Various indicators place Malta with the stronger performers with a growth rate for Malta that generally exceeds the corresponding rates for both categories of countries. A similar conclusion can be drawn from the unemployment rate. Similarly the level of unit labour costs is lower in Malta than in both the weaker and stronger groups.
Central Bank Governor Josef Bonnici was speaking last night at the annual Institute for Financial Studies at the Hilton.
In the first two quarters of 2013, the Governor said, Malta’s GDP growth rate stood at 2.7%. Net exports have been the main source of expansion. The outlook is for stronger growth in 2014 as Malta continues to benefit from its competitiveness.
The economy continues to diversify, creating high value added job opportunities. While some sectors have had to downsize, there has been a compensating expansion in other sectors, such as financial and other services.
An aspect that may go unnoticed is the role of the financial sector in the resilience of the Maltese economy and its alignment with the stronger group of countries.
Financial soundness indicators confirm that Malta has a sound and robust banking sector. A three-way split of the banking sector distinguishes between the core domestic banks that are closely integrated with the domestic economy at one end and the international banks that conduct all their business abroad at the other end, along with a relatively small sector, the non-core domestic banks, in between.
Looking more closely at the external dimension, an important characteristic that distinguishes us from other models, such as the one in Cyprus, is the fact that the international banking sector in Malta is only lightly linked to the domestic economy and the remainder of the Maltese banking system, Prof. Bonnici said.
Meanwhile, unlike the situation in other countries, the core domestic banks have very low reliance on non-resident deposits. They operate along traditional lines, applying a prudent business model and, like the rest of the banking sector, carrying minimal exposure to securities issued in the distressed economies. The core domestic banks are highly capitalised, profitable and liquid, and the other categories of the banking sector are similarly robust.
Although various indicators place Malta with the stronger performing group, there is room for further improvement. Interest rates on loans to businesses are currently around 2% to 3% higher in Malta as compared to Germany, Netherlands, Finland, Austria, and Luxembourg.
In contrast deposit rates offered by Maltese banks are broadly in line with those across the euro area. As a result, bank interest margins are higher in Malta. A closer alignment of margins with those of our peers appears to be warranted. The recently proposed Budget measure to conduct a review of bank charges to businesses makes sense. The benefits of having a robust banking sector would then be passed more fully to the rest of the economy.
This would be reflected in faster growth in the volume of credit, which recently has been trending downwards, although it should also be pointed out that credit growth in Malta continues to outpace that in the euro area.
The expected setting-up of the Development Bank will also contribute to fill a funding gap that currently exists in the financial sector in Malta, which could provide relief to the cost and difficulty of access to finance, particularly for SMEs and may serve to complement the core banks in the funding of larger projects.
Economic and financial stability also require fiscal consolidation, so that the deficit progressively declines towards the Fiscal Compact target. The debt-to-GDP ratio is expected to reach a plateau and then start declining, as planned by the government. Budget figures project the debt-to-GDP ratio at 73% in 2013, along with a deficit ratio of 2.7%. An exit from the Excessive Deficit Procedure is essential.
Indeed, the Governor added, the Fiscal Compact involves strict budgetary commitments and places limits on the government’s deficit. Moreover, even in the absence of the obligations under the Fiscal Compact, public debt cannot be allowed to accumulate persistently as this could lead to unsustainable debt dynamics.
GDP growth reduces the debt ratio first by automatically raising revenues and reducing spending. Secondly, it expands the denominator of the debt-to-GDP ratio. Obviously, resolving fiscal excess through an expanding GDP is less painful.
To sustain economic growth, the economy needs to offer products with high value added and at competitive prices. The alignment of wages and productivity is crucial for competitiveness, particularly at a time when neighbouring economies are undergoing an internal devaluation.
Because of this correction, unit labour costs in the stressed economies have plateaued and are now converging with those in the better performing countries. While unit labour costs in Malta have been lower than in other euro area countries, it is crucial to ensure that higher productivity supports wage growth, thereby safeguarding the country’s competitiveness.