IMF Executive Board Concludes 2016 Article IV Consultation with Malta

IMF News, February 21, 2017

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Malta is described as "one of fastest-growing economies in Europe."
Output and demand
- Following an average growth of nearly 8 percent in 2014-15, output is estimated to have expanded by 4.1 percent in 2016, supported by strong domestic demand.
- Real GDP (percent change year on year): 2012: 2.7; 2013: 4.5; 2014: 8.4; 2015: 7.4; 2016: 4.1; 2017 (Proj.): 3.4.
- Domestic demand (percent change year on year): 2012: -0.2; 2013: 2.7; 2014: 3.0; 2015: 12.8; 2016: 5.5; 2017 (Proj.): 3.6.
Labor market and prices
- Robust job creation drove unemployment to record lows despite rising labor supply.
- Unemployment rate (percent): 2012: 6.3; 2013: 6.4; 2014: 5.8; 2015: 5.4; 2016: 4.8; 2017 (Proj.): 4.9.
- CPI (harmonized, average): 2012: 3.2; 2013: 1.0; 2014: 0.8; 2015: 1.2; 2016: 0.9; 2017 (Proj.): 1.5.
- Subdued wage pressures contributed to low inflation.
External sector
- The external position remains strong, with sizable exports of services keeping the current account in surplus.
- Current account balance (percent of GDP): 2012: 1.7; 2013: 3.1; 2014: 9.6; 2015: 5.2; 2016: 4.4; 2017 (Proj.): 4.4.
- Trade balance (goods and services) (percent of GDP): 2012: 4.9; 2013: 7.1; 2014: 12.6; 2015: 7.9; 2016: 7.1; 2017 (Proj.): 7.0.

Fiscal outcomes
- Owing to buoyant revenues and consolidation measures, the 2016 fiscal deficit narrowed to an estimated level of 0.7 percent of GDP, well below the budget target of 1.1 percent of GDP.
- Overall balance (General government, percent of GDP): 2012: -3.7; 2013: -2.6; 2014: -2.0; 2015: -1.3; 2016: -0.7; 2017 (Proj.): -0.6.
- Primary balance (General government, percent of GDP): 2012: -0.6; 2013: 0.3; 2014: 0.8; 2015: 1.2; 2016: 1.4; 2017 (Proj.): 1.4.
Public debt
- Public debt declined further to about 60 percent of GDP in 2016.
- Gross debt (percent of GDP): 2012: 68.0; 2013: 68.7; 2014: 64.3; 2015: 60.8; 2016: 60.0; 2017 (Proj.): 59.0.
Executive Directors' fiscal advice
- Commended the authorities’ medium-term fiscal consolidation plan as striking an appropriate balance between further lowering public debt and sustaining growth momentum.
- To achieve fiscal targets, highlighted the need to:
- enhance the efficiency of tax collection;
- contain the fast growing wage bill and spending on goods and services, including by building on recommendations of recent in-depth spending reviews;
- further improve the financial health of SOEs and contain long-term spending pressures to reduce fiscal risks.

System-wide position
- Domestic banks remain well-capitalized and liquid, with profitability well above the levels seen in European peers.
- Banks’ asset quality continues to improve; measures have been taken to reduce legacy non-performing loans (NPLs).
Credit, property exposure, and risks
- Credit growth to the private sector was subdued as credit to the non-financial corporate sector contracted, but mortgage lending remained buoyant, resulting in higher household debt and further increase in banks’ exposure to property-related loans.
- Residential property prices showed positive momentum in the face of rising demand and sluggish supply response.
- Interest rate for mortgage purposes (year average, percent): 2012: 3.6; 2013: 3.6; 2014: 3.5; 2015: 3.1; 2016: 3.1.
- Ten-year government bond yield (percent): 2012: 4.1; 2013: 3.4; 2014: 2.6; 2015: 1.6; 2016: 1.1.
Executive Directors' financial-sector recommendations
- Encouraged deployment of targeted macro-prudential tools to enhance resilience of banks and households to property market swings.
- Urged closing data gaps and reviewing fiscal incentives related to the property market.
- Supported faster resolution of remaining distressed non-financial corporate NPLs and welcomed plans to streamline insolvency and bankruptcy frameworks.
- Emphasized maintaining robust implementation of the AML/CFT framework in line with international standards to safeguard financial system integrity.

Growth and convergence
- The outlook is favorable, though growth is set to moderate to 3.4 percent in 2017 and converge to its potential of about 3 percent over the medium term as the impetus from domestic demand is projected to weaken.
Labor market and prices
- Strong job creation is likely to continue, keeping unemployment low.
- Inflation is expected to pick up as import prices recover.
External and fiscal outlook
- The output gap is expected to close, while the current account surplus is set to increase modestly.
- Favorable macroeconomic conditions, the low interest rate environment, and persistent primary fiscal surpluses are expected to bring down public debt as a proportion of GDP in the coming years.

The Executive Directors agreed with the thrust of the staff appraisal and commended the authorities for implementing sound macroeconomic policies that contributed to strong economic performance, robust job creation, low unemployment, and improved public finances.
As a small and open economy, Directors agreed policies should continue to focus on enhancing resilience to shocks and strengthening competitiveness.
Directors welcomed the authorities’ commitment to building fiscal buffers, preserving financial sector stability, and implementing structural reforms to address remaining impediments in the labor market, boost productivity, and ensure inclusive growth.