The Euro area has yet to hit the same GDP rate as was evident in 2008, Central Bank Governor Josef Bonnici has said, however notes that Malta's GDP has continued to rise well above the 2008 mark.

He explained that the Euro area economy is 1.9% smaller than it was in 2008, prior to the economic crisis. "Malta compared favourably throughout the crisis and the aftermath. The contraction at the trough in 2009 was relatively moderate. The path taken in the recovery has been stronger - in fact consistently stronger - than in the other economies shown in the Chart. Output is at present 12% higher than in 2008," he said.

Professor Bonnici described the diversification of new sectors in Malta as 'remarkable'. "Malta passed through a liberalization and restructuring experience that saw the exit of inefficient entities and businesses mostly prior to E.U. accession in 2004. This process of rationalization, which occurred only a few years before the start of the crisis in 2008, made the overall economy resilient and in a better position to weather adverse events in external markets".

He warns that "although we have experienced higher GDP growth, we must be aware that some of our competitors are starting to benefit from the structural reforms and internal devaluation that they went through in response to the impact of the financial crisis on their economies".

Structural and fiscal policies in the Euro area

"In view of the serious damage caused by the financial crisis, there is widespread realization that a durable solution to the current economic stagnation needs to be built around a structural reform programme. Over time these reforms would result in a greater degree of competitiveness, improving the growth potential of the economy. In the short run, however, such supply-side reforms often involve transitional costs. Hence the importance of demand-side measures that alleviate the impact on those that are negatively hit by structural reforms. This would prevent deflation and high levels of unemployment".

Turning to female participation rate in the labour market over the past ten years, Malta is leading the charge with 15%, and has a current female activity rate of 61%.

Turning to the banking sector, "generally speaking, Maltese banking is run on a prudential and cautious business model and this is particularly true of the systematically-relevant banks, which manifest for example a low loan-to-deposit ratio. Nevertheless, we have stepped up our efforts, jointly with the MFSA, to ensure that the soundness of the banking system is not only preserved but also enhanced."

"In the aftermath of the sovereign debt crisis there is a heightened recognition that a more diversified investment portfolio would reduce the risk exposure related to the bank-sovereign nexus. Looking to the future, further diversification of our sovereign debt market may be warranted.  It would be advisable if, going forward, stable alternative options are identified to complement current practice".

The road ahead

Against a rapidly changing economic landscape, Malta needs to be attentive to take advantage of its flexibility and adaptability, he said. Over the past years, the Maltese economy went through significant structural change. "Not only by diversifying into a number of new growth sectors such as aviation services, pharmaceuticals and internet related activity, but also by upgrading its investments in the traditional sectors. For example, the tapping of new source markets for tourists in European cities that were newly serviced by low-cost airlines allowed the hospitality sector to overcome the recession-driven weak demand in already serviced markets. Similarly, the financial and other services sectors continued to expand, thanks to the right conditions for growth, including the appropriate legislative environment". 

He argued that Inefficiencies in public administration processes hamper the development of the Maltese business environment and need to be improved, so as to better support competitiveness and encourage foreign direct investment. 

"The cost of credit in Malta remains on the high side and further easing would help our businesses to invest at a lower cost".

"The crisis has uncovered various shortcomings in corporate governance in the banking sector, mainly in areas like risk management and internal controls, compensation, corporate structures and transparency.  Some Maltese banks have yet to adopt a number of necessary risk oversight practices that would ultimately benefit the banks and their stakeholders".

Reforms in the banking system need to be accompanied by structural reforms in other parts of the economy, he said, noting that this can only be possible if the economy is growing sustainably. "Going forward, we need to enhance Malta's competitive position in order to attract a higher volume of capital investment in the future. A strong education and skills base, an upgraded infrastructure and a clean and sustainable source of energy are essential elements that would pave the way for future investment".