Resilient Maltese economy gives it best eurozone performance – IMF

The Maltese economy's average growth gave it the best performance in the euro area, despite its deteriorating fiscal position and a high public debt.

The International Monetary Fund's concluding statement to its Article IV monitoring of the Maltese economy, released 15 May, found Malta's resilience had been backed by its sound banking system and robust growth in exports.

FULL REPORT Article IV Concluding Statement

The IMF also said it supported the new government's plans to diversify energy production, but warned that reducing energy tariffs must complement a reduction in costs of generation and restructure Enemalta's financial situation.

READ MORE IMF reporting - May 2012

But economic growth slowed to 0.75% in 2012, mainly due to the weak external economy in the rest of the EU and dampened demand domestically.

The forecast is that economic growth will gain traction between 2013 and 2015, with Malta "continuing to outperform the euro area average" through a recovery of private consumption and improved confidence.

The IMF said Malta's deficit in 2012 stood at 3.3% of gross domestic product, which will trigger a reassessment of Malta's public finances under the EU's Excessive Deficit Procedure.

But it also notes that the new Labour government's budgetary measures in 2013 "are expansionary" even though the tax cuts that will affect high earners up until 2015 will still generate optimistic revenues as long as there is moderate growth.

The IMF said Malta has to adopt more measures, ostensibly spending cuts and revenue-generation measures, to bring the deficit to below 3% and put public debt on a sustainable path. "The focus should be on tightening controls on the growth of health spending, greater use of means-testing for government benefits, and containing the wage bill through prudent collective wage agreements and compression of public sector employment through attrition."

Malta still remains exposed to the risk of less trade from the EU if financial stresses increase on the continent, as well as the ubiquitous spillover from banking and financial markets that encounter trouble.

But the IMF says Malta's low reliance on foreign debt, its resilient financial system, and households' savings limits the island's vulnerability against these external risks.

Malta's risks stem from the EU's intentions to increase fiscal integration and harmonise tax rates, which could erode the local financial sector which offers reduced tax incentives to attract major players to the island. Malta remains a staunch opponent of the EU's attempts to introduce a Tobin tax on financial transactions.

The IMF has recommended that banks improve their coverage of non-performing loans and that the Central Bank is at the ready if external crises affect the international banks that have business in Malta, by increasing the resources of the deposit compensation scheme.

"Despite turbulence in the euro area, the performance of Maltese banks has been satisfactory. Banks report adequate capitalization, liquidity, and profitability...

"However, these banks are heavily exposed to the local property market and non-performing loans are on the rise, reflecting subdued conditions in the construction and real estate sectors. A significant decline in house prices, although not likely in the short term, could have a sizeable impact on the domestic banking sector."

The IMF said budget assistance to Enemalta had to be phased out, and expressed support for the government's objective to reduce energy costs - one of the highest in the EU - and diversify energy sources to reduce Malta's dependence on oil. "However, any reduction in electricity tariffs should be contingent on the success of the government's strategy to reduce costs and restore Enemalta's financial health."

Once again, the IMF called for retirement age to be aligned with life expectancy, and the introduction of second and third pension pillars, which the government so far has not undertaken.