20/09/2016

Central Bank of Malta Quarterly Review – Second Issue 2016

The Central Bank of Malta has published the second issue of its Quarterly Review for 2016, which analyses recent economic and financial developments in Malta and abroad during the first half of the year. The Review also includes analytical reports on the local construction sector, the economic impact of pension age changes and the seasonal adjustment of Harmonised Index of Consumer Prices (HICP). This edition also introduces a measure of financial stress and assesses the impact of financial stress on the Maltese economy.

The Review highlights that, during the second quarter of 2016, the Governing Council of the European Central Bank (ECB) maintained an accommodative monetary policy stance to strengthen the economic recovery in the euro area and to accelerate the return of inflation to levels below, but close to 2%. More specifically, during the quarter under review, key interest rates remained unchanged. The ECB also started to implement the comprehensive package of non-standard measures that were announced in March, which included an increase in the amount of monthly asset purchases, a new corporate sector purchase programme and a new series of targeted longer-term refinancing operations.

During the second quarter of 2016, gross domestic product (GDP) in the euro area rose by 0.3% on a quarter-on-quarter basis and by 1.6% in annual terms. Annual inflation in the euro area, as measured by the HICP, remained subdued, standing at 0.1% in June.

ECB staff projections published in September, indicate a continuation of economic growth within the euro area with GDP expected to grow by 1.7% in 2016 and by 1.6% in 2017 and 2018. Inflation is projected to accelerate, reaching 1.2% in 2017 and 1.6% in 2018.

Turning to domestic developments, the Review notes that the Maltese economy continued to grow strongly during the first quarter of 2016. This growth was supported entirely by domestic demand. The initial estimate for real GDP growth in this period, published in June, shows an annual increase of 5.2%.¹ During the second quarter, annual real GDP growth eased to 3.0%.

Strong economic activity was also reflected in the labour market. According to the Labour Force Survey (LFS), in the first quarter of 2016, employment increased by 2.6% in annual terms. Meanwhile, the unemployment rate based on the LFS fell to 4.9%. According to administrative records, the number of registered unemployed continued to decline in the second quarter of 2016.

The annual HICP inflation rate in Malta was 1.0% in June, unchanged from March. Faster increases were registered in the prices of unprocessed food and services. However, these factors were offset by a faster fall in energy prices and a slower increase in the prices of non-energy industrial goods.

In the external sector, the current account of the balance of payments posted a narrower surplus in the first quarter of 2016 when compared to the same quarter of 2015. This was attributable to a widening in the merchandise trade gap and to higher net outflows related to primary income, which offset a rise in net receipts from services and secondary income.

Monetary dynamics remained robust, although residents' deposits with Maltese banks grew at a slower annual rate of 6.0%, following a 10.0% increase in March. Credit to Maltese residents also continued to increase rapidly, with the annual growth rate standing at 5.4% in June.

In line with developments in the euro area as a whole, domestic money market yields edged down during the quarter under review. In the primary market, the yield on three-month Treasury bills fell by 14 basis points between March and June, ending the quarter at -0.28%.  In the secondary market, the ten-year government bond yield declined by 4 basis points between March and June, to 0.86%. Over the same period, the weighted average interest rate offered by monetary financial institutions to households and non-financial corporations on deposits declined by 5 basis points, to 0.58%.  The rate on loans also edged down slightly, to stand at 3.75% in June.

As regards fiscal developments, in the first quarter of 2016 the general government balance narrowed on the same period a year earlier as revenue grew while expenditure fell. As a result, the general government deficit narrowed to 0.1% of GDP when measured as a four-quarter moving sum. However, the general government debt-to-GDP ratio increased, to reach 65.3% at the end of the quarter. Consolidated Fund data show that, during the first half of 2016, the deficit narrowed compared with the corresponding period of 2015.

From a policy perspective, the Bank notes that the narrowing in the fiscal deficit is a positive development. The Pre-Budget Document for 2017 foresees an additional narrowing, with a target for the deficit-to-GDP ratio of 0.6% in 2017 and a close-to-balance position in 2018. The debt ratio is also set to decrease, falling below 60% in 2018. It is essential that these targets are supported by well-defined measures.

The financial system continues to benefit from a strong pace of economic growth, prudent business practices and macro-prudential measures designed to mitigate potential systemic risks. Capital and liquidity ratios remain at high levels while non-performing loans show signs of decline. Prudent dividend pay-out policies, higher provisioning levels and enhanced collateral valuation processes are essential to preserve the health of the financial system.

Moreover, the Central Credit Register introduced recently by the Central Bank of Malta and the additional non-standard monetary policy measures launched by the ECB could help banks reduce domestic borrowing costs and support further credit growth. Greater transparency as regards non-interest charges could also help ease local financing conditions.

The second issue of the Quarterly Review for 2016 is available on the website of the Central Bank of Malta www.centralbankmalta.org.

---

¹ This was revised up to 5.3% in NSO Release 142/2016, published on 6 September 2016.

Back to Archive