under exceptional circumstances. The effective enforcement of fiscal rules requires a gradual, well-defined and credible sanctions mechanism, which leaves only very limited room for political discretion. To strengthen the enforcement of fiscal rules and counteract governments’ inherent deficit bias, compliance with fiscal rules should be monitored by an independent body, such as a fiscal council.

Independent fiscal councils improve the transparency and quality of fiscal policies. These independent bodies contribute to the effectiveness of fiscal rules, by providing unbiased and realistic macroeconomic and budgetary projections, or by scrutinizing the government’s projections. Overly optimistic projections yield excessively positive assessments of the underlying fiscal stance, thus masking emerging fiscal imbalances.

  • In fact, projections of economic growth and government revenue have been “too optimistic” in a number of EU Member States over the past decade. The Government’s excessive optimism is proxied by its revenue projection errors. From 2000 to 2011, Malta has registered one of the highest projection errors among EU countries, while the projection errors have been smaller in countries where forecasts are produced or scrutinized by independent bodies, such as in the Netherlands, Austria and Belgium.

  • To contribute to the enforcement of fiscal rules and the eradication of the government’s deficit bias, the fiscal council must have the following characteristics: be strictly independent from the government; have a comprehensive mandate; and have the tools to persuade the government by being visible. That is, if the government fails to meet a target or does not follow a given rule, then it must publicly explain the deviations from the fiscal council’s advice. Alternatively, the government could be asked to publish the results of ex-post reviews prepared by the fiscal council.

uA01fig22

Government Revenue Projection Errors

(Percent of GDP, average 2000–2011)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: European Central Bank Monthly Bulletin, Feb 2013.

To promote a sound and credible medium-term fiscal planning, a multi-annual fiscal budgeting framework is required. Transparent multi-annual budgetary objectives, for the general government’s expenditure, deficit and debt should be published, including the projections of the main revenue and expenditure items for the budget year and beyond. Further, these projections should constitute the basis for future budget preparations. A description of the medium-term policies envisaged should be provided, as well as a forecast of the impact that these policies may have on long-term fiscal sustainability.

Strong budgetary coordination between the different levels of government is important for ensuring full compliance with fiscal rules. EU Member States should have appropriate coordination mechanisms in place across the different sub-sectors of general government. These mechanisms should ensure comprehensive and consistent coverage of all government entities with respect to annual and multi-annual fiscal planning and compliance with the numerical fiscal rules.

Finally, an adequate monitoring framework is a crucial element of fiscal surveillance. To ensure that fiscal slippages are detected at an early stage, governments should be required to provide timely and accurate budgetary data, including the publication of data on contingent liabilities, as these could have a large impact on public budgets.

The figure below puts into perspective the progress Malta has made in adapting to the new regulatory framework. Relative to its EU peers, the Maltese government needs to make further efforts in adopting a clear fiscal rule, establish a fiscal council and impose its multi-annual fiscal projections as targets.

uA01fig23

Overview Fiscal Frameworks - Fiscal Rules

(Percent of EU 27 member countries)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01fig24

Overview National Fiscal Frameworks

(Percent of EU 27 member countries)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: European Commission; and European Central Bank.

C. Boosting Long Term Growth and Competitiveness

Staff’s Views

25. Steady implementation of structural reforms is critical to boost potential growth and ensure the sustainability of public finances. The mission welcomes the government’s recent adoption of the National Reform Program that includes specific measures in different areas, but progress on other reforms has been slow, notably pension reform. If continued income growth depends on flexibility in developing niche service industries, there will be a premium on tackling the country’s low female labor force participation and tertiary education and relatively inflexible wage-setting regime. The priority areas should include:

  • Advancing pension and health care reform to ease long-term fiscal pressures. Without the implementation of mitigating reforms, Malta’s deficit would worsen by over 8 percentage points of GDP by 2060, reflecting an expected large increase in ageing-related spending (twice the EU average). The mission recommended: (i) indexing the retirement age to longevity, (ii) accelerating the planned increase in the statutory retirement age to 65, and (iii) introducing a mandatory privately funded second pillar and a voluntary third pillar to supplement the pay-as-you-go system. The latter, which would require an appropriate legal framework, would support the development of the local capital market and allow households to diversify their sources of savings (Appendix V).

  • Strengthening female labor participation. The authorities have recently introduced tax incentives and child care and maternity support measures to promote female labor participation, which is the lowest in the euro area. This will also help alleviate long-term fiscal pressures from ageing spending through a reduction in the dependency ratio.

  • Enhancing education attainment. The demand for high skilled labor in Malta is likely to increase with the growth of the financial sector and other high-value added activities. Yet, the rate of early school leavers in Malta is among the highest in the EU, and the rate of tertiary education is among the lowest. Education reforms should focus on promoting greater social inclusion and linking vocational training more closely with labor market needs.

  • Reforming the wage setting mechanism. Collective wage agreements should ensure better alignment of wage and productivity developments. Wage growth has exceeded productivity growth and increases in unit labor costs continue to outpace the euro area average. While the removal of the cost of living adjustment (COLA) may not be politically feasible and may raise social equitable considerations, a gradual moderation in the indexation mechanism and its greater integration in the collective wage negotiations could help make the labor market more efficient and competitive. Appendix VI discusses possible reform initiatives.

  • Improving the business climate. Malta ranks particularly poorly in the areas of starting a business, getting construction permits, and contract enforcement. Measures to minimize start-up barriers and improve the legal environment would create a more welcoming business climate.

26. More generally, these reforms would make the economy less vulnerable to sectoral setbacks and more resilient to a potential harmonization of tax rates at the EU level. With Malta’s growth model increasingly dependent on financial and niche services, measures to broaden competitiveness would help diversify the economy. This is particularly important at a time when many of Malta’s trading partners are undergoing internal devaluation, fiscal consolidation, and structural reforms to restore their competitiveness.

The Authorities’ Views

27. The authorities broadly agreed with the assessment but emphasized several obstacles to the swift implementation of some of the proposed reforms. They acknowledged that increasing the retirement age beyond what is already planned would help reduce public expenditure and increase contributions. However, they noted that this would not be politically acceptable in the short term, just as the introduction of the mandatory second pension pillar. The government is exploring measures to reform the public pension system by assessing potential enhancements to the first pension pillar, allowing the development of the third pension pillar, and reviewing incentives aimed at encouraging individuals to save with private pension funds. The authorities noted that measures to increase female labor force participation and education attainment are included in the National Reform Program under the Europe 2020 strategy. The government emphasized that COLA has served the country well in terms of social cohesion and industrial peace, and noted that wage growth already reflected productivity growth in some sectors of the economy.

D. Statistical Issues

28. There is room to strengthen data collection and analysis. The recent IMF technical assistance mission on balance of payments (BOP) identified several actions that the CBM and National Statistics Office (NSO) should implement to achieve the latest internationally accepted methodological standards and good practices. The current data collection system is based on a direct reporting system covering the largest companies, which raises concern in terms of coverage and timeliness, particularly in the context of the rapid growth of new activities facilitated by tax incentives.

29. Large revisions to the first released estimates in certain areas, in particular services, point to the need of a re-examination of the data collection strategy. It would be important to build up more robust sampling frames to conduct benchmark and/or regular BOP surveys. The enrichment of the BOP register would constitute a first step. The inclusion of special purpose entities (SPEs) in the external sector accounts would be one of the milestones for which the country has committed as part of BPM6 adoption in 2014 by Euro area members. The release of new estimates should be preceded by a thorough analysis of their impact on the external sector accounts and other macroeconomic indicators, including GDP. There is a need to reinforce the scarce human resources, in particular at the NSO, to facilitate the implementation of these measures.

30. Although the current provision of statistics is sufficient for surveillance, further efforts in specific areas are needed. For instance, it would be advisable to compile series for household disposable income and household savings.

Staff Appraisal

31. Malta has shown remarkable resilience in the face of a major crisis in Europe. Since the beginning of the crisis, the average real GDP growth in Malta has been one of the best among all EU members and the unemployment rate remains one of the lowest. This resilience was underpinned by robust service export growth and a sound banking system. As a result, the current account balance has improved gradually in recent years, turning into surplus in 2012. Although, economic growth slowed in 2012 reflecting weak external conditions and subdued domestic demand, staff projects a moderate acceleration in 2013-15, which means that Malta would continue to outperform the euro area average. The pick-up in activity is predicated on the recovery of private consumption and improved confidence. While this would lead to some increase in imports, the current account balance is projected to remain slightly positive.

32. Recent events in Europe have heightened perceptions about the risks of hosting a large banking sector in a small country, posing difficult policy challenges for the authorities. These risks are contained in Malta because the large international banking segment has limited balance sheet exposures to the domestic economy. Nonetheless, the authorities should re-double their efforts to monitor closely developments in all banks, including links between foreign parent banks and their Maltese entities, and take concrete measures to strengthen the resilience and bolster the reputation of Malta’s financial system. Specifically, loan loss provisions should be increased; the crisis preparedness and management frameworks should be enhanced, notably by boosting the resources of the deposit insurance fund; and, in light of the rapid growth in financial sector and online gaming activities, the implementation of the anti-money laundering framework should be further strengthened. In this regard, staff welcomes the establishment of the Joint Financial Stability Board to monitor system-wide risk and conduct macro-prudential policy, and urges the authorities to undergo a prompt and in-depth examination of the financial sector under the IMF’s Financial Sector Assessment Program, including an AML/CFT assessment.

33. The authorities’ intention to establish a development bank has merits, but requires careful evaluation. The authorities should ensure that the conditions required for the successful operation of a development bank are in place, including clear mandate and identification of the market failure that the development bank is expected to mitigate, robust governance structure to ensure financial sustainability, and the use of best practices of the private sector. In addition, the operation of the development bank should not cause significant market distortion or compete with the private sector.

34. The immediate challenge for fiscal policy is to reverse the deterioration in the fiscal balance and to strengthen the fiscal governance framework. The fiscal position deteriorated in 2012 amid the election cycle and the level of public debt is uncomfortably high, constraining the fiscal space in the event of further shocks. Furthermore, discretionary measures announced for 2013 are expansionary and tax revenue projections appear optimistic. In the absence of additional credible measures, staff projects the deficit to widen further to 3.5 percent of GDP in 2013. Efforts should focus on containing the fast growth of current spending and reducing the reliance on one-off and temporary measures, while preserving capital spending. Further fiscal consolidation will be required in the medium-term to meet a structural balanced budget and ensure sustainable debt dynamics, thus reducing fiscal risks to manageable levels.

35. Much more needs to be done to reduce contingent liabilities and address Malta’s long-term fiscal challenges. Pension and health care reforms are crucial to improve the adequacy and sustainability of the schemes. In particular, the retirement age should be aligned with life expectancy, and second and third pension pillars should be introduced. The latter, which would require an appropriate legal framework, would support the development of the local capital market. Staff supports the government’s plans to restructure Enemalta, reduce energy costs, and diversify energy sources. However, there are significant potential fiscal risks from these initiatives that require close monitoring.

36. With Malta’s growth model increasingly dependent on financial and niche services, the medium-term challenge to broaden competitiveness, diversify the economy, and boost long-term growth appear increasingly daunting. Maintaining macroeconomic stability and a sound financial system are necessary but not sufficient for long-term growth. Going forward, policy efforts are needed to strengthen female labor force participation and educational attainment, ensure better alignment of wages and productivity at the enterprise level, promote foreign investment and R&D, and improve the business climate and the judicial system. These reforms would also make the economy less vulnerable to sectoral setbacks and more resilient to a potential harmonization of tax rates at the EU level.

37. It is recommended that the next Article IV consultation with Malta be held on the standard 12-month cycle.

Malta: Risk Assessment Matrix2

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Figure 1.
Figure 1.

Malta: Economic Indicators

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Central Bank of Malta; Eurostat; IMF World Economic Outlook; and IMF staff calculations.
Figure 2.
Figure 2.

Malta: Short-Term Indicators, 2006–2013

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: European Central Bank; Central Bank of Malta; European Commission; and IMF staff calculations.
Figure 3.
Figure 3.

Malta: Labor Market Indicators, 2000–2013

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; National Statistics Office; European Central Bank; World Economic Outlook; and IMF staff calculations.1/Data for Euro Area is based on countries for which data was available.
Figure 4.
Figure 4.

Malta: Inflation, 2007–2013

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; Central Bank of Malta; Haver; and IMF staff calculations.
Figure 5.
Figure 5.

Malta: Fiscal Developments

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat, IMF World Economic Outlook; and IMF staff calculations.
Figure 6.
Figure 6.

Malta: Financial Soundness Indicators

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Central Bank of Malta; and Malta Financial Services Authority.
Table 1.

Malta: Selected Economic Indicators, 2009–2015

(Year on year percent change, unless otherwise indicated)

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Sources: National Statistics Office of Malta; Central Bank of Malta; Eurostat; and IMF staff estimates.
Table 2.

Malta: Fiscal Developments and Projections, 2007–2015

(Percent of GDP, unless otherwise indicated)

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Sources: Maltese authorities; and IMF staff projections.
Table 3.

Malta: Balance of Payments, 2007–2015

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Sources: National Statistics Office of Malta; and IMF staff projections.
Table 4.

Malta: General Government Financial Balance Sheet

(Millions of euros)

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Sources: Eurostat; National Statistics Office of Malta; and IMF staff calculations.
Table 5.

Malta: International Investment Position, 2005–2011

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Source: Central Bank of Malta
Table 6.

Malta: Financial Soundness Indicators, 2009–2012

(Percent, unless otherwise indicated)

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Source: Central Bank of Malta

Appendix I. An Overview of Malta’s Resilience During the Crisis1

1. Compared to its euro area peer, Malta has shown remarkable resilience during the financial and the euro area sovereign debt crises. Average real GDP growth relative to the country’s own pre-crisis growth has been the best in Malta, even surpassing Germany, amongst euro area countries.

uA01app01fig01

Real GDP Growth

(Percentage Points)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

2. The increase in the unemployment rate was less drastic in Malta. The global financial crisis and the subsequent euro area sovereign debt crisis resulted in a sharp spike in the unemployment rate across advanced economies. Compared to the pre-crisis trend, the unemployment rate actually decreased in Malta during the crisis. The fall in real GDP growth was not only lower than in other euro area counterparts, but also resulted in less job loss than in the other countries.

uA01app01fig02

Increase in Unemployment Rate During Peak-to-Trough Output Loss

(Percentage points)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; and IMF staff calculations.

3. Malta’s resilience was underpinned by robust export growth. The export sector of the European countries was severely hit by the crisis. Malta also had to wither the storm. However, the fall in export growth was less than in most countries due to the strong performance of the tourism sector and niche services like remote gaming and financial services.

uA01app01fig03

Export Growth

(Percentage)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; and IMF staff calculations.

4. Robust real consumption growth also contributed towards the country’s resilience. Real consumption growth, compared to the country’s historical performance, has been well above the average performance of its euro area peers, except Germany, Belgium, Luxembourg, and Austria.

uA01app01fig04

Real Consumption Growth

(Percentage points)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; and IMF staff calculations.

5. Government bond spreads remained contained. The bond yield in Malta has remained low during the euro area sovereign debt crisis, when the 10 year government bond spreads raised by more than 1000 bps in Portugal and Cyprus, causing severe funding constraints.

6. Deposit and credit growth was robust. The performance of the banking sector in Malta remained solid during the crisis and better than the average performance of its euro area peers. Funding and liquidity levels remained robust, with both deposit and loan growth safely above the euro area average.

uA01app01fig05

MFI Deposits, February 2013

(Percent change year on year)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01app01fig06

MFI Loans, February 2013

(Percent change year on year)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: European Central Bank; and IMF staff estimates.

Factors Contributing to Malta’s Resilience

7. Robust household income, low consumer leverage and robust credit growth contributed towards consumption resilience. The resilience of the household sector during the crisis can be attributed to five factors:

  • Stable household income. Since Malta does not publish data on disposable income, the net national income per capita can be viewed as a proxy. The growth of household income per capita was negative in 2009. However, it rebounded strongly on the back of, amongst other factors, positive developments in the labor market and relatively contained inflation. The expansion in household income in real terms also contributed.

  • Stable household loans as a share of GDP. At the onset of the crisis, Malta’s household loan as a share of GDP was 52 percent in 2006, lower than Portugal, Ireland and Spain. Hence, unlike a lot of advanced economies, there was no real pressure of deleveraging. Though the total household loan as a share of GDP has increased since then, the interest rate burden on the household remained stable since the household income was rising in line with the growth in debt.

  • Strong balance sheet. Malta has one of the strongest household balances sheets, with net assets close to 200 percent of GDP in 2006, much higher than the euro area average, and continues to remain strong at close to 170 percent in 2011.

  • Robust consumer credit and mortgage growth. The consumer credit growth has been robust with Slovakia being the only country amongst the comparator countries that outperformed Malta during the crisis. Although consumer loan growth dropped in the negative territory in 2010, it rebounded in 2011 and 2012. A similar resilience is also exhibited by household mortgage loans where Malta’s performance during the crisis is well above the euro area average. The mortgage loan growth in 2009 was also strong when other countries faced headwinds in the mortgage market due to the plunge in their GDP growth.

  • The fall in property prices was not drastic. The decline in property prices during the crisis was 8 percent. The loss in household wealth from property was thus moderate. Malta’s house prices are one of the most undervalued amongst the advanced economy countries, indicating there is no potential risk of correction in the property market. Both the price-to-income and price-to-rent ratio remain one of the lowest among the advanced economies.

uA01app01fig07

Growth in Net National Income per Inhabitant

(Percent change year on year)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; and IMF staff estimates.
uA01app01fig08

Household Net Assets

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; and IMF staff estimates.
uA01app01fig09

Property Price Indices

(2000=100)

House prices slightly below pre-crisis peaks.

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: CBM; Eurostat; and IMF staff calculations.
uA01app01fig10

Price-to-Rent Ratio vs. Price-to-Income Ratio

(Relative to Historical Average)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: OECD; and IMF staff calculations.Note: House prices of countries in the upper right quadrant are overvalued.

8. Export diversification, in terms of products, has helped Malta maintain robust export growth. In the past years, Malta has very successfully reduced its trade balance and gradually shifted from -6.1 percent of GDP in 2006 to 5.3 percent of GDP in 2011. The positive trade balance has been achieved on the back of export diversification from goods to services, as discussed in Appendix II. The market share in world services trade continues to increase at a rapid pace in Malta, successfully offsetting the decrease in Malta’s share of world goods.

uA01app01fig11

Bank Return on Assets

(Percent)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01app01fig12

Bank Regulatory Capital to Risk-Weighted Assets

(Percent)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: IMF, Financial Soundness Indicators; and IMF staff estimates.

9. Malta’s conservative domestic banking system with less reliance on wholesale funding acted as a cushion during the crisis. The domestic banking sector in Malta has sound capital and liquidity buffers, low leverage, and follows a conservative funding model (high deposit-to-loan ratio). This has helped Malta’s banking sector to outperform its euro area peers, with both banking sector’s return on equity and return on assets posting the best profit numbers amongst the euro area countries. This performance was also supported by solid bank capital to assets and bank regulatory capital to risk-weighted assets that were at par with other euro area peers. According to the Financial Stability Report 2011, released by the Central Bank of Malta, the core domestic banks had a very limited exposure of 8 percent of total assets to euro area assets. Moreover, those holdings were diverse and exposed to higher rated sovereign states, with 39 percent of the foreign sovereign holdings from France, 18 percent from Germany. The exposure to EU/IMF program countries was 14 percent of the total (Ireland 7 percent, Greece 4.5 percent, and Portugal 2.8 percent).

10. One of the main reasons for Malta’s strong fiscal stand during the crisis, relative to its peers, is the limited foreign exposure of the country’s government debt. This left the government bond prices insulated from the developments of the euro area sovereign crisis. Malta’s foreign holding of government debt, at 4 percent in 2012, is by far the smallest amongst advanced economies; and even smaller than that of Japan. Consequently, as discussed in the first section, the government bond spreads remained low.

11. Malta’s strong internal investment position (IIP) acted as a great cushion during the crisis. Malta had entered the crisis with a strongly positive net international investment position. However, the net foreign asset position of Malta has decreased from 28.1 percent of GDP in 2006 to 7.5 percent of GDP in 2011.

uA01app01fig13

Net International Investment Position

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: IMF, International Finance Statistics; CBM; and IMF staff estimates.

Appendix II. Malta’s External Competitiveness1

1. Malta’s trade balance, driven by increases in services, has improved remarkably since 2004. This note sheds light into possible avenues for further improvement by comparing Malta’s export performance to that of Germany. The comparative exercise shows that, despite less favorable supply factors, Malta has benefited from a strong demand for its exports. The country could improve its export performance by reorienting its exports, both in terms of products and destinations, and by reducing the cost of production.

2. Continued export diversification could preserve and extend Malta’s recent competitiveness gains. Although Malta has done tremendous progress, there is scope for further diversification of exports towards fast growing economies in emerging markets and newer varieties. To shed light into possible avenues for improvement, Malta’s export performance is compared to that of Germany’s. Germany has been a forerunner in the euro area as a country who has successfully shifted its export base, both in terms of composition of trade and export destinations. Also, Germany is one of the top five contributors of world export services growth, making it a suitable benchmark for services trade as well.

3. Malta has made tremendous progress in non-price competitiveness, by successfully diversifying its trade (Appendix I). Malta’s external trade performance has improved significantly since 2004. The improvement in the trade balance has been one of the best in the region, only outperformed by Estonia and Latvia, and even better than Germany, Austria, and the Netherlands. The improvement in the trade balance has been driven by increases in services.

Exports of goods

4. Malta’s lower exposure to fast growing economies and its higher cost of producing goods explain Malta’s worse trade performance relative to Germany. Malta’s exports of goods grew by an average of 4 percent over 2005–11, compared to 7 percent in Germany. This partly reflects Germany’s larger share of exports going to fast growing emerging markets, such as China, India, Russia, Brazil, and Turkey. Furthermore, Germany’s goods have also done better in Malta’s main destination markets, suggesting that supply factors (e.g. cost of producing goods, productivity) are at play. In other words, Malta’s higher wage growth and lower productivity growth, relative to Germany places Malta at a disadvantage in world’s export markets. There are two aspects worth highlighting, nevertheless. First, although Malta’s trade share to the fast growing emerging markets is smaller than Germany’s, Malta’s export growth in most of these markets is higher than Germany’s, suggesting a large upside potential for Malta in these destinations. Second, Malta’s exposure to the euro area seems to be lower than Germany’s, which does indicate that Malta has, to some extent, diversified its export partners.

uA01app02fig01

Average Weights of Exports in Goods (2005–2011)

(Percent of total exports)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01app02fig02

Export Growth in Goods (2005–2011)

(Average percent change year on year)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: IMF, Direction of Trade Statistics; and IMF staff calculations.

  • Counterfactual 1: Malta’s export growth of goods, but Germany’s destination markets. What would be the export growth in Malta with the same destination markets as Germany? The exercise suggests that Malta’s average export growth over the period 2005–2011 would have been 6.9 percent, in par with Germany’s 7.1 percent over the same period, and higher than the actual performance of 4.1 percent.

  • Counterfactual 2: Malta’s destination markets, but Germany’s export growth of goods. What would be the export growth in Malta with German goods? The country’s growth would then have been 6.2 percent, higher than its realized growth and closer to Germany’s overall export growth.

uA01app02fig03

Nominal Export Growth, 2005–11

(Average percent change year on year)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: IMF, Direction on Trade Statistics; World Trade Organization; and IMF staff calculations.

Exports of Services

5. Malta has outperformed Germany in terms of services exports, but could do better by improving its composition. Malta’s growth in the service sector in the period 2005–2011 was 16 percent, compared to 9.3 percent in Germany over the same period. Malta’s export base of services is less diversified than Germany’s. The highest share of export services in Malta is occupied by the category ‘others’ which mostly reflects exports of personal, cultural and recreational services, including online gaming. However, compared to Germany, the export growth to almost all the service components has been higher. The best performers have been computer, information, personal, cultural, recreational and business services.

uA01app02fig04

Composition of Services, Share of Total Exports, Average 2005–2011

(Percent)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01app02fig05

Composition of Services, Export Growth, Average 2005–2011

(Percent)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: World Trade Organization; and IMF staff calculations.

  • Counterfactual 1: Malta’s growth of services exports, but Germany’s composition of services. What would be the export growth of services in Malta with the same composition of services exports as Germany?” Malta’s average export growth for the period 2005–11 would have been 24.1 percent, much higher than its 16 percent realized growth.

  • Counterfactual 2: Malta’s composition of services exports, but Germany’s growth of services exports. What would be the export growth in Malta with German growth rates? Malta’s export growth would have been 7.8 percent, lower than Malta’s actual number. This suggests that supply factors have weighed in the trade performance of Malta’s goods but not of its exports. In other words, Malta’s new niches of services exports are relatively competitive. This is consistent with the findings in Appendix VI, which suggests that wage growth in the newer industries has not outpaced productivity growth, as in more traditional sectors.

uA01app02fig06

Nominal Export Growth in Services, Average 2005–11

(Percent)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: IMF, Direction of Trade Statistics; World Trade Organization; and IMF staff calculations.

6. The comparative exercise with Germany suggests that Malta could improve its export growth performance by further reorienting its export, both in terms of products and destinations, and by reducing the cost of the goods it produces. With the euro area in recession and future domestic demand growth likely to be coming from emerging markets like BRICs and Indonesia, successful geographical diversification is warranted to preserve the continued positive performance in the trade sector. Similarly, diversification toward new types of services could also improve trade performance. However, one has to also acknowledge that, given the size of the economy compared to Germany’s and its economic structure, it might be difficult to expand the composition of tradable goods and services. Finally, increased effort to align wage and productivity developments at the sectoral level could reduce the cost of producing Maltese goods and services, increasing their competitiveness in international markets.

7. Despite less favorable supply factors compared to Germany, Malta has benefited from a strong demand for its exports, particularly services. Malta’s large improvement in the trade balance reflects strong external demand for Maltese services. This is evident from the evolution of the terms of trade in the past years. The overall terms of trade of goods and services has fallen in the past years, but the terms of trade of services has increased remarkably, outperforming Germany and euro area, indicating increase in foreign demand for Malta’s service sector. In addition, the real GDP of trading partners has grown in line with that of Germany, and in some years, has outperformed Germany. This has also boosted the country’s trade performance. The service sector has not been affected from the relative lag in competitiveness of the supply side due to the strong external demand factor.

uA01app02fig07

Terms of Trade of Goods

(2005=100)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; and IMF staff calculations.
uA01app02fig08

Terms of Trade of Services

(2005=100)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Appendix III. International-Oriented Banks 1

1. Malta has been an important international banking centre in the past 25 years. A special offshore regime for banks (and other non-bank institutions) was promoted since the late 1980s. Like in several other European jurisdictions (Cyprus, Ireland, Luxembourg, or Switzerland), the main incentives offered to foreign investors at that time included exemptions from various regulations imposed on onshore banks and a favorable fiscal treatment.

2. The separate offshore supervisory framework was eliminated in 2002. As part of the planned accession into the EU, Malta was required to amend its financial policies to treat local businesses the same as international companies. In the mid-1990s, Malta started abolishing its offshore banking. In 2002, the legal amendments to the Banking Law removed an offshore banking option. Since then, all banks operate under the same regulatory and fiscal frameworks.

3. However, Malta maintained a substantial tax incentive for attracting foreign investors in its banking and other businesses. This was achieved through tax refunds based on the dividends that a local bank distributes to its shareholders. While the headline corporate income tax rate in Malta is 35 percent, the application of a tax refund system positions Malta as the country with one of the lowest effective tax in the EU, which ranges between 0 and 12 percent. The quantum of the tax refund depends on the nature of income and is generally equal to 6/7th of the underlying tax (35 percent), resulting in a 30 percent tax refund of the taxable profits.

4. In addition, the EU accession in 2004 and the euro adoption in 2008 boosted international banking and non-bank financial sector activities in Malta. Several large banking groups from various countries around the world (Australia, Germany, Saudi Arabia, etc) established their presence in Malta since the mid-2000s. The EU and euro area memberships inspired confidence; the former also allowed non-EU investors an easy access to European markets, while the latter facilitated transactions for EU-based investors. The availability of skilled people and the use of English as the official language also contributed to making Malta an attractive place for doing business by the multinational banks.

5. As a result, the internationally-active banks have become large compared to the size of the Maltese economy. As of October 2012, there were 13 non-core domestic banks and 8 international banks, with assets of respectively €5.3 billion (80 percent of GDP) and €33.1 billion (500 percent of GDP). The majority of these banks are subsidiaries of EU banks offering a range of services to non-residents that include trade finance, investment banking, and group funding operations.

6. Unlike some other EU countries with a big international financial centre (for example, Cyprus or Ireland), Malta has not experienced any deleveraging pressures in recent years. As a result, measured by the total bank assets to GDP ratio, Malta now ranks higher than Cyprus or Ireland, and is second only to Luxembourg among all EU countries.

Table 1.

Structural Banking Indicators of Selected EU Countries

(June 2012)

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Sources: Central Bank of Malta, BIS, ECB, Eurostat.

7. Finally, the AML/CFT regime in Malta remains largely untested, and the rapid growth in financial sector activities calls for further strengthening it. Most of the right laws and regulations are in place in Malta, and progress in strengthening the AML/CFT regime has been achieved in recent years. The 2012 report of MONEYVAL (the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures) notes that the money laundering offences in Malta are broad and fully cover the elements of the Vienna and Palermo Conventions.1 The legal base for financing of terrorism is also broadly in line with the international standards, and even goes beyond the minimum required by the Terrorist Financing Convention in some areas. However, the framework remains largely untested, and the AML/CFT laws and regulations have not been sufficiently used. As a result, the MONEYVAL concluded that the effectiveness of the system is difficult to assess. Some of the conclusions of the 2012 MONEYVAL Report are:

  • While the comprehensive reporting obligations are now in place in Malta, the level of reporting of suspicious transactions for both money laundering and terrorism financing remains relatively low.

  • The current Maltese legislation provides for broad measures in terms of powers of sanctioning of subject persons for non compliance, but these sanctions have not been sufficiently used, and the financial penalties that have been imposed were not necessarily dissuasive. No sanctions have been imposed on the financial institutions.

  • The practice of joint inspections carried out by MFSA and FIAU (the financial intelligence unit of Malta) is a welcome step that has certainly contributed towards strengthening the supervisory regime. However, the number of the on-site visits remains low and not commensurate with the size of the financial market.

  • The absence of a national risk assessment to identify the most risky areas for money laundering/terrorist financing gives rise to concerns with regard to the effective implementation of risk based supervisory activity.

Appendix IV. Restructuring Enemalta in the Context of a New Energy Reform Plan1

1. The delicate financial position of the national utility company, Enemalta2, has added to Malta’s fiscal pressures. The budget has been providing subsidies to cover the company’s losses, and government-guaranteed debt has been rising in line with Enemalta’s increasing debt. The company’s losses amounted to 70 million euro (1 percent of GDP) in 2012, 36 percent of which were covered by the budget. In turn, Enemalta’s total debt in 2012 grew to 836 million euro (12.4 percent of GDP), of which 85 percent is guaranteed by the government.

uA01app04fig01

Profits/Losses

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Enemalta; and Maltese government.
uA01app04fig02

Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Enemalta; Maltese government.

2. Enemalta’s poor financial performance reflects the company’s exposure to oil prices, the lack of timely and cost-reflective adjustments in electricity tariffs, and inefficiency costs. Enemalta’s operations have been consistently loss-making for two reasons. First, the company has had to assume losses ensuing from the increase in international oil prices. About 75 percent of Enemalta’s costs are fuel-related and the company is not allowed to pass oil price increases to final consumer tariffs, as electricity prices for industrial customers in Malta are among the highest in Europe. Indeed, to avoid further tariff hikes, the government has been supporting Enemalta through subsidies. This situation reflects the fact that Malta is highly dependent on energy imports. Its energy dependence ratio is 100 percent, which is above the Euro Area average of 68.9 percent. On the other hand, Enemalta also has important inefficiency costs. The technical losses in distribution are estimated at 4.6 percent, and an additional 5.2 percent arises from unbilled electricity in relation to meter deficiencies and theft.

uA01app04fig03

Retail (end-user) Energy Prices for Households, Nov 2012

(Euros per kilo watt hour Electricity)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01app04fig04

End-user Energy Prices for Industrial Customers, Nov 2012

(Euros per kilo watt hour Electricity)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: Europe’s Energy Portal

3. In December 2012, Parliament approved a plan to restructure the company’s debt to ensure payment of outstanding obligations, while avoiding increases in tariffs. The restructuring plan involves setting a special purpose vehicle (SPV) - Vault Finance. The SPV is a financing intermediary that would allow Enemalta to reschedule debt repayments by aligning available cash flows from tariff income, and smooth the effects of bullet repayments by transforming loan repayments into a rental expense of about 20 million euro per year. Enemalta has contributed to the asset side of the SPV by selling and leasing-back from the SPV two power stations and other properties. On the the liability side, the utility company initially transferred 243.5 million Euros worth of debt by settling the loan and taking out a new loan, for the same amount, in the name of Vault Finance. A further 75 million worth of debt will be transferred to the SPV in 2015, to settle a loan due, on that date, to its German creditor, Depfa. To sum up, Enemalta’s interest payments on the debt transferred to Vault Finance and the depreciation expenditure of the assets sold and leased-back from it are substituted with a rental charge. This rent is meant to cover both principal and interest payments of the SPV’s new loan.

4. Enemalta’s debt restructuring is an essential part of a larger energy reform plan, which aims at reducing electricity generation costs, lowering tariffs, and diversifying energy sources. The energy agenda of the new government seeks to lower the cost of electricity generation by reducing the dependence on oil and the costs emanating from operational inefficiencies. The government pledged to pass the savings brought about by these measures to the final consumer in the form of lower electricity tariffs. In this context, households’ electricity tariffs are expected to be reduced by 25 percent, starting in March 2014. Tariffs charged to industrial customers are expected to be reduced in March 2015. To lower the cost of electricity generation, Enemalta has embarked on several major investment projects that need financing. Some projects will be financed through private public partnerships (PPP), and other investments require funding from European Investment Bank (EIB).

  • Enemalta will widen its energy mix through the interconnector to Sicily, which is scheduled to be completed by 2014. Connecting the Maltese electricity grid to the European grid will allow Malta to secure energy supplies by reducing its dependency on a single fuel and its exposure to fuel price shocks. Further, Malta will benefit from economies of scale of larger plants with more competitive prices, and the increased capacity will allow the old Marsa power station to be phased out. This will reduce the costs associated with the operational inefficiencies.

  • The new government is also pursuing various projects to reduce electricity generation costs by shifting towards natural gas power generation and renewable energy sources.

  • A new gas-fired power plant will be built and is expected to become fully operational by 2015. This new plant will be configured so as to operate exclusively on natural gas. In turn, the supply of natural gas requires the construction of infrastructure for receiving, storing, and re-gasifying liquefied natural gas.

  • The new gas-fired plant and gas supply infrastructure will be financed through public private partnerships (PPP). In April 2013, the government issued an Expressions of Interest and Capability (EoIC) to enter into a power purchase agreement and a gas supply agreement with the private sector. The successful tenderer(s) will build, own, and operate the gas and power plants at Enemalta. Enemalta will lease properties to the private partner(s), and the latter will make an upfront payment to the utility company. Enemalta will use this sum to pay the SPV rent until profitability is restored.

  • The liquefied natural gas infrastructure will supply power to Enemalta’s old heavy fuel oil power plant, but the latter will eventually be converted to run on natural gas. This project will be undertaken by Enemalta.

  • Malta’s current renewable energy production is 0.4 percent of its gross final consumption, which is the lowest in the EU and below the targets foreseen for 2012. To meet the EU 2020 target of producing 10 percent of energy through alternative sources, the government has engaged in large wind farm energy projects, but progress has been slow. The uptake of projects such as the installation of photovalvic power and solar water heaters has exceeded the government targets, but the contribution of these initiatives is small. In response to these challenges, the government will launch a comprehensive renewable energy policy framework by the end of summer 2013.

  • The policy framework will include measures to promote the purchase of solar panels and bio-fuel transport, improved management of street lighting, and government support for private investment in renewables.

  • Finally, the government has implemented several measures to contain the operational and efficiency losses of the company. To enhance revenue collection and avoid theft, Enemalta has invested in activating a large number of smart meters. Moreover, operational inefficiencies are being addressed through a cost rationalization program. Together, these measures could improve the company’s cash-flow position by around 40 million in 2013, and about 20 million in the following year.

5. The government’s plans to restructure Enemalta’s debt, reduce electricity generation costs and diversify energy sources are appropriate. However, the risks ensuing from these initiatives warrant close monitoring. The government expects Enemalta to breakeven by 2015. To meet its financial obligations, including the SPV rent, during the bridge years, the utility company is expected to rely on government subsidies, operational efficiency savings, energy reduction costs brought about by the Sicily interconnector, and the upfront payment from the PPP private tender. It is crucial that electricity tariffs are only reduced once electricity generation and transmission costs are successfully lowered and the company’s financial health is restored. In this regard, the timely completion of the interconnector to Sicily is essential. Furthermore, it is important to make Enemalta’s financial reporting more timely and enhance transparency by issuing progress reports on Enemalta’s restructuring and the government’s energy reform plan. This would contribute to the identification of inefficiencies and vulnerabilities that could put additional strain on the company’s financial position and the budget, thus allowing authorities to act promptly.

Appendix V. Pension and Health Care Reform1

Medium-Term Risks of Ageing-Related Spending

1. The fiscal impact of an ageing population is expected to be significant in Malta. According to the 2012 Ageing Working Group (AWG)2 report, the expected increases in age-related government spending in Malta could pose significant risks to the sustainability of public finances. Under the reference scenario, which focuses on the budgetary impact of demographic developments, strictly-age-related public spending3 will increase by 8.2 percentage points of GDP between 2010 and 2060. In turn, under the risk scenario4, Malta will experience the second highest increase in age-related spending within the EU, which will amount to 11.3 percentage points of GDP between 2010 and 2060.

uA01app05fig01

Projected Change in Strictly-age-related Expenditure for 2010-2060

(Percentage of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: European Commision; and the Economic Policy Committee.

2. The main challenge for Malta is to curb the expected increase in public pension and health care spending. Between 2010 and 2060, public pension expenditure will increase by 5.5 percentage points of GDP, reaching a level 15.9 percent of GDP in 2060. In turn, the share of health care age-related expenditure is expected to reach 8.3 percent of GDP in 2060, up from a level of 5.4 percent of GDP in 2010.

uA01app05fig02

Malta - Strictly-age-related Expenditure in the Reference Scenario

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: European Commission; and Economic Policy Committee.

Pension and Health Care Reform by Authorities

3. The path for future reforms to the public pension and health care systems is not yet well-defined. The 2006 reform initiatives to the public pension system started being implemented in 2007. However, some of the legislated changes, most notably the increase in the retirement age, have been slow. What is more, the consultation process following the launch of the 2010 report of the Pensions Working Group, presented a number of recommendations for further reform. But the government has yet to agree on the reform agenda going forward. With respect to the health care system, as far as population coverage is concerned, no changes have been made through legislation. Nevertheless, the benefit packages have been modified in ways that have not contributed to restrain public spending.

4. The Maltese public pension system consists of a mandatory earnings-related framework, which is financed on pay-as-you-go (PAYG) basis. The system covers all strata of the Maltese society5, and contributions are payable on a weekly basis by all gainfully occupied persons between the age of 16 and the retirement age (employees, self-occupied or self-employed persons).

  • In the early 2000’s, basic demographic trends suggested that the system had become unsustainable. Between 2003 and 2050 the share of the population aged 61 and above is expected to grow, while the share of those aged between 16 and 61 is set to decline. By 2050, each person in the working age population is expected to support 0.8 non-active persons, compared to 0.6 non-active persons in 2003. Further, while in 2003 there were around 4 persons in employment for every retired person; by 2050 this estimate is expected to drop to 2 employed people per retired person6.

  • To address these concerns, a pension reform was enacted in 2006. The main measures are listed in Table 1. In addition to these measures, every 5 years the Ministry of Social Security is committed to prepare a report reviewing the Public Pensions System, upon which further recommendations could be made.

  • From the first of these reports, 45 additional recommendations were issued, thus suggesting that a second reform is warranted. The recommendations made by the Pensions Working Group in December 2010 are summarized in Table 1. To date, these recommendations have not yet been legislated, and the consultation process following the 2010 strategic review report of the Pensions Working Group continued through 2012.

Table 1.

Pension Reform in Malta (Selected Measures)

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5. Public health care expenditure in Malta is relatively low compared to other EU countries. This is partly explained by the fact that Malta has fewer hospital beds and fewer physicians per 100,000 inhabitants than other countries in the European Union1. Further, the system is highly centralized and operates within a small jurisdiction that is densely populated.

uA01app05fig03

Healthcare Spending in 2010

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: European Commision; and Economic Policy Committee.

  • The public health care system is mainly funded through taxation and operates through public hospitals and health care centers. 65 percent of total health expenditure is financed through general taxation. This is complemented by private financing expenditure (33 percent) and private health insurance (2 percent). The latter is a voluntary system that provides supplementary financing and does not replace mandatory statutory contributions. Public hospitals and health care centers are available to all residents and offer primary, secondary and tertiary health care services free of charge2. Primary health care is offered by the public and private systems, although they function independently. Secondary and tertiary care is mainly provided by specialized public hospitals of varying size and function.

  • The Government is facing an increasing burden from health care expenditure. The Maltese are ageing and living longer, and the private health insurance sector is small. Private insurance coverage is becoming more unaffordable due to spiraling health care costs, while public hospital care has been upgraded. Hence, fewer people are seeking private full insurance coverage, and more individuals are shifting to public health care in spite of the insurance cover available.3

  • Health care reform in Malta has focused on quality issues, but it has ignored the need to curb public spending. Under the previous government, there was political controversy regarding the effects that the planned reduction in public current spending could have on the health care sector. The measures that have been implemented include an increase in the number of medicines provided, and the introduction of new services which, previously, were only offered in the UK. Efforts to reform primary health care by giving doctors more access to patient information have been implemented. These measures are expected to improve efficiency and possibly alleviate health care costs, but the benefits are likely to materialize only in the long run.

Staff Assessment and Further Recommendations

6. The Malta-2012 IMF Article IV Concluding Statement supported the main recommendations of the Pensions Working Group. The staff judged that further pension reform would contribute to address the anticipated long term fiscal imbalances ensuing from an ageing population, while supporting medium-term growth. In particular, the staff favored the proposals of indexing retirement age to longevity, accelerating the planned increase in retirement age, and introducing a mandatory privately funded second pillar and voluntary third pillar.

7. Further recommendations include measures to increase the involvement of the private sector and to encourage labor participation. In the absence of second or third pillar pension schemes, and given the existence of a number of voluntary long-term savings products, private/funded pensions could complement the PAYG system if accompanied with fiscal incentives for savers. Addressing existing bottlenecks in labor market participation is also important. Some progress has been achieved in retaining older workers in employment, and measures to encourage female labor participation have been implemented. Yet, further efforts are warranted as the female employment rate in Malta remains the lowest in the EU.

8. The sustainability of the health care system requires measures that increase the role of private health care providers and improve the efficiency of the system. Since public financing is prevalent, sources of funding other than general taxation should be explored. Public Private Partnerships (PPPs) could be considered for undertaking business operations and care delivery. Further, since the private health insurance market is small, the government could intervene to stimulate and regulate the buying of insurance. The health care market is highly concentrated. Over 95 percent of hospital beds are publicly owned, which implies that there is considerable scope for increasing private sector involvement. This requires the setup of control mechanisms and the provision of proper incentives. Regulatory reform is also necessary to control costs by changing the behavior of practitioners and patients.

Appendix VI. Factors Influencing Wage Determination in Malta1

1. The recent crisis has brought to the fore the negative consequences of the misalignment of wage and productivity growth. Wage growth in Malta has surpassed productivity growth resulting in increases in unit labor costs. The current discussion on structural reforms to increase competitiveness and decrease labor cost in the euro area periphery has underscored the need for a better understanding of the determinants of wage growth, and reforms needed in the labor market in Malta. As discussed in Appendix II, Malta has lagged other euro area peers in terms of price competitiveness measures and, despite progress in narrowing differentials, increases in unit labor costs continue to outpace the euro area average. This note discusses possible ways of reforming the wage determination process in Malta so that wage growth is more in tune with productivity growth.

uA01app06fig01

Productivity and Compensation per Employee

(Four quarter moving average indices, 2001Q1=100)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; European Central Bank; and IMF staff calculations.
uA01app06fig02

Unit Labor Cost

(Four quarter moving average indices, 2001Q1=100)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

2. The productivity and compensation gap differs amongst sectors. The lack of sectoral productivity data makes it difficult to identify the sectors where the labor market inefficiency is the highest, in terms of the gap between productivity and wages. We use gross value added as a proxy for productivity and find that the gap is the highest for the agriculture, forestry, and fishing sectors, industry, and construction. On the other hand, the gap is the lowest for arts, entertainment, professional, and financial services.

uA01app06fig03

Gross Value Added minus Labour Compensation per Person, Average 2004–2012

(Percent)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: European Central Bank; and IMF staff calculations.

3. Wage indexation and collective agreements are two key features of Malta’s wage determination. In Malta, wages are predominantly regulated by collective agreements at the company level, and a cost of living adjustment (COLA) is imposed by legislation. COLA is added to the pay of all workers based on the average inflation rate of the previous 12 months, as calculated by the Retail Price Index (RPI). Wage indexation is a feature of Malta’s labor market, which is present in only three other euro area countries, namely Cyprus, Belgium, and Luxembourg. The idea of wage indexation is to link wages to the living costs with the aim of preserving the real wages, and thereby, the living standard of people. In Belgium, Cyprus and Luxembourg, the cost of adjustment is calculated using the Consumer Price Index (CPI). The wage adjustment is done every year in Malta and Belgium and every six months in Luxembourg and Cyprus. In Luxembourg, the wage indexation is applied only if the CPI rises above 2.5 percent.

4. The misalignment of wage and productivity growth in Malta cannot be entirely attributed to the wage indexation mechanism. One hypothesis for the mismatch between wage growth and productivity is the implementation of wage indexation in Malta. However, it is estimated that COLA has, on average, accounted for about 40 percent of the wage increase during 1996-2012. The remaining increase is attributed to the collective agreements. However, in many cases, COLA is superimposed to the outcome of collective agreement, further compounding the wage rise, instead of being part of the collective agreement. As emphasized by the Governor of Malta in a recent speech1, rather than imposing it on the collective agreements, the COLA increase due to wage indexation should form part of the negotiation process. This would ensure that the COLA increase is to some extent included in the wage rise due to productivity growth, and make the wage negotiation system more efficient.

uA01app06fig04

Increase in Compensation Per Employee Due to COLA

(Percent of Total Increase in Compensation Per Employee)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: Government of Malta; ECB; and IMF staff calculations.*The total wage increase in 2010 was smaller than the COLA increase. One possible explanation is that the COLA was fully incorporated, but that the result of the negotiations was to lower wages a bit in exchange of labor hoarding.

5. The current wage setting process may be partly responsible for the downward rigidity of wages and inflation during economic slowdowns. Excessive wage increases can trigger risk of inflation spirals—a process when the rise in inflation causes wages to increase, and as a second round response, the rise in wages in turn increase inflation further. Although there is no sign of self-perpetuating inflation spiral in Malta, the inflation differential vis-à-vis the euro area has been high. The growth in compensation of employees, headline and core inflation, relative to their historical averages, in the year after economic slowdown, for the period 2001-2012, was higher in Malta, Belgium, Cyprus and Luxembourg than in other euro area economies (excluding the four countries with wage indexation mechanism). However, the fall in output, relative to historical average, was also lower in these countries than the euro area countries during economic slowdown episodes making it difficult to assess whether the stickiness of wages and inflation can be completely attributable to the wage indexation mechanism.

uA01app06fig05

Growth, Inflation and Wages (Relative to Historical Average) During Economic Slowdown3/, 2001–2012

(Percentage points)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: Eurostat; IMF WEO; ECB; and IMF staff calculations.1/Inflation2/Compensation per Employee3/Economic slowdown are episodes where real GDP growth is below the country’s growth average of 2001-12.Similarly, all the indicators represent their annual growth at period t (or t+1) relative to their average of the period 2001-12; where t represents the year of economic slowdown, and t+1 the next year.

6. A recent survey commissioned by the Central Bank of Malta also shows evidence of downward wage rigidity. A recent survey2 of 161 firms in 2008 revealed that firms usually opt to reduce the cost of production by decreasing non-labor costs during negative economic shocks, rather than decreasing wages. The labor market inflexibility is also exhibited by the fact that firms opt for a freeze in wages as opposed to a cut in wages. Even during periods with high labor supply, firms usually do not lower wages due to the implicit impact on work effort.

7. The combination of wage indexation and collective agreements could result in less job creation. By providing less flexibility in the pay offered by the employers, wage indexation superimposed on the collective agreements can negatively impact employment growth and the efficiency of the labor market. During episodes of economic boom, employment growth of both the current year and the next year, relative to their historical averages, is lower in Malta, Cyprus and Luxembourg than in euro area countries without wage indexation mechanism. While in Malta, this might also be due to varying degree of output changes compared to the euro area (excluding the four countries), employment growth, relative to historic average, is much lower in Luxembourg compared to the euro area (excluding the four countries) despite having similar output changes, relative to the historical averages.

uA01app06fig06

Growth and Employment (Relative to Historical Average) During Economic Boom1/, 2001–2012

(Percentage points)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Source: Eurostat; IMF WEO, ECB and IMF staff calculations.1/Economic boom are episodes where real GDP growth is above the country’s growth average of 2001-12.Similarly, all the indicators represent their annual growth at period t (or t+1) relative to their average of the period 2001-12; where t represents the year of economic boom, and t+1 the next year.

8. Malta’s wage setting process could also lead to higher mismatch in the labor market. The job vacancy rate in Malta is one of the highest in the euro area. Moreover, for a given job vacancy rate, the unemployment rate is one of the highest in the euro area, indicating less efficiency and more mismatch in the labor market. The fact that the unemployment is relatively high during periods of high vacancy rate or high demand for labor suggests that the employers may hesitate in recruiting due to the wage setting mechanism, which results in higher wages and less downward rigidity in wages during downturn. The moderation of wage indexation and collective agreements could possibly result in the creation of more jobs in the economy, as employers would be encouraged to hire due to the increased flexibility in setting the wages of their employees.

uA01app06fig07

Job Vacancy Rate, Average 2009–20121/

(Percent)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

uA01app06fig08

Job Vacancy Rate and Unemployment Rate of Euro Area Countries, Average 2009–20121/

(Percent)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Eurostat; and IMF staff calculations.1/Organizations with more than 10 employees

9. The COLA should be part of the negotiation process. The staff condones the Governor’s recommendation that the COLA should be part of the negotiation process, rather than imposed on collective agreements by legislation. In that light, it is a positive development that a number of collective agreements already incorporate the COLA increase. This would prevent from compounding the problem of misalignment of productivity and wage growth due to the addition of COLA on the company level collective agreement.

10. Wage negotiations should take productivity at the firm or enterprise level into consideration. The analysis on the gap between sector gross value added and compensation suggests that this gap is not same all across sectors, and wage negotiation needs to take this into account. The authorities should take initiative to produce productivity data on sectoral levels so that the issue of productivity can be discussed during wage negotiation. The wage indexation mechanism could only be implemented to sectors where the compensation is lower than the gross value added by that sector. The other alternative would be to complement the wage determination process in certain sectors with better measures to improve productivity in such sectors. The negotiated wage could be conditional on the improvement of productivity to provide incentives to make the production process more efficient.

11. The wage setting process should not hinder job creation. The fact that Malta has one of the highest vacancy rates in the euro area and the highest unemployment rate for the level of vacancy rate strongly hints that wage setting mechanism possibly has a detrimental impact on the hiring of employees. Measures and initiatives should be taken to make the labor market more flexible, and to give more leeway to the employers in setting the pay of their workers. The supply side factors also need to be improved so that there is a better match between the jobs offered by the employers and the skills offered by the employees.

12. Reforms in wage indexation could help in aligning productivity with wages in Malta. While the abolishment of wage indexation may not be politically feasible and may also raise social equitable considerations, a gradual moderation in the indexation mechanism could help in making the labor market more efficient and competitive. Some of the possible reforms that the authorities could take are listed below:

  • Scope of coverage: The wage indexation mechanism could only be applied for wages less than a certain threshold. Such a mechanism would assure the social equitable issues while not making the entire labor market inefficient.

  • Index wages only if inflation is above a threshold level. Instead of applying wage indexation for all inflation levels, the mechanism could be operated only when the inflation rises above a threshold level. This is practiced in Luxembourg where the wage indexation is implemented when the inflation is above 2.5 percent.

  • Adjust RPI weights more frequently to reflect current standards of living. The wage indexation in Malta is done using the retail price index as the benchmark of the cost of living adjustment. The RPI measures price changes but does not take into account the manner in which households change their pattern of expenditure. Consequently, newly significant goods are not included in the RPI. According to documents released by Malta’s National Statistics Office, the weights are updated almost once every decade. The last update was done in 2000–01. To make the wage indexation more relevant, the RPI weights should be adjusted on a more regular basis. This would ensure that the COLA accurately reflects the impact of prices on the living standards of people.

Appendix VII. Debt Sustainability Analysis

1. The public debt to GDP ratio has been on a rising path since 2007. The general government debt-to-GDP ratio increased from 60.9 in 2008 to 72.1 in 2012. Besides financing the deficit, since 2010 the Government has also issued debt to fund the loans made to the countries affected by the crisis through the European Financial Stability Facility and the European Stability Mechanism. Under the baseline scenario, the debt-to-GDP ratio is expected to peak in 2015 at a level of 74.5 percent. Under current policies, the primary balance is only expected to turn into surplus in 2016. This will help stabilize debt below 74 percent of GDP by 2018.

2. The stock of contingent liabilities, largely in the form of government debt guarantees, continued to increase. Government guaranteed debt amounted to 17.6 percent of GDP in 2012, 6.1 percentage points higher than in 2008. About 60 percent of the guaranteed debt corresponds to Enemalta (the national utility company), which has been facing financial problems for a number of years.

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

  • A ½ standard deviation permanent shock to economic growth is expected to place debt on an increasing path, whereby it would reach a level of 84 percent of GDP by 2018.

  • A ½ standard deviation shock to the general government primary balance would stabilize debt at 75 percent of GDP, slightly above the baseline forecast.

  • A one-time shock to contingent liabilities is also assessed, because the latter are sizeable and essential to the dynamics of public debt. The shock is assumed to amount to 10 percentage points of GDP and to be originated in 2014. This shock captures the case where some contingent liabilities are called upon and recorded on the government’s balance sheet. Under this scenario, the debt–to-GDP ratio increases sharply to 84 percent, and then remains roughly at that level.

4. 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.

Table 1.

Malta: Public Sector Debt Sustainability Framework, 2008–2018

(Percent of GDP, unless otherwise indicated)

article image

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.

Figure 1.
Figure 1.

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

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

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 primary balance.4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2013, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
Figure 2.
Figure 2.

Malta: The Structure of Public Debt

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: Ministry of Finance; and Eurostat.

External Debt Sustainability Analysis

Table 1.

Malta: External Debt Sustainability Framework, 2008–2018

(Percent of GDP)

article image

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/

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 203; 10.5089/9781475553093.002.A001

Sources: International Monetary Fund, country desk data, and 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 six pack is a set of EU legislative measures to reform the Stability and Growth Pact and to introduce a new macroeconomic surveillance. The fiscal compact is an intergovernmental treaty introduced as a new stricter version of the Stability and Growth Pact.

2

The RAM shows relatively low probability events that could materially alter the baseline discussed in this report (which is the scenario most likely to materialize in view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of risks surrounding this baseline. The RAM reflects staff’s views on the sources of risks as of the time of discussions with the authorities.

1

Prepared by Swarnali Ahmed (EUR).

1

Prepared by Swarnali Ahmed (EUR).

1

Prepared by Vassili Prokopenko (EUR).

2

The AML/CFT framework in Malta is periodically assessed by MONEYVAL. A comprehensive MONEYVAL assessment of the compliance with the FATF 40 Recommendations and 9 Special Recommendations was conducted in 2007. Since then two progress reports were made to MONEYVAL and a follow up targeted assessment was performed in June 2011 (4th assessment visit) which focused on key and core FATF Recommendations as well as those for which Malta had received non-compliant and partially compliant ratings in the 2007 assessment. The report on the 4th assessment visit was adopted by MONEYVAL in March 2012. The 2007 MONEYVAL Report, the progress reports and the 2012 4th Assessment Report can be found at http://www.coe.int/t/dghl/monitoring/moneyval/Countries/Malta_en.asp

1

Prepared by Carolina Osorio (EUR).

2

Enemalta is the main provider of energy generation and distribution in Malta, and is 100 percent owned by the state.

1

Prepared by Carolina Osorio (EUR)

2

The Ageing Working Group (AWG) is commissioned by the European Commission and mandated by the Economic Policy committee, and does not incorporate reforms legislated after December 2011. For countries that have implemented reforms since December 2011, the report estimates are not the latest projections

3

In contrast to total age-related spending, strictly age-related spending excludes unemployment benefits. This is due to the fact that the latter are driven by cyclical factors

4

The AWG risk scenario takes into account the impact of non-demographic drivers of health care and long-term care expenditure (such as technological changes and institutional mechanisms). The risk scenario assumes a more dynamic spending growth in the beginning of the projection period in line with past trends for the EU as a whole. This scenario puts more pressure on public budgets.

5

The system includes the provision of retirement pensions as well as survivor’s benefits and invalidity pensions.

6

These estimates correspond to the results reported in the 2007 EC Occasional Papers Series No. 35, pp. 246, http://ec.europa.eu/economy_finance/publications/publication_summary10175_en.htm. The results were based on the World Bank’s pension reform options simulation toolkit–PROST, which was run by the Economic Policy Division of the Ministry of Finance.

1

As of 2009, Malta had a similar number of beds per 100,000 inhabitants as Greece, Netherlands and Slovenia. Germany and Austria had a higher number of hospital beds. There have been various efforts, across EU member states to decrease the number of hospital beds, since a lower number of beds is meant to lead to financial and operational efficiency.

2

Provisions include free medical services at Health Centers and free hospitalization. No user charges or co-payments apply. There are a few services that are provided subject to means testing. These include dental treatment, optical services and certain formulary medicines. Patients are sent overseas for highly specialized care required for rare diseases. The private sector acts as a complementary mechanism for health care coverage, funded by out of pocket payments and private health insurance.

3

This private health insurance rate is estimated at 21 percent of the population, the same as in 2002. Further, only 10 percent of the population benefits from an extensive refund plan. The rest subscribe to policies for very limited refunds. Those covered by basic plans find their policy useful when paying for low-valued medical consultations, but private hospitalization exceeds their benefit limits. In addition, patients with a full refund scheme choose to use public hospitals, as treatment offered there is more intensive and sophisticated.

1

Prepared by Swarnali Ahmed (EUR)

1

“Economic growth in turbulent times,” Address by Professor Josef Bonnici, Governor, Central Bank of Malta; in Annual Dinner, Institute of Financial Services – Malta, 14 December 2012.

2

“Wage Dynamics Report Malta,” commissioned by the Central Bank of Malta and prepared by E-cubed Consultants on behalf of the Malta Chamber of Commerce, Enterprise and Industry.

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Cover IMF Staff Country Reports
Malta: 2013 Article IV Consultation
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2013: Issue 203
Publisher:
International Monetary Fund
ISBN:
9781475553093
ISSN:
1934-7685
Pages:
82
DOI:
https://doi.org/10.5089/9781475553093.002

Average Growth 2007-2012, Relative to Historical Average

(Percent)

Real GDP1/

(t=100)

Change in Trade Balance, 2006-2012

(Percent of GDP)

Real Effective Exchange Rate

(2005=100)

Ten-year Government Bond Spreads

(Over 10-year German bunds, basis points)

Nonresident Holding of General Government Debt, 2012

(Percent of total)

Household Debt

(Percent of GDP)

Non-financial Corporations Debt

(Percent of GDP)

Total Assets

(Percent of GDP)

Banking sector assets

(Percent of total assets)

Banking sector liabilities

(Percent of total liabilities)

Financial Services and Other Niche Activities

(Percent of total gross value added)

Gross Value Added by Financial Sector, 2012Q41/

(Percent of total)

Insured (Covered) Deposits, March 2012

(Percent of GDP)

General Government Deficit

(Percent of GDP)

General Government Debt

(Percent of GDP)

Government Current Spending, Selected Items

(Percent of GDP)

Wage Bill, Average 2010–12

(Percent of GDP)

Debt Decomposition

(Percent of GDP)

Deficit Decomposition

(Percent of GDP)

General Government’s Balance Sheet Components

(Millions of euro)

Government Revenue Projection Errors

(Percent of GDP, average 2000–2011)

Overview Fiscal Frameworks - Fiscal Rules

(Percent of EU 27 member countries)

Overview National Fiscal Frameworks

(Percent of EU 27 member countries)
Figure 1.

Malta: Economic Indicators
Figure 2.

Malta: Short-Term Indicators, 2006–2013
Figure 3.

Malta: Labor Market Indicators, 2000–2013
Figure 4.

Malta: Inflation, 2007–2013
Figure 5.

Malta: Fiscal Developments
Figure 6.

Malta: Financial Soundness Indicators

Real GDP Growth

(Percentage Points)

Increase in Unemployment Rate During Peak-to-Trough Output Loss

(Percentage points)

Export Growth

(Percentage)

Real Consumption Growth

(Percentage points)

MFI Deposits, February 2013

(Percent change year on year)

MFI Loans, February 2013

(Percent change year on year)

Growth in Net National Income per Inhabitant

(Percent change year on year)

Household Net Assets

(Percent of GDP)

Property Price Indices

(2000=100)

House prices slightly below pre-crisis peaks.

Price-to-Rent Ratio vs. Price-to-Income Ratio

(Relative to Historical Average)

Bank Return on Assets

(Percent)

Bank Regulatory Capital to Risk-Weighted Assets

(Percent)

Net International Investment Position

(Percent of GDP)

Average Weights of Exports in Goods (2005–2011)

(Percent of total exports)

Export Growth in Goods (2005–2011)

(Average percent change year on year)

Nominal Export Growth, 2005–11

(Average percent change year on year)

Composition of Services, Share of Total Exports, Average 2005–2011

(Percent)

Composition of Services, Export Growth, Average 2005–2011

(Percent)

Nominal Export Growth in Services, Average 2005–11

(Percent)

Terms of Trade of Goods

(2005=100)

Terms of Trade of Services

(2005=100)

Profits/Losses

(Percent of GDP)

Debt

(Percent of GDP)

Retail (end-user) Energy Prices for Households, Nov 2012

(Euros per kilo watt hour Electricity)

End-user Energy Prices for Industrial Customers, Nov 2012

(Euros per kilo watt hour Electricity)

Projected Change in Strictly-age-related Expenditure for 2010-2060

(Percentage of GDP)

Malta - Strictly-age-related Expenditure in the Reference Scenario

(Percent of GDP)

Healthcare Spending in 2010

(Percent of GDP)

Productivity and Compensation per Employee

(Four quarter moving average indices, 2001Q1=100)

Unit Labor Cost

(Four quarter moving average indices, 2001Q1=100)

Gross Value Added minus Labour Compensation per Person, Average 2004–2012

(Percent)

Increase in Compensation Per Employee Due to COLA

(Percent of Total Increase in Compensation Per Employee)

Growth, Inflation and Wages (Relative to Historical Average) During Economic Slowdown3/, 2001–2012

(Percentage points)

Growth and Employment (Relative to Historical Average) During Economic Boom1/, 2001–2012

(Percentage points)

Job Vacancy Rate, Average 2009–20121/

(Percent)

Job Vacancy Rate and Unemployment Rate of Euro Area Countries, Average 2009–20121/

(Percent)
Figure 1.

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

(Percent of GDP)
Figure 2.

Malta: The Structure of Public Debt
Figure 1.

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

(Percent of GDP)