Malta: Malta In The Eurozone: A Safe Harbour In 2013

Last Updated: 21 August 2013
Article by Juanita Bencini

Malta has successfully weathered the challenges posed initially by the global financial crisis, and at a second stage, by the EU sovereign debt crisis. This can be attributed to the domestic macroeconomic conditions, which have remained supportive of financial stability, and prudent banking practices characterised by healthy solvency and liquidity positions. These factors have jointly ensured that Malta remained immune from the adverse consequences of the so-called 'negative feedback loop' which hit a number of other euro area countries over the past year.

Domestic Macroeconomic Conditions Remain Supportive Of Financial Stability

Despite the challenging external conditions, the economy expanded by 2.9%, 1.7% and 0.8% in real terms between 2010 and 2012 (Source: NSO News Release 049/2013). According to the latest published economic forecasts, the Maltese economy is projected to regain momentum, growing by 1.5% in 2013 (second best among euro area countries) and 2.0% in 2014 (Source: European Economic Forecast Winter 2013, European Commission).

Developments in net exports are expected to contribute to economic growth and also achieve a surplus on the current account of the balance of payments. This reflects a significant improvement compared with the series of current account deficits recorded up to 2011. The rather benign external position is further supported by Malta's "net external creditor position and positive net international investment position" (Source: Alert Mechanism Report 2013, European Commission).

In recent years, the labour market has been resilient, and as a result, the unemployment rate remains low, in the region of 6-7%, among the lowest in the euro area. The property market has likewise showed signs of resilience, with no pronounced price declines being observed (Source: IMF Country Report No.12/105).

Malta - Key Economic Highlights

GDP growth: 0.8% (2012), 1.5% (expected 2013)

Unemployment rate (January 2013): 7%

Inflation rate (February 2013): 3.2%

Fiscal deficit-to-GDP ratio (2011): 2.7%

Sources: Eurostat, European Commission, NSO

The country's public finances also remain under control, particularly since none of the banks in Malta required public assistance. Looking ahead, the fiscal deficit-to-GDP ratio is projected to remain below 3%. As a result, the general government gross debt position is expected to stabilise at around 73% of GDP. Sovereign debt roll-over risks are further contained since the bulk of sovereign debt is held by residents and hence shielded from sudden swings in international financial sentiment.

"... the strong tendency of residents to subscribe substantially to primary issues of domestic government bonds have shielded the Maltese economy and the financial sector ... "

Central Bank Of Malta Financial Stability Report 2011

Risks of over indebtedness are contained since "the private sector does not appear overleveraged currently given that households and corporates have sizeable financial assets and the maturity structure of their debt is relatively favourable: around two thirds of it is long-term" (Source: Alert Mechanism Report 2013, European Commission).

The Banking System Remains Resilient

An expanding financial sector has been an important source of economic growth in recent years. Banks operating in Malta can be distinguished into three different clusters. Five 'core domestic banks' have a widespread branch network, provide a full spectrum of banking services and are the core providers of credit and deposit services in Malta. Their capital adequacy and Tier 1 capital ratios, which stood at 13.85% and 9.81% respectively as at June 2012, are well above the current regulatory requirements. Their aggregate balance sheet is comparable to that in the other euro area countries, at around 223% of GDP (Source: Financial Stability Report 2011, Central Bank of Malta). Another subset of banks play a limited role in the economy, offering niche services to residents alongside their foreign-oriented business (the size of these 'non-core domestic banks' approximates 77% of GDP).

The rest of the banking system is composed of 'international banks', which, although representing the largest segment in terms of assets – around 500% of GDP – have virtually no links with the domestic economy. Their business is predominantly driven by intra-group activities. Risks emanating from the international banking sector are further mitigated since international banks are heavily capitalised, with a Tier 1 capital ratio of 103.37% as at June 2012 (Source: Financial Stability Report Update 2012, Central Bank of Malta).

The International Monetary Fund (IMF), in its 2012 Article IV mission, reported that "the sensitivity of the Maltese banking sector to sovereign risk events in Europe is low". This reflects the very low exposures to EU periphery debt.

Core domestic banks fund most of their activities through retail deposits which represent more than four-fifths of their total liabilities (including capital). Non-resident customer deposits account for only 17% of their total customer deposits and are diversified across regions. While wholesale funding channels remain intact for banks, core domestic banks continue to make limited use of this source of funding, owing to their traditional business model. Meanwhile, in the case of the rest of the banking system, no signs of parent bank funding pressures have been observed.

The banking sector in Malta remains profitable. As at June 2012, banks' return on equity (ROE) and return on assets (ROA) stood at 5.37% and 1.11%, respectively, with all three banking clusters recording positive profitability performances.

Concluding Insight

The EEAG Report on the European Economy 2013 attributes the robust economic momentum enjoyed by Malta in recent years to the solid condition of its public and private finances, as well as the country's high level of international competitiveness. Indeed, Malta's economic fundamentals are sound, enabling the country to face up to the challenges posed by the external environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Juanita Bencini
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