The International Monetary Fund today lauded Malta’s resilience in the face of a “major European crisis.”
“Average growth of the Maltese economy (relative to historical average) has been the best in the euro area since the beginning of the crisis, and the unemployment rate remains one of the lowest,” the IMF report said.
The main underpinnings of this resilience were robust export growth and a sound banking system.
The fund nevertheless warned that Malta’s fiscal position “has deteriorated and the level of public debt is uncomfortably high, constraining the fiscal space for manoeuvre in the event of further shocks.”
The IMF identified the short term risks to Malta as mainly being external.
“A protracted period of slower growth in Europe, or re-emergence of euro area financial stress if policy momentum is not sustained, would negatively affect the economy through the trade channel.”
In the longer term, the erosion of Malta’s tax arbitrage may present problems.
“The Maltese economy, including the financial sector and other niche services, has greatly benefitted from a business-friendly tax regime. Greater fiscal integration of EU member states and potential harmonisation of tax rates could erode some of these benefits, with consequences on employment, output, and fiscal revenues”
The IMF recognised the heightened awareness about large banking sectors domiciled in small economies, but deemed such risks in Malta to be “negligible.” It also noted that banks report adequate “capitalisation, liquidity and profitability,” but they are vulnerable to fluctuations in the property market.
“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.”
‘Delicate situation at Enemalta and Airmalta’
The report called the situations at Enemalta and Airmalta, particularly at the former.
“The high level of government-guaranteed debt and delicate financial position of Enemalta and Airmalta heighten concerns about fiscal sustainability. Progress on the restructuring of Airmalta appears on track and the restructuring plan of Enemalta was approved in December 2012.”
“In this context, budget assistance to Enemalta needs to be phased out, as it crowds out priority public spending.”
It also warned that any tariff reductions at the state owned entity “should be contingent on the success of the government’s strategy to reduce costs and restore Enemalta’s financial health.”
Report-http://www.imf.org/external/np/ms/2013/051313b.htm