02/05/2017

The Central Bank of Malta’s Annual Report 2016

The Central Bank of Malta has just released its Annual Report for 2016. The Report reviews the Bank's policies and operations during the year and includes detailed financial statements. An opening statement by the Governor is followed by an analysis of economic and financial developments in Malta and abroad and a review of the Bank's operations. The Report also carries articles on sectoral financial linkages and house prices in Malta. It also includes an assessment of the contribution of net exports to economic growth in recent years and the factors driving the shift from a deficit to a surplus on Malta's current account of the balance of payments.

The Report notes that the Maltese economy continued to grow robustly during 2016, extending the strong pace of activity recorded in recent years. Real GDP grew by 5% during the year under review, and was primarily driven by net exports. Domestic demand also supported the expansion, but its contribution was small in relation to that of external trade. Sector data show that services activities remained the main driver of economic growth, with a smaller contribution stemming from the manufacturing sector. In contrast, construction activity declined slightly, driven by developments in the non-residential segment.

Although the pace of GDP growth moderated compared with 2015, it remained much higher than that registered in the euro area. The Bank's latest projections, which were concluded in November, suggest that after three years of very strong growth, the pace of activity is likely to slow down to around 4% in 2017 and 2018.

The strong pace of economic expansion was reflected in the labour market. Employment continued to rise whilst unemployment declined, reaching a historical new low. Labour Force Survey (LFS) data show that employment expanded at an average annual rate of 2.8% in the first nine months of 2016. The increase in the number of jobs was driven by full-time employment, which went up by 6,160 in absolute terms. The labour force expanded by 2.2% mainly due to strong gains in female activity rates, although male participation rates also rose. Despite increases in labour supply, the unemployment rate continued its downward trend, falling to 4.9%. Jobsplus data also point to favourable labour market conditions, with the average number of registered unemployed during 2016 as a whole down by almost one-third over 2015.

Turning to price developments, the Report notes that the average annual rate of inflation based on the Harmonised Index of Consumer Prices (HICP) moderated to 0.9% in 2016, from 1.2% in 2015. This moderation was driven by slower growth in prices for services. Although prices in Malta were rather muted compared with historical trends, HICP inflation was above that in the euro area, which averaged 0.2% during the year. HICP inflation in Malta is set to pick up to 1.9% by 2019, according to the Bank's projections. 

Residents' deposits continued to grow, although the rate of increase slowed down compared with 2015. The low level of interest rates contributed to a further shift towards overnight deposits. Growth in credit to Maltese residents slowed in 2016, with this moderation driven by slower growth in credit to general government. Meanwhile, interest rates on deposits and loans to Maltese residents fell further, as did yields on Treasury bills and government bonds.

As regards fiscal developments, in the third quarter of 2016, the general government balance recorded a surplus of 0.6% when measured on a four-quarter moving sum basis, a significant improvement when compared with a 1.3% deficit in 2015. This improvement in the government balance was mainly attributed to lower capital expenditure and higher current revenue. The government debt-to-GDP ratio declined by 0.9 percentage point, to 59.7%. This decline was driven by positive developments in the primary balance. Strong economic growth also contributed, as the rate of GDP growth surpassed the effective rate of interest paid by government on its borrowing.

During 2016 the Bank continued to implement the Eurosystem's monetary policy stance in Malta, through standing facilities, regular liquidity-providing operations and the Public Sector Purchase Programme (PSPP). Given ample liquidity, credit institutions established in Malta increased the level of excess funds held in overnight facilities with the Bank and reduced participation in the regular liquidity-providing operations. Through the PSPP, the Bank bought approximately €700 million worth of Maltese government securities by the end of 2016.

The PSPP contributed to a further expansion in the Bank's balance sheet, with total assets reaching €5.5 billion at the end of 2016, up from €4.5 billion twelve months earlier. The low-interest environment continued to weigh on net interest income, which decreased slightly over the previous year. Nevertheless, operating profit before transfers to provisions and reserves edged up to €76.4 million, from €75.0 million in 2015. The Bank added €20.0 million to its provisions and €6.4 million to reserves, leaving an unchanged amount of €50.0 million payable to the Government of Malta.

As part of its mandate to ensure financial stability, the Bank continued to monitor the health of the financial system, assessing systemic risks and imbalances and formulating relevant policy recommendations. It also remained active in the Joint Financial Stability Board, which brings together senior officials from the Bank and the Malta Financial Services Authority. Extensive work was carried out on the quality of banks' assets to address issues related to non-performing loans (NPLs). The Bank also launched a Central Credit Register containing granular information on bank credit to households and firms and, together with the Ministry for Finance, carried out preparatory work on EU legislation related to the financial sector ahead of Malta's EU Council Presidency.

The Bank also stepped up its efforts to monitor and assess economic and financial developments in Malta and abroad, including through enhanced direct contact with large companies and public sector entities. Its economic publications were overhauled, with more prominence given to research findings. A collection of papers on the Maltese economy was launched during an international symposium on small euro area countries, which the Bank hosted in June.

Meanwhile, the Bank pursued further its capital investment programme, which included upgrades to the IT infrastructure in several departments and works on a new building that will host the Library, conference facilities, offices and a data centre.

The Annual Report 2016 is available on the Central Bank of Malta's website at www.centralbankmalta.org.

Governor's presentation at the Annual Report 2016 Press Conference.

 

Back to Archive