The International Monetary Fund in a report on Malta, issued late yesterday, praised the country for weathered the recession well while noting some risks in the financial sector due to dependence on the property sector, which has been slowing down.

The executive directors said the economy is now showing signs of a robust cyclical upswing. The challenge ahead, they said, would be to achieve strong and sustainable growth, something which would require strategic fiscal consolidation and prudent risk management. Continued progress with structural reforms was also important to establish high value exports and to raise productivity and employment rates.

"Malta weathered the global recession relatively well. Output fell less than the euro area average and unemployment rose only modestly, partly reflecting government support," the IMF noted.

"Driven by external demand, a cyclical upswing is now underway and manufacturing and tourism activity, hit hard by the global recession, have recovered with the latter near pre-crisis record levels. However, the recovery is not yet broad based and some sectors, including construction and retail, are lagging.

"On the back of softer real estate prices, elevated unemployment, and higher uncertainty about job prospects, consumption growth slowed but has been supported by very low interest rates. Investment, especially in construction, decelerated sharply and remains sluggish. Inflation has picked up as the ongoing rebound allows firms to rebuild profit margins and pass on higher energy prices, but underlying inflation is expected to remain contained," the Fund said

"The Maltese banking sector has weathered the global financial crisis relatively well, but vulnerabilities are rising. Relatively conservative funding models and little exposure to U.S. toxic assets have kept spillovers from the global financial crisis to banks in Malta at bay.

"However, a long real estate boom contributed to a significant increase in private sector debt and as a result domestic credit risk. Real estate prices and collateral values experienced some correction and appear to have stabilized more recently, but excess supply likely remains in segments of the market. Household debt has grown rapidly but still remains somewhat below the euro area average. Non-financial corporate sector debt has risen to elevated levels, with a significant share of debt incurred by the construction and real estate sectors. Banks have tightened lending policies and bank credit growth has decelerated but remains strong compared to the euro area average. In parts of the banking sector the growing exposure to debt securities, including to euro-area peripherals currently under stress, poses additional risk."

Executive Board Assessment

The directors said they endorsed the the government’s ambitious fiscal consolidation plans in response to the increase of public debt and guarantees and implicit liabilities to relatively high levels. They noted that although fiscal deficits have remained contained, a more rigorous approach that spells out specific measures underpinning priorities for the next budget will raise the credibility of adjustment plans.

Directors noted that Malta’s financial sector showed resilience during the global crisis. However, high credit risk following a long real estate boom and the large exposure of a few banks to foreign securities, including to euro-area peripherals currently under stress, warranted heightened vigilance and determined supervisory action. This included encouraging banks to strengthen their capital buffers, preferably through equity injections and retained earnings.

Directors agreed that further structural reforms will be critical for increasing Malta’s competitiveness, productivity and attractiveness to foreign direct investments. Measures to enhance the education system and encourage women and older workers to participate in the labor market will be important to raise employment. Further liberalization of the regulated sectors would boost economic efficiency.

See official report summary by clicking the pdf below