The Central Bank of Malta’s Annual Report for 2011

The Central Bank of Malta’s Annual Report for 2011 was recently published. In his statement to the report the Governor of the Central Bank of Malta, Josef Bonnici, explained: “Global economic activity moderated during 2011, as the recovery from the international economic and financial crisis proved to be fragile.” Furthermore, as he explained in his presentation, “the outlook is for slower growth ahead” and consequently “the preservation of international competitiveness becomes even more essential against a backdrop of heightened uncertainty and volatility in the financial markets.”

The statistics are compelling in their support of this bleak assessment of what has long since stopped being a simple “crisis”, but instead become a sustained period of lost opportunity: all the major global economies grew by less in 2011 than they did in 2010. Overall the euro area only grew by 1.4 per cent in 2011, as compared to by 1.9 per cent in 2010, and from a level of 10 per cent in 2010, unemployment rose to a stubbornly high 10.4 per cent. The latest ECB staff projections also suggest that the economy of the euro area as a whole will actually shrink in 2012. Malta compares favourably with the euro area having enjoyed GDP growth of 2.1 per cent and 6.4 per cent unemployment.

In his statement to the report Prof. Bonnici attributes Malta’s favourable economic performance “to a gradual process of structural reform that goes back to the period preceding entry into the EU in 2004.” These reforms “have contributed to a process of diversification towards new areas of economic activity largely backed by foreign direct investment.” Specifically between 2004 and 2010 there was a growth from 10 per cent to above 30 per cent of nominal GDP in exports related to new economic areas such as financial (and other business related services), ICT, and remote gaming.

Current austerity measures have obviously not helped European growth and while growth in net exports has remained stable since 2010 (at around 0.8 per cent for 2010 and one per cent for 2011) growth in domestic demand has declined from 1.6 per cent in the first quarter of 2011 to -0.5 per cent in the fourth quarter of the year (overall: 1.1 per cent in 2010 and 0.5 per cent in 2011). These are troubling figures in that they crisply silhouette the horns of the dilemma that European governments are facing: the very austerity they are implementing to limit budget deficits and to release funds for repaying debt is taking money out of people’s pockets stopping it fuelling growth by being spent in shops.

Euro area inflation reached an average of 2.7 per cent across the whole of 2011 (and 2.4 per cent for Malta in 2011), versus 1.6 per cent for 2010. This was actually the lowest of all the major economies except Japan, which has had for at least the last three years. The Central Bank flagged the importance of current higher energy prices to these elevated levels of inflation. They explained that their prediction, of around two per cent inflation for the euro area in 2012 , was predicated on the assumption that “oil prices will not get worse.”

In his presentation Prof. Bonnici also examined euro area monetary and fiscal developments. Reflecting the difficulties a number of countries were experiencing financing their spending using the debt markets, the European Central Bank, having initially raised it, lowered the MRO (Main Refinancing Operation) rate back to one per cent. The ECB also conducted two long-term refinancing operations of three years each (in December 2011 and February 2012 respectively). Put another way, while the European Central Bank has been shy to purchase the debt of countries such as Italy, Spain and Portugal, who were having trouble raising debt through the markets, the Governing Council of the ECB decided that it would provided credit support indirectly, by providing funds to European banks, for them, in turn, to use to purchase the debt of stressed nations.

The good news is that austerity measures are being effective at constraining fiscal imbalances, with euro area government balances, as a percentage of GDP, projected to reduce to 3.5 per cent in 2012. However, a fiscal “deficit” still isn’t a “surplus” and general euro area government debt as a percentage of GDP was over 85 per cent in 2011 and is projected to exceed 90 per cent in 2012. At 2.7 per cent of GDP Malta’s 2011 deficit was less than the euro area average, as was the level of government debt at 70 per cent of GDP. However Prof. Bonnici does note that “the government debt ratio at 70 per cent of GDP remains high and concerted efforts need to be made to reduce it to below 60 per cent in the medium term.” He also said in his presentation: “We are a small country, funding our own needs so we need to be even more vigilant to make sure we get this level down.”

Unit labour costs in Malta have increased approximately in-line with ULC increases across the euro area while the productivity of Maltese workers has increased faster than the EU average. Obviously this is good news since Malta’s GDP per person is lower than the EU average; for Malta’s per capita GDP to approach the euro area average you would need productivity to increase faster than the average. However the rate of increase of the level of compensation of Maltese workers has increased faster that the EU average since 2004. This could erode the competitiveness of the Maltese workforce to international investors and threaten future GDP growth.

Here the Central Bank made a potentially controversial observation that “caution must be exercised to ensure that compensation increases are driven as much as possible by productivity growth.” The suggestion goes that “COLA [cost-of-living-allowance] increases should be incorporated as part of the negotiations in collective agreements. COLA increases should only be mandated through a wage order for workers not covered by collective agreements.”

In the presentation the Central Bank concluded that, overall “risks to the growth outlook are mainly on the downside” with high levels of economic and financial uncertainty, especially in the euro area; the euro area’s debt crisis; and the inability of the euro area economies to deliver growth. On the upside the Central Bank speculates that the loss of value of the euro could increase exports to non-euro countries, and that the resolution of the debt crisis could lead to business recovery.

Mr Allen has worked internationally in the technology sector, earning his first masters qualification in engineering from the University of Durham. For his second masters (in business administration, again from Durham) he researched the Maltese financial sector.