IMF warns of risks to recovery
Pension reform critical
Malta’s real estate market weakness could turn out to be deeper and more protracted than expected in view of excess supply and some debt overhang, the International Monetary Fund warned yesterday.
In its outlook on Malta’s economy, the IMF said that while the island had weathered the global recession relatively well and was enjoying a “cyclical upswing” driven by external demand, the momentum was expected to fade.
Manufacturing and tourism activity had recovered but some sectors were lagging behind. Consumption growth had slowed partly on the back of softer real estate prices, and investment, especially in construction, had decelerated sharply.
Besides real estate, risks to economic growth were also to be found in the fragile economic and financial situation in parts of the euro area which could spill over to Malta, the Fund said.
On the other hand, growth in the medium term could exceed the euro area average if the momentum of reform and diversification into high value export activities was sustained. Growth could also be sustained longer than anticipated by low interest rates and export demand.
On the fiscal front, the IMF welcomed the government’s goal of reducing the deficit to 1.4 per cent by 2013. However, it sees significant risks of falling short of targets arising in part from a slowing of economic growth and slippages in containing expenditure.
In what has now become an oft-repeated warning, it said a “bold and comprehensive pension reform” was critical to contain future fiscal costs as Malta’s age-related public spending was projected to increase significantly over the long term. “A timely but gradual introduction of an additional mandatory and privately funded pillar would allow the government to reduce further the benefits of the pay-as-you-go system over time.”
Vulnerabilities were also rising in the financial sector, and the IMF again identified real estate as one of the risk factors. While conservative funding models and a focus on domestic assets had protected banks from the global financial crisis, the past real estate boom had led private debt to increase significantly. While property prices had corrected after a period of high growth and appeared to have stabilised, excess supply remained in segments of the market.
Experience from other euro area countries showed that such potential imbalances need to be treated proactively, the IMF advised. Non-performing property loans were on an upward trend, weighing on bank profitability, and many banks were highly exposed to the real estate sector.
The IMF said Malta was adjusting to the challenges of globalisation, with progress being made on diversifying the economy into high value-added activities such as aircraft maintenance and pharmaceuticals.
However, raising productivity, skills and employment rates simultaneously was necessary for catching up with incomes of richer European countries.
“Wages should follow productivity developments. Employment rates, in particular for women, remained low and more flexible arrangements for part-time work and flexible working practices could help,” the fund said, also calling for increased support for education.