22/06/2016

Central Bank of Malta Quarterly Review – First Issue 2016

The Central Bank of Malta has published the first issue of its Quarterly Review for 2016, which analyses recent economic and financial developments in Malta and abroad. The Review also includes a number of analytical reports, namely on measuring international competitiveness, the economic impact of foreign workers in Malta, and access to finance. This edition also carries an article on the evolution of the European financial system after the crisis.

The Review highlights that, during the first half of 2016, the Governing Council of the European Central Bank (ECB) strengthened its accommodative monetary policy stance. A comprehensive set of measures was announced, aimed at reinforcing the economic recovery in the euro area, as well as helping inflation return to the target of below, but close to, 2.0%.

More specifically, on 10 March the Governing Council lowered the interest rate on the main refinancing operations and the rate on the marginal lending facility by 5 basis points to 0.00% and 0.25%, respectively. At the same time, the deposit facility rate was lowered by 10 basis points to -0.40%. The Governing Council also expanded its monthly purchases under its asset purchase programme by €20 billion to €80 billion. As from June, this programme also includes a new corporate sector purchase programme. A new series of four targeted longer-term refinancing operations, each with a maturity of four years, was also announced.

During the first quarter of 2016, gross domestic product (GDP) in the euro area rose by 0.6% on the previous quarter, with the expansion being driven by domestic demand. Inflationary pressures remained subdued, however. Indeed, the annual rate of inflation in the euro area measured on the basis of the Harmonised Index of Consumer Prices (HICP) fell from 0.2% in December, to 0.0% in March and edged down again to -0.1% in May.

According to the June 2016 Eurosystem staff macroeconomic projections, the economic recovery in the euro area is expected to continue, with real GDP growth projected to reach 1.6% this year and 1.7% in both 2017 and 2018. Inflation is initially set to remain low, at 0.2% in 2016, before accelerating to 1.3% and 1.6% in 2017 and 2018, respectively.

Turning to domestic developments, the Review notes that the Maltese economy continued to expand at a robust pace. Indeed, the initial estimate for the last quarter of 2015 showed annual real GDP growth rate of 5.7%, mainly driven by domestic demand. This was subsequently revised up to 6.2%. During the first quarter of 2016, annual real GDP growth slowed down to a still-buoyant 5.2%.

Strong economic activity was also reflected in the labour market. During the fourth quarter of 2015, employment continued to grow, while the unemployment rate maintained its declining trend. According to the Labour Force Survey (LFS), employment increased by 3.0% in annual terms. Meanwhile, the unemployment rate based on the LFS fell to 5.2%. According to administrative records, the number of registered unemployed continued to decline in the first quarter of 2016.

The annual HICP inflation rate in Malta eased to 1.0% in March, from 1.3% in December. This deceleration was mainly due to slower growth in the prices of services and unprocessed food. In April, the annual inflation rate moderated further to 0.8%.

In the external sector, during the fourth quarter of 2015 the surplus on the current account of the balance of payments increased substantially compared to the corresponding period of 2014. This reflected developments in the primary and secondary income accounts as well as a higher surplus on services. These outweighed a wider merchandise trade deficit.

Monetary dynamics remained robust, with residents' deposits with Maltese banks growing at an annual rate of 10.0% in March. Meanwhile, credit to Maltese residents continued to increase, though the annual growth rate eased to 5.2% in March, from 5.6% in December.

In line with developments in the euro area as a whole, domestic money market yields fell during the quarter under review. The three-month Treasury bill rate in the primary market fell to -0.14% by the end of March. In the secondary capital market, government bond yields continued their downward trend, with the ten-year yield falling to 0.9%. Similarly, bank lending rates edged down, with the weighted average interest rate on outstanding loans to resident households and non-financial corporations ending the quarter at 3.77%.

As regards fiscal developments, in the final quarter of 2015 the general government balance improved by €16.9 million on a year earlier, as revenue outpaced expenditure. As a result, the general government deficit narrowed to 1.5% of GDP over the year as a whole. The general government debt-to-GDP ratio also fell, standing at 63.9% at the end of 2015. Consolidated Fund data show that, during the first four months of 2016, the deficit narrowed compared with the corresponding period of 2015.

This edition of the Review also carries the Bank's latest macroeconomic projections. The Bank foresees real GDP growth of 4.9% this year. Growth is set to ease further over the following two years, reaching 3.6% in 2018. Domestic demand is set to be the main driver behind growth in activity.

HICP inflation is set to moderate slightly to 1.1% in 2016, before picking up to 1.7% in 2017 and 1.8% in the final year of the projection horizon. Risks to both the GDP growth and inflation projections are slightly on the downside.

From a policy perspective, the Bank welcomes the recent narrowing in the fiscal deficit and recalls that the latest Update of the Stability Programme targets a close-to-balance position in 2018. Similarly, the debt ratio is also expected to fall below 60% in the outer year. Additional measures aimed at ensuring that these targets are actually met need to be specified. The achievement of such objectives and further reductions in contingent liabilities for guarantees to state-owned entities, will enhance fiscal sustainability, improve investor sentiment and increase the prospect of a rating upgrade by international credit rating agencies.

The financial system remains sound, as reflected in the banks' capital and liquidity levels. However, further efforts are required to raise provisions against non-performing loans and to strengthen capital buffers.

If the banks were to take advantage of the additional monetary policy measures announced by the Governing Council in March 2016, this would support further credit growth. While domestic interest rates have responded to past declines in official rates, there is still scope for them to fully reflect the more accommodative policy stance pursued in recent years. Greater transparency as regards non-interest charges would also help ease local financing conditions. The Central Credit Register launched recently by the Bank should help in this regard, as it addresses information differences among borrowers and lenders, and should stimulate greater competition across banks.

The first issue of the Quarterly Review for 2016 is available on the website of the Central Bank of Malta.

 

 

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