Macroeconomic imbalances, Malta 2013.
Date: 2013-08-26
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: Malta, debt, economic forecasting, economic indicator, macroeconomics, public finance

ISSN 1725-3209

EUROPEAN 
ECONOMY

Occasional Papers 139 | April 2013

                        Macroeconomic Imbalances 
Malta 2013

Economic and 
Financial Aﬀ airs

Occasional Papers are written by the Staff of the Directorate-General for Economic and 
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© European Union, 2013 
Reproduction is authorised provided the source is acknowledged. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Directorate-General for Economic and Financial Affairs 

Macroeconomic Imbalances 

Malta 2013 

EUROPEAN ECONOMY 

Occasional Papers 139 

 
 
 
 
 
 
 
 
 
 
 
 
 
ACKNOWLEDGEMENTS 

This  report  was  prepared  in  the  Directorate  General  for  Economic  and  Financial  Affairs  under  the 
direction of Servaas Deroose, deputy director-general, István P. Szekely and Anne Bucher, directors. 

The  main  contributors  were  István  P.  Szekely,  Laura  Bardone,  Barbara  Bernardi  and  Presiyan  Petkov. 
Additional  contributions  were  provided  by  Nikolay  Gertchev.  Statistical  assistance  was  provided  by 
Daniela Porubska.  

Comments on the report would be gratefully received and should be sent, by mail or e-mail to: 

Laura Bardone 
European Commission, 
B-1049 Brussels. 
e-mail: laura.bardone@ec.europa.eu 

The cut-off date for this report was 2 April 2013 

 
 
 
 
Results  of  in-depth  reviews  under  Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic imbalances 

MALTA is experiencing macroeconomic imbalances, which deserve monitoring and policy action. In particular, 
the long-term sustainability of the public finances warrants attention while the very large financial sector, and in 
particular, the strong link between the domestically-oriented banks and the property market poses challenges for 
financial stability and deserves continued monitoring. 

More  specifically,  the  long-term  sustainability  of  public  finances  is  at  risk  due  to  the  high  projected  cost  of 
ageing and other sizeable contingent liabilities. While the real estate market does not appear to be exposed to an 
immediate  risk  of  boom  and  bust,  ensuring  its  proper  functioning  is  of  particular  importance  for  financial 
stability. To this purpose, regular monitoring of developments in the property market appears warranted. Risks to 
domestic financial stability stemming from the presence of a very large financial sector should not be overstated, 
given the very limited exposure of internationally-oriented banks to the domestic economy, but continued regular 
monitoring  of  the  activities  of  the  internationally-oriented  and  the  non-core  domestic  banks  is  important. 
Furthermore, the stability of the core domestic banks would benefit from further measures to strengthen loan loss 
provisions to limit risks arising from their exposure to the property sector. 

Excerpt of country-specific findings on Malta, COM(2013) 199 final, 10.4.2013. 

3 

 
 
 
 
 
 
Executive Summary and Conclusions 

1. 

Introduction 

2.  Macroeconomic Situation and Potential Imbalances 

2.1.  Macroeconomic scene setter 

2.2. 

Sustainability of external positions 

2.3.  Competitiveness and trade performance 

2.4.  Private sector indebtedness 

2.5.  Government debt 

2.6.  Property market developments 

3. 

In-Depth Analysis of Selected Topics 

4. 

Policy Challenges 

References 

LIST OF TABLES 

3.1. 

Selected financial soundness indicators for Maltese banks 

LIST OF GRAPHS 

2.1.  Malta's real GDP evolution, 2000 = 100 

2.2.  Decomposition of Malta's current account balance 

2.3. 

The financing of Malta's current account balance 

2.4.  Malta's inward FDI stocks 

2.5.  Composition of Malta's net international investment position 

2.6.  Decomposition of Malta's net IIP changes 

2.7.  Decomposition of Malta's export market shares 

2.8.  Unit labour costs in Malta 

2.9.  REER 

2.10.  Private sector indebtedness 

2.11.  Households indebtedness 

2.12.  Financial balance sheets of households 

2.13.  Financial balance sheets of non-financial corporations, non-consolidated 

2.14.  Government debt and primary balance 

7 

9 

11 

11 

11 

15 

18 

22 

23 

27 

31 

32 

27 

11 

12 

12 

13 

13 

15 

16 

16 

18 

19 

19 

20 

21 

22 

5 

 
 
 
 
2.15.  House price cycle 

2.16.  Mortgage lending (stock) and house growth 

3.1.  Banking sector assets in selected euro-area countries in October 2012, % of GDP 

3.2.  Evolution of non-performing loans in the core domestic banks 

LIST OF BOXES 

2.1. 

Frequent revisions to Malta's economic data 

2.2.  Economic restructuring in Malta 

2.3. 

Immovable property taxation in Malta 

23 

24 

27 

28 

14 

17 

25 

6 

 
 
 
 
 
 
EXECUTIVE SUMMARY AND CONCLUSIONS 

In the previous round of the  MIP, Malta  was  not identified as experiencing imbalances. In the  updated 
scoreboard, a number of indicators are above their indicative thresholds, namely, private sector debt, the 
current  account  balance  and  government  debt.  In  addition,  the  growth  rate  of  total  financial  sector 
liabilities  has  exceeded  the  indicative  threshold  several  times  in  the  past  decade  and  as  a  result  the 
accumulated  growth in 2011 significantly exceeded the average for the euro area. This in-depth review 
takes  a  broad  view  of  the  Maltese  economy  in  order  to  identify  actual  or  potential  imbalances  and  the 
macroeconomic risks which they may entail. The main observations of this review are: 

·  After posting sizeable deficits for most of the past decade, the current account balance has been 
on an upward path since 2009 and turned into a surplus in late 2011. The adjustment appears to 
reflect a structural improvement in the trade balance as services exports increased and goods imports 
growth  moderated,  both  on  the  back  of  a  lower  import  content  of  exports  and  the  slowdown  in  the 
import-intensive  construction  sector.  Additional  factors,  such  as  a  positive  net  international 
investment position and Malta's position as a net external  creditor contribute to the sustainability of 
the external position.   

·  The level of private debt in the scoreboard is high, but there are mitigating factors. Starting from 
a  low  level,  household  debt  has  increased  rapidly  in  recent  years,  mainly  via  growing  mortgage 
lending. Nevertheless, households continue to hold sizeable net financial wealth. High gross corporate 
debt and leverage raise more concern, but potential risks are mitigated by a number of factors such as 
the mainly long-term structure of liabilities and the diversification of sources. 

·  The long-term sustainability of public finances is at risk. Government debt amounted to 70.4% of 
GDP  in  2011,  up  from  60.9%  of  GDP  when  Malta  adopted  the  euro  in  2008.  The  government  is 
currently  not experiencing problems  with debt financing thanks to high domestic demand for issued 
securities,  but  sizeable  state-guarantees  to  state-owned  companies,  some  of  which  not  in  a  sound 
financial state, represent an important risk to the future dynamics of government debt. Moreover, the 
long-term  projections  for  both  pension  and  healthcare  expenditure  in  Malta  significantly  exceed  the 
EU average.  

·  Despite some overvaluation and possible oversupply, the property market does not appear to be 
exposed  to  an  immediate  risk  of  a  bust.  Housing  prices  increased  significantly  over  the  past  two 
decades.  Overvaluation  appears  to  have  occurred  in  the  years  before  euro  adoption,  but  since  then 
some  correction  has  been  taking  place.  Sharp  downward  adjustments  in  prices  in  the  short-term  are 
not expected: demand is robust while developers’ balance sheets are strong enough to allow them to 
abstain from selling at unfavourable prices, even if estimations suggest that there may be oversupply 
in some segments of the market. 

·  The majority of the very large financial sector is internationally-oriented with very little link to 
the  domestic  economy,  and  therefore  does  not  pose  large  risks  for  domestic  stability.  The 
domestically-oriented  financial  sector,  which  invests  in  resident  assets  and  funds  itself  in  Malta,  is 
significantly smaller, relatively well-capitalised and profitable. However, its high exposure to the real 
estate market warrants close monitoring, also in view of a relatively low coverage of non-performing 
loans through loan loss provisioning.   The activities of the non-core domestic banks,  which account 
for around 10% of total assets, appear riskier and therefore require strict supervision. 

The  IDR  also  discusses  the  policy  challenges  stemming  from  these  imbalances  and  possible  policy 
responses. A number of elements can be considered for further policy action. These include the need to 
closely monitor developments in the financial sector, including the internationally-oriented and non-core 
domestic  segments,  and  to  take  any  appropriate  further  measures  to  strengthen  loan  loss  provisions  in 
domestically-oriented banks; close monitoring of  developments on the property market,  in view of the 
exposure  of  the  financial  sector  to  it;  finally,  pension  and  healthcare  reforms  are  needed  to  address  the 

7 

 
long-term  sustainability  of  public  finances,  while  measures  to  limit  unsustainable  growth  of  private 
indebtedness may be warranted. 

8 

 
 
 
1. 

INTRODUCTION 

On 28 November 2012, the European Commission presented its second Alert Mechanism Report (AMR), 
prepared  in  accordance  with  Article  3  of  Regulation  (EU)  No.  1176/2011  on  the  prevention  and 
correction  of  macroeconomic  imbalances.  The  AMR  serves  as  an  initial  screening  device  helping  to 
identify Member States that  warrant  further in depth analysis to determine  whether imbalances exist or 
risk  emerging.  According  to  Article  5  of  Regulation  No.  1176/2011,  these  country-specific  “in-depth 
reviews”  (IDR)  should  examine  the  nature,  origin  and  severity  of  macroeconomic  developments  in  the 
Member State concerned, which constitute, or could lead to, imbalances. On the basis of this analysis, the 
Commission will establish whether it considers that an imbalance exists and what type of follow-up it will 
recommend to the Council. 

The  AMR  suggested  the  need  to  look  more  closely  at  whether  Malta  is  exhibiting  macroeconomic 
imbalances  of  an  external  and  internal  nature.  On  the  external  side,  the  AMR  highlighted  persistent 
current  account  deficits  in  the  past.  On  the  domestic  side,  corporate  and  government  debt  levels  are 
elevated. In addition, the size of the financial sector appears to be very large compared to the domestic 
economy and with a high exposure to the property sector, which has seen very dynamic price growth in 
recent  years.  Malta  also  faces  challenges  in  ensuring  the  long-term  sustainability  of  public  finances  in 
view of population ageing and sizeable contingent liabilities. To this end this IDR takes a broad view of 
the  Maltese  economy  in  line  with  the  scope  of  the  surveillance  under  the  Macroeconomic  Imbalance 
Procedure (MIP). 

Against this background, Section 2 of this in-depth review looks more in detail into these developments 
covering  both  the  external  and  internal  dimensions,  followed  by  a  specific  focus  on  potential 
vulnerabilities in the financial sector Section 3. Section 4 discusses policy considerations. 

9 

 
 
2.  MACROECONOMIC SITUATION AND POTENTIAL 

IMBALANCES 

2.1.  MACROECONOMIC SCENE SETTER 

Graph 2.1:Malta's real GDP evolution, 2000 = 
100

The  Maltese  economy  demonstrated  resilience 
throughout the crisis. Economic growth in Malta 
in  the  years  before  the  crisis  was  in  line  with  the 
average for the euro area, but well below the group 
of new Member States (EU12 – see Graph 2.1). In 
the  aftermath  of  the  global  crisis,  the  domestic 
economy  proved  resilient:  in  2009,  real  GDP 
declined by 2.4%, well below the 4.4% contraction 
in  the  euro  area.  The  subsequent  rebound  was 
more  pronounced  than  for  the  euro  area  average 
(2.7%  of  GDP  against  2.0%  of  GDP  in  the  euro 
area),  mainly  driven  by  exports,  while  domestic 
demand  and  in  particular  the  import-intensive 
investment  were  subdued.  As  a  result,  the  current 
account  balance  has  been  gradually  improving. 
Against  the  background  of  Malta's  still  very  low 
participation  rates,  especially  among  women  and 
older  worker,  job  creation  was  strong  and  the 
unemployment  rate  remained  at  a  low  level 
compared  to  the  euro  area  average.  According  to 
the  Commission  services’  winter  2013  forecast, 
after  moderating  in  2012,  economic  growth  is 
projected to accelerate in 2013-14 and to continue 
to  outperform  the  euro  area  average,  underpinned 
by  gradually  resuming  business  investment  and 
household  consumption.  Growth  is  expected  to 
remain  job-rich  and  employment  is  forecast  to 
continue increasing at a relatively fast rate, mainly 
thanks 
and 
employment  among  women  and  older  workers, 
also 
in  decreasing  unemployment. 
Recovering domestic demand is expected to result 
in worsening external trade balance over 2013-14, 
although  the  current  account  is  forecast  to  remain 
in surplus. 

participation 

resulting 

catching 

up 

to 

155

145

135

125

115

105

95

0
0
1
=
0
0
0
2

,
x
e
d
n
I

forecast

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Malta

EA17

EU12- NMS

Source: Commission services

2.2. 

SUSTAINABILITY OF EXTERNAL POSITIONS 

Malta’s external balance has been characterised 
by  persistent  current  account  deficits  for 
several  years  up  to  2011.  After  recording  a 
surplus  in  2002,  the  current  account  averaged  a 
deficit  of  6.4%  of  GDP  between  2003  and  2010 
(see  Graph  2.2).  The  persistent  deficits  mainly 
reflected  a  negative  balance  of  goods,  related  to 
the large import-dependence  of domestic demand, 
including  nearly  full  dependence  of  the  economy 
on imported oil for energy generation. The income 
account  has  also  contributed  significantly  to  the 
deficit  in  the  current  account,  reflecting  the  big 
share  of  foreign  companies  operating  in  Malta, 
including  the  very  large  internationally-oriented 
banks. Net outflows averaged around 2% of GDP 
in  2000-08  before  increasing  substantially  to 
average around 7% of GDP in 2009-11 on the back 
of higher profits by foreign-owned enterprises. The 
capital  account,  having  averaged  a  surplus  of  just 
over 1% of GDP throughout the 2000s, has offset 
some  of 
thus 
contributing  positively 
the  net  external 
borrowing requirement. 

the  current  account  deficit, 
to 

11 

 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Malta 2013 

P
D
G

f
o
%

25

20

15

10

5

0

-5

-10

-15

-20

-25

Graph 2.2:Decomposition of Malta's current account balance

00

01

02

03

04

05

06

07

08

09

10

11

12*

Capital account
Trade balance - services
Current account balance (CA)

Current transfers
Trade balance - goods
Net lending/borrowing (CA+KA)

Income balance
Trade balance

Source: Commission services

Past  current  account  deficits  have  been 
comfortably  financed  by  FDI  inflows,  mainly 
thanks  to  an  expanding  banking  sector.  Malta 
has  historically  been  an  attractive  destination  for 
foreign  investment,  despite  the  small  size  of  its 
domestic  market.  FDI  inflows  have  averaged 
around  10%  of  GDP  since  the  beginning  of  the 
decade 
(see  Graph  2.3).  The  majority  of 
respondents  in  a  recent  survey  by  Ernst  &  Young 
(2012)  indicated  that  Malta's  attractiveness  as  a 
destination  for  foreign  investment  is  related  to  its 
stable social climate and corporate taxation regime 
as  well  as  the  reliable  and  transparent  regulatory 
environment. As Graph 2.4 illustrates, FDI inflows 
have  been  largely  dominated  by  the  financial 
sector,  which by 2009 represented around 56% of 

the  total  stock  of  FDI  in  Malta  and  this  share 
increased to around 80% in 2010, with the arrival 
of a major German international bank. In fact, FDI 
represents  a  relatively  small  proportion  of  the 
gross financing flows in Malta. The banking sector 
attracts  also  a  significant  amount  of  financing 
reported  as  'other  investment'  in  the  balance  of 
payments statistics, which mainly represents loans 
and  deposits  transferred  from  parent  institutions 
into  their  banking  branches  and  subsidiaries  in 
Malta.  

Graph 2.3:The financing of Malta's current account balance

P
D
G

f
o
%

60

40

20

0

-20

-40

-60

15

10

5

0

-5

-10

-15

00

01

02

03

04

05

06

07

08

09

10

11

12*

Net errors and omissions
Other investment (net)
Direct investment (net)
Net lending/borrowing (CAB+KAB), rhs

Official reserves (net)
Portfolio investment (net)
Current account balance, rhs

Source: Commission services

12 

 
 
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

As  Section  3  discusses,  these  very  large  capital 
flows  do  not  stay  in  the  country  but  are  invested 
abroad either as loans or deposits in other banks or 
investment. (1)  The 
in 
construction  sector  also  attracted  a  sizeable  share 
of FDI inflows, but  these appear to have dried up 
after 2007-08.   

the  form  of  portfolio 

Graph 2.4:Malta's inward FDI stocks

14

12

10

8

6

4

2

0

n
b
R
U
E

04

05

06

07

08

09

10

11

Other activities
Construction, real estate and transportation
Financial and insurance
Total

Source: NSO

to 

in  exports  are  key  drivers  of 

The  improvement  is  mainly  attributable  to  the 
goods balance, which moved from -21% of GDP at 
the beginning of 2009 to -15% of GDP in the third 
quarter  of  2012.  The  slowdown  in  the  import-
intensive construction sector (see section 2.6 later), 
also  related 
the  completion  of  a  major 
construction  project  in  2007,  as  well  as  a  strong 
this 
increase 
development. The continuously expanding services 
exports also contributed to the improving external 
balance,  driven  in  particular  by  tourism (3)  and 
financial  services  as  well  as  the  remote  gaming 
industry. A shrinking deficit in the income account 
has  also  been  contributing  to  the  improvement  of 
the  current  account  balance  since  the  second  half 
of 2011, as net portfolio investment inflows started 
recovering  after  the  financial  crisis  in  2008-2009. 
According  to  the  Commission  services'  2013 
autumn forecast, the current account is projected to 
remain  in  surplus  during  the  forecast  horizon.  It 
should  be  noted,  however,  that  quarterly  statistics 
in Malta are very volatile and subject to sometimes 
significant revisions (see Box 2.1) and therefore it 
is  still  early  to  draw  definitive  conclusions  based 
on these data. 

A  notable  improvement  in  the  current  account 
balance  started  in  2009.  The  current  account 
balance moved from a deficit of nearly 8% of GDP 
at the end of 2009 to a 2% of GDP surplus in the 
2012 (2). 
second 

quarter 

of 

(3)  The 

tourism  sector  proved  particularly  resilient  and 
managed to reach record-high levels of arrivals despite the 
challenging  macroeconomic  environment  in  the  EU  – 
Malta's main market. 

(1)  Therefore, the headline capital flows data for Malta can be 
misleading as a significant share of those does not interact 
with the domestic economy. 

(2)  All  Graphs  in  this  paragraph  refer  to  4-quarter  sums.  The 

last available data are for Q3 2012. 

Graph 2.5:Composition of Malta's net international investment position

P
D
G

f
o
%

300

200

100

0

-100

-200

-300

00

01

02

03

04

05

06

07

08

09

10

11

12*

Net financial derivatives
Reserve changes (net)
Marketable debt

Source: Commission services

Net direct investment
Net portfolio investment
Net int'l investment position (rhs)

Other investment (net)
Net external debt (neg. sign)

50

40

30

20

10

0

-10

-20

-30

-40

-50

13 

 
                                                           
                                                           
 
 
 
 
European Commission 

Macroeconomic Imbalances - Malta 2013 

The  sustainability  of  Malta's  external  balance 
also  benefits  from  a  favourable  net  external 
debt  and  positive  net  international  investment 
position.  Thanks  to  large  investments  in  foreign 
debt  instruments,  the  net  international  investment 
position (NIIP) averaged a surplus of over 20% of 
GDP  over  2001-2011  (see  Graph  2.5).  Malta  is  a 
net  external  creditor  and  its  positive  balance  has 
increased  from  4.5%  of  GDP  in  1995  to  nearly 

160% of GDP in 2011. 

international 

The  net 
investment  position 
(NIIP)  reflects  large  asset  and  liability  stock 
positions,  which  largely  offset  each  other.  (4) 
Gross foreign assets amounted to 689% of GDP in 
2011,  up  from  122%  of  GDP  in  1995.  Of  these, 
gross  assets  of  monetary  financial  institutions, 
excluding  the  central  bank,  grew  from  62%  of 

Box 2.1: Frequent revisions to Malta's economic data

(4)  Total  assets  of  resident  banks  exceed  800%  of  GDP.    Of 
these,  500%  of  GDP  belong  to  internationally-oriented 
banks. 

Revisions of economic data occur frequently in Malta and at times their magnitude is particularly 
large. Table 1 illustrates the size of the revisions by showing key balance of payments and national 
accounts data  for 2011 as reported in successive data releases by the National Statistical Office: 
the current account deficit was reported at 3.2% of GDP in March 2012, but was revised to only 
0.3% of GDP six months later.  
Furthermore, sizeable reported amounts for net errors and omissions in the balance of payments – 
which could either stem from the current account side (an understatement of exports) or from the 
financial  side  (an  overstatement  of  capital  outflows)  -  obscure  the  picture  that  comes  out  of  the 
data. In annual terms, net errors and omissions are reported at over 5% of GDP in 2009 and 2010 
(data for these years is still provisional), among the highest in the EU. Large positive amounts for 
this  item  have  also  been  reported  in  the  quarterly  data  since  the  third  quarter  of  2011.  Finally, 
changes in inventories – which are normally used as a residual category in national accounts - are 
often reported to have a significant role in economic activity and are reported to have contributed 
1.3pp on average to annual real GDP growth between 2001 and 2011.  
Frequent data revisions and the large use of residual categories can to some extent be explained by 
the  difficulty  to  represent  the  highly  volatile  and  narrow-based  Maltese  economy.  They  are  also 
the result of a number of attempts by the National Statistical Office (NSO) to gauge the ongoing 
structural  changes  in  the  domestic  economy.  In  particular,  in  2011,  the  NSO  undertook  a  major 
revision of national accounts data to take account of the emerging remote gaming industry. Table 2 
shows that the impact of this revision on reported real GDP growth was very sizeable, although it 
was partly corrected in the latest release. More recently, data revisions were undertaken to reflect 
the emergence of the oil re-exporting activity as well as the availability of data reclassified under 
the NACE Rev. 2 methodology. 
Overall,  the  instability  of  statistical  data  makes  adequate  monitoring  and  forecasting  of  the 
domestic economy particularly challenging. 

Table 1:
Overview of revisions to balance of payments and national accounts data for 2011 in the latest releases

% of GDP

Current account balance
Trade balance
   Balance of goods
   Balance of services
Income balance
Real GDP growth (y-o-y)
Source:  NSO, Eurostat

Mar-12
-3.2%
4.9%
-15.3%
20.2%
-8.6%
2.1%

Jun-12
-1.3%
4.2%
-15.8%
19.9%
-6.8%
2.1%

Sep-12
-0.3%
5.6%
-15.6%
21.2%
-6.3%
1.9%

Table 2:
Real GDP growth before and after 2011 revision incorporating the remote gaming industry
2008
2.7%
5.3%
3.7%

2007
3.9%
4.4%
4.1%

2006
3.3%
2.1%
2.6%

Before revision
After revision
Latest available information
Source:  NSO, Eurostat

y-o-y%

Dec-12
-0.5%
5.2%
-16.0%
21.3%
-6.1%
1.6%

2009
-1.9%
-3.4%
-2.4%

14 

 
                                                           
 
 
 
 
 
 
 
GDP in 1995 to 581% of GDP, thereby accounting 
for almost the entire growth of assets abroad in the 
IIP. Loans and deposits abroad as well as holdings 
of  debt  instruments  exceeded  600%  of  GDP  in 
2011  and  represented  around  90%  of  total  assets. 
The  liabilities  side  of  the  NIIP  consists  mainly  of 
loans  and  deposits  by  parent  banks  into  their 
subsidiaries  in  Malta  (as  well  as  FDI).  In  light  of 
these large stock positions,  the NIIP is  vulnerable 
to  valuation  changes.  In  the  past,  the  contribution 
of  valuation  changes  to  the  annual  changes  in  the 
NIIP  has  fluctuated  between  -10pp.  and  +10pp 
(see  Graph  2.6).  Given  the  presence  of  two  large 
branches of Turkish banks, the appreciation of the 
Turkish lira also has a notable impact.  

Graph 2.6:Decomposition of Malta's net IIP 
changes

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

25

20

15

10

5

0

-5

-10

-15

-20

01

02

03

04

05

06

07

08

09

10

11

Valuation changes
Net transaction effect (rest FA bal.)
Investment income effect
Nominal growth effect
Change in NIIP (y-o-y)

Source: Commission services

domestic 

economy 

although  unavailability 

The  structure  of  liabilities  in  the  NIIP  appears 
benign 
of  data 
precludes  precise  conclusions.  The  majority  of 
foreign  liabilities  belong  to  the  internationally-
oriented banks, which have very limited impact on 
the 
3). 
Furthermore,  the  high  share  of  FDI  in  gross 
liabilities (5)  indicates  significant  shock-absorbing 
capacity  on  the  part  of  the  banking  sector  to 
withstand  significant 
financial 
market 
conditions  worsen.  Available  data, 
between 
however, 
domestically-oriented  and  internationally-oriented 
banks  and  therefore  it  is  not  possible  to  fully 

losses,  should 

(see  Section 

disaggregated 

not 

is 

(5)  FDI represented over 28% of total foreign liabilities of the 
Maltese  economy,  slightly  higher  than  the  average  for  the 
euro area. 

2. Macroeconomic Situation and Potential Imbalances 

distinguish 
impact  of 
the 
internationally-oriented banks. 

the  much 

larger 

2.3.  COMPETITIVENESS 

AND 

TRADE 

PERFORMANCE 

The  Maltese  economy  is  very  open  and  total 
trade  (exports  plus 
imports)  amounted  to 
around  200%  of  GDP  in  2011.  In  the  trade  of 
services, the  main exports are tourism and remote 
gaming (6), whereas the economy imports business 
services, in particular management and accounting. 
In  terms  of  goods,  the  main  export  is  electrical 
machinery,  while  new  high-technology  activities 
have  emerged  in  recent  years,  namely  in  the 
aircraft and pharmaceuticals sectors. As Malta has 
increasingly  become  an  important  trans-shipment 
centre  for  crude  oil  in  the  Mediterranean  area, 
trade  in  oil  has  also  seen  significant  growth  over 
the  past  several  years.  Its  net  impact  on  the  trade 
balance, however, appears to be small as it mainly 
represents re-exporting. 

that  drove 

import-intensive  services 

trade  balance  has  been  gradually 
The 
improving  in  recent  years,  mainly  reflecting 
gains in market shares in services. Reflecting the 
structural shift in the economy, it was trade in the 
the 
less 
improvement.  This  has  been  reflected  in  gains  in 
market  shares  in  the  trade  of  services  –  in 
particular 
and 
accounting  services  and  IT  –  while  losing  in  the 
trade  of  goods 
electrical 
equipment as well as textiles, see Graph 2.7). The 
improvement in market share in the trade of goods 
in 2009 reflects the fact that goods exports in that 
year declined by much less than the world trade. 

recreational 

(machinery 

services, 

legal 

and 

(6)  Following  the  so-called  "VAT  package"  adopted  by  the 
council  in  Council  Directive  2008/8/EC  of  12  February 
2008,  Malta's  attractiveness  as  a  location  for  remote 
gaming  could  diminish.  Malta  currently  exempts  from 
VAT such activities. The new Council Directive stipulates 
that as of 2015 VAT must be charged on the basis of where 
the  customer  is  located.  Since  several  Member  States  do 
not apply a blanket exemption to gaming, service suppliers 
established  in  Malta  will  have  to  charge  and  account  for 
VAT where this is applicable. Any VAT advantage gained 
by  choosing  Malta  as  a  location  for  remote  gaming  will 
thus disappear. 

15 

 
 
                                                           
                                                           
 
 
 
 
 
Graph 2.7:Decomposition of Malta's export 
market shares

Graph 2.8:Unit labour costs in Malta

A: Composition

European Commission 

Macroeconomic Imbalances - Malta 2013 

30

20

10

0

-10

)

%

(

e
t
a
r

h
t
w
o
r
G

-20

-30

00 01 02 03 04 05 06 07 08 09 10 11

Denominator: World Export growth (neg. sign)
Numerator: Export growth
EMS growth rate

Source: Commission services

The  economy  has  been  gradually  losing  cost 
competitiveness vis-à-vis the euro area over the 
past  decade.  The  growth  of  nominal  unit  labour 
costs, an  indicator of the cost of labour needed to 
produce  one  unit  of  output,  was  notably  more 
moderate  than  the  average  for  the  new  Member 
States  but  still  exceeded  the  average  for  the  euro 
area (see Graph 2.8). Compensation per employee 
increased faster than in the euro area, in particular 
in the years following EU accession, also because 
skill  shortages  in  the  emerging  new  industries 
increased competition for qualified employees and 
pushed  up  wages.  At  the  same  time,  labour 
productivity  growth  in  Malta  has  been  modest, 
trailing  behind  the  average  increases  for  the  euro 
area.  After  2009,  however,  wage  developments 
moderated  and  converged  to  the  relatively  slow 
productivity  growth,  thus  helping  the  economy  to 
regain  some  cost  competitiveness  and  support  the 
export-led  recovery  from  the  recession  in  2009. 
While  the  existing  automatic  wage  indexation 
mechanism  (Cost-of-Living  Adjustment)  does  not 
appear  to  have  been  a  major  hindrance  to  wage 
adjustment and overall labour market performance 
so far, looking  forward it poses a potential risk to 
the economy in particular during strongly adverse 
phases  of  the  economic  cycle,  by  impeding  the 
adjustment  of  real  wages,  in  turn  impeding  the 
absorption  of  unemployment  and  hampering 
competitiveness.  

16 

10

8

6

4

2

0

-2

-4

-6

-8

)

%

(

h
t
w
o
r
g
C
L
U
o
t

s
n
o
i
t
u
b
i
r
t
n
o
C

-10

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Inflation (GDP deflator) Compensation per Employee
Real Compensation per Employee
Productivity Contribution (negative sign)
Nominal unit labour cost
ULC in Euro Area

B: Evolution

forecast

0
0
1
=
0
0
0
2

,
x
e
d
n

i

170

160

150

140

130

120

110

100

90

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Malta

EA17

EU12- NMS

Source: Commission services

competitor 

a  group  of 

However,  price  competitiveness  improved  after 
the  crisis.  The  real  effective  exchange  rate,  a 
measure  of  the  economy’s  price  competitiveness 
against 
countries, 
appreciated notably before the crisis also reflecting 
the  nominal  appreciation  of  the  euro  against  the 
US  dollar  (see  Graph  2.8,  Panel  A).  Following 
2009,  the  nominal  exchange  rate  depreciation, 
which is particularly relevant for Malta given that 
a  significant  part  of  exports  goes  outside  of  the 
EU,  and  moderate  price  growth  resulted 
in 
improving price competitiveness. This trend is also 
confirmed  by  dynamics  of  the  ECB's  Harmonised 
Competitiveness  Indicator,  which 
looks  at  a 
country's price competitiveness vis-à-vis the other 

 
 
 
 
 
 
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

Box 2.2: Economic restructuring in Malta

Malta’s  production  structure  predominantly  consists  of  domestic-owned  micro  enterprises 
large  export-oriented  subsidiaries  of 
operating  alongside  a  small  number  of  relatively 
multinational  companies.  While  the  manufacturing  sector  remains  an  important  pillar  of  the 
domestic  economy,  the  share  of  total  value  added  generated  by  this  sector  has  been  steadily 
declining  -  from  21%  in  2000  to  13%  in  2011  -  and  its  share  in  total  employment  declined  by 
almost  8  percentage  points  over  the  same  period  (see  Graph  1).  This  structural  change  started 
already  twenty  years  ago,  thanks  to  foreign  direct  investment  and  the  birth  of  new  and  growing 
industries. In addition, important changes have occurred within the manufacturing sector, with the 
emergence  of  activities  in  pharmaceuticals,  precision  engineering,  aircraft  maintenance  and 
medical  devices  coming  to  complement  the  important  electronics  sector  and  moving  the  overall 
sector to higher technology activities.  

By contrast, the services sector has been gaining in importance, mainly thanks to the emergence of 
new activities such as remote gaming, financial intermediation, tourism, as well as, more recently, 
IT,  legal  and  accounting  services.  In  particular,  the  rapid  growth  of  the  remote  gaming  sector  is 
striking as the number of people employed in it doubled and this sector increased its share in gross 
value  added  by  around  8  percentage  points  since  2000.  The  shift  towards  services  plays  an 
important  role  in  the  current  account  balance  improvement  due  to  the  much  smaller  share  of 
imported inputs in total output in their production compared to the production of goods. 

Graph 1:Malta's production structure

A: Employment

B: Gross value added

l

a

t

o

t

f

o
e
g
a

t

n
e
c
r
e
p

100

90

80

70

60

50

40

30

20

10

0

l

a

t

o

t

f

o
e
g
a

t

n
e
c
r
e
p

100

90

80

70

60

50

40

30

20

10

0

2000

2003

2006

2009

2011

2000

2003

2006

2009

2011

Public administration
Services
Industry (except construction)
Construction
Agriculture, forestry, fishing

Source: Commission services

Public administration
Services
Industry (except construction)
Construction
Agriculture, forestry and fishing

17 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Malta 2013 

Graph 2.9:REER

A: Composition

)

%

(

h
t
w
o
r
g
R
E
E
R
o
t

s
n
o
i
t
u
b
i
r
t
n
o
C

4

3

2

1

0

-1

-2

-3

-4

B: Evolution of HICP-deflated real effective 
exchange rate and HCI

forecast

100

0
0
1
=
9
0
0
2

,
x
e
d
n
I

95

90

85

80

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

00 01 02 03 04 05 06 07 08 09 10 11

Relative HICP (-)

NEER

REER (HICP)

Malta REER

EA17 REER

Malta HCI

Source: Panel A Commission services                                                       Panel B Commission services and ECB

 euro  area  Member  States  and  the  euro  area's  20 
main trading partners (see Graph 2.8, Panel B). 

2.4. 

PRIVATE SECTOR INDEBTEDNESS 

of 

growing 

household 

Private sector debt expanded since Malta joined 
the EU, to reach 204% of GDP in 2012. Private 
sector debt increased from 178.2% of GDP in 2004 
to  peak  at  213%  of  GDP 
in  2009  before 
moderating to 204.4% of GDP in 2012 (see Graph 
2.10,  Panel  A).  The  increase  was  mainly  on  the 
back 
indebtedness, 
reflecting  a  quickly  expanding  mortgage  market, 
as a result of which the share of household debt in 
total  private  sector  debt  increased  from  25%  in 
2004  to  30%  in  2011.  Private  sector  credit  flows 
(Graph 2.10, Panel B) exceeded the MIP threshold 
twice  during  that  period  on  the  back  of  spikes  in 
corporate  borrowing, 
the 
construction  and  real  estate  sectors.  After  2009, 
private sector debt stabilised and started gradually 
decreasing,  reflecting  to  some  extent  both  tighter 
lending  standards  by  banks  and  more  moderate 
non-financial 
demand 
corporations,  as  also  evidenced  by  the  relatively 
low 
in  a  historical 
perspective.  

investment-to-GDP  ratio 

related  mostly 

financing 

for 

by 

to 

the 

thus 

increased  substantially  since 

Overall, the economy does not appear to suffer 
from  lack  of  competitiveness.  The  economy 
underwent  a  structural  shift  away  from  traditional 
manufacturing  and  towards  higher  technology 
activities,  mainly  in  services,  in  a  relatively 
smooth  way.  The  restructuring  was  job-rich  and 
thus able to absorb a significant increase in labour 
participation,  in  particular  as  more  and  more 
women  entered 
labour  market.  While 
remaining  well  below  the  EU  average  (at  57.6% 
and  41%  in  2011  for  the  total  population  and  for 
women,  respectively),  the  employment  rate  in 
Malta 
the 
beginning of the decade, especially for women (7.9 
pps).  Export  market  shares  increased,  mainly  in 
services, but also in some segments of the trade of 
goods.  Price  and  cost  competitiveness  have 
improved  following  the  crisis,  thereby  supporting 
an  export-led  recovery  of  the  economy  and  a 
further 
the  current  account 
in 
balance.  A  stable  regulatory  environment  and  a 
relatively  cheap  and  skilled  labour  force  certainly 
contributed  to  these  favourable  developments, 
although  skill  shortages  in  some  growing  sectors, 
such as financial services, have resulted in upward 
pressure 
hamper 
on  wages,  which  may 
competitiveness going forward. 

improvement 

18 

 
 
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

Graph 2.10:Private sector indebtedness

A: Decomposition of debt by sector

B: Decomposition of credit flows

P
D
G

f
o
%

250

200

150

100

50

0

P
D
G

f
o
%

20

15

10

5

0

-5

04

05

06

07

08

09

10

11

12*

04

05

06

07

08

09

10

11

12*

Household
Non financial corporations
Private sector EA17
MIP Threshold
Private sector

Household
Non financial corporations
Private sector EA17
MIP Threshold
Private sector

Source: Commission services        
Note: * indicates estimated Graph based on quarterly data                                                              

Household  debt  has  been  increasing  at  a  fast 
pace,  but,  starting  from  a  low  level,  it  remains 
below the euro-area average. At the time of EU 
accession  in  2004,  household  debt  in  Malta  was 
relatively low by EU standards, standing at 45% of 
GDP (see Graph 2.11, Panel A). Since then, it has 
increased  at  a  fast  pace  to  peak  at  nearly  63%  of 
GDP  in  2011,  broadly  catching  up  with  the  EU 
average,  before  moderating  slightly  in  2012.  This 
has to a large extent been driven by strong demand 
for loans for house purchases, typically granted at 
variable  rates,  and  is  reflected  in  the  strong 

increase in house prices.  

The  loan-to-value  ratio  granted  by  banks  was 
relatively  low,  at  about  40%,  until  2008,  which 
helped to keep household debt in check. However, 
as demand  for  housing remained strong,  the loan-
to-value  ratio  for  new  loans  has  increased  to 
between 70% and 80%. Demand for new mortgage 
and  consumer  loans  has  been  more  subdued 
recently, as evidenced by the results of  the ECB's 
regular Bank Lending Survey, although it remains 
more  dynamic  than  the  average  for  the  euro  area 

Graph 2.11:Households indebtedness

B: Loans

A: Leverage

70

60

50

40

30

20

10

0

P
D
G

f
o
%

50

45

40

35

30

25

20

15

10

5

0

P
D
G

f
o
%

04

05

06

07

08

09

10

11

00 01 02 03 04 05 06 07 08 09 10 11 12

Debt-to-GDP, EA17
Debt-to-GDP, Malta
Debt-to-assets, EA17
Debt-to-assets, Malta

Loans for house purchase, Malta
Loans for consumption, Malta
Loans for house purchase, EA17
Loans for consumption, EA17

Source: Commission services, ECB       
Note: * indicates estimated Graph using quarterly data                                                              

19 

 
 
 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Malta 2013 

Graph 2.12:Financial balance sheets of households

A: Malta

300

200

100

0

P
D
G

f

o
%

-100

04

05

06

07

08

09

10

11

12*

A - currency and deposits
L - other accounts
A - other accounts
L - insurance & techn. reserves
A - insurance & techn. reserves
A - shares and other equity
L - loans
A - loans
A - securities (other than shares)
Net financial assets

300

200

100

P
D
G

f

o
%

0

-100

B: Euro area

04

05

06

07

08

09

10

11

A - currency and deposits
L - loans
L - other accounts
L - insurance & techn. reserves
A - other accounts
A - insurance & techn. reserves
A - loans
A - shares and other equity
A - securities (other than shares)
Net financial assets

Source: Commission services    
Note: * indicates estimated figure using quarterly data                                                              

(see Graph 2.11, Panel B). 

Despite  the  increase  in  their  indebtedness, 
households' net financial assets remain positive. 
Thanks  mainly  to  a  high  propensity  to  save, 
reflected  in  a  high  deposit  base  in  the  absence  of 
particularly  developed  domestic  insurance  and 
investment  fund  industries,  net  financial  assets  of 
Maltese  households  are  among  the  highest  in  the 
euro  area,  standing  at  170%  of  GDP  in  2011  (see 
Graph  2.12).  This 
factor 
underpinning  domestic  financial  stability  as  it 
allows  banks 
lending 
to  fully  finance 
portfolio with retail deposits, thereby reducing the 
need  for  wholesale  funding.  Maltese  households 
also  have  considerably  more  assets  invested  in 
government debt securities: as of December 2011, 
some  29%  of  Malta  Government  Securities  were 
owned by individuals (MFEI 2011). 

important 

is  an 

their 

of 

debt 

non-consolidated 
non-financial 
corporations  grew  substantially,  from  133.2%  of 
GDP  in  2004  to  151%  in  2009. The  increase  was 
entirely driven by loans, while debt in the form of 
securities is relatively low at around 13% of GDP 
due  the  underdeveloped  domestic  corporate  bond 
market.  Since  2009,  corporate  debt  has  been  on  a 
downward  path  and  reached  143%  of  GDP  in 
2012.  The  main  reason  for  this  has  been  lower 
credit demand by companies, in line with the more 
subdued  macroeconomic  environment  in  Malta 
and  in  the  euro  area,  leading  to  a  drop  in  the 
investment-to-GDP ratio. Another important factor 
is the halt of bank lending to construction and real 
estate  activities,  as  banks  sought  to  reduce  their 
concentration to the real estate  market, as a result 
of  which  the  share  of  these  two  sectors  in  total 
lending  to  residents  (including  lending  to  the 
public sector) fell from over 23% in 2009 to below 
17% in November 2012. 

The  debt  ratio  of  non-financial  corporations 
(NFC) increased substantially until 2009 on the 
back  of  increased  borrowing.  As  a  result  of 
improving  financing  conditions,  facilitated  by  EU 
and  euro-area  entry,  and  partly  also  thanks  to  a 
bias  against  equity  in  corporate  taxation, ( 7)  the 

(7)  Malta  has  the  largest  gap  between  the  effective  marginal 
tax  rates  on  debt-  and  equity-financed  new  corporate 
investment among the 27 Member States. See Tax reforms 
in  EU  Member  States  2012  –  Tax  policy  challenges  for 
economic growth and fiscal sustainability/ 

The large gross debt figure for corporates hides 
some positive features. The term structure of debt 
has been fairly stable over time, with some 50% of 
total  debt  in  long-term  loans,  40%  in  short-term 
loans  and  the  rest  in  securities  other  than  shares. 
2011  brought  about  a  slight  shift,  as  a  result  of 
which  the  share  of  short-term  loans  decreased  to 

20 

 
                                                           
                                                                                   
 
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

B: Euro area

Graph 2.13:Financial balance sheets of non-financial corporations, non-consolidated

A: Malta

P
D
G

f
o
%

300

200

100

0

-100

-200

-300

-400

300

200

100

P
D
G

0

f
o
%

-100

-200

-300

-400

04

05

06

07

08

09

10

11

12*

04

05

06

07

08

09

10

11

A - currency and deposits
A - other accounts
A - insurance & techn. reserves
A - shares and other equity
A - loans
A - securities (other than shares)

L - other accounts
L - insurance & techn. reserves
L - shares and other equity
L - loans
L - securities (other than securities)
Net financial assets

A - currency and deposits
A - other accounts
A - insurance & techn. reserves
A - shares and other equity
A - loans
A - securities (other than shares)

L - other accounts
L - insurance & techn. reserves
L - shares and other equity
L - loans
L - securities (other than securities)
Net financial assets

Source: Commission services    
Note: * indicates estimated figure using quarterly data                                                              

loans, 

32%.  The  sources  of  financing  for  Maltese  NFCs 
are quite diverse and in fact despite the presence of 
a large banking system, bank loans represent only 
about  half  of  total  loans  to  corporates,  or  64%  of 
GDP in 2011, down from a peak at 69% of GDP in 
2009  (see  Graph  2.13).  In  the  same  year,  total 
loans  in  non-consolidated  terms  were  134%  of 
GDP.  An  important  part  of  the  debt  of  non-
financial corporations is in the form of short-term 
intra-company 
from  abroad, 
which  are  fully  matched  by  intra-group  loans  on 
terms 
the  asset  side.  Thus, 
corporate debt was much lower, at 106.3% in 2011 
(up  from  93%  in  2004).  Financing  in  the  form  of 
loans  and  deposits  from  non-residents  increased 
from  6.6%  of  GDP  in  2004  to  14.4%  of  GDP  in 
2011.  Additional  sources  of  financing  include 
inter-sectorial and household loans. A diverse mix 
of  funding  sources  reduces  the  funding  risk  for 
companies  and  therefore  contributes  to  domestic 
financial stability. 

in  consolidated 

including 

The 
leverage  of  non-financial  corporations 
appears  high,  but  corporations  still  have 
sizeable financial assets. Despite the high level of 
debt,  the  corporate  sector  also  has  sizeable  assets 
and  when  expressed  as  a  ratio  to  financial  assets, 
Malta  stands  below  the  euro  area  average.  In 
addition, the ratio has been declining since 2004 to 
reach  53.9%  in  2011  thanks  to  increases  in  total 
financial  assets  and  in  particular  in  unquoted 

shares,  trade  credits  and  bank  deposits.  However, 
the  debt-to-equity  ratio  exceeds  the  euro-area 
average,  reflecting  an  underdeveloped  domestic 
equity  market  and  the  tendency  for  the  smaller 
family-owned Maltese enterprises (which make up 
the  overwhelming  majority  of  firms)  to  refinance 
themselves  internally  or  take  bank  loans  rather 
than  to  look  for  equity  financing.  The  elevated 
ratio  is  also  encouraged  by  the  high  bias  towards 
debt-financing  in  corporate  taxation. ( 8)  Although 
the debt-to-equity ratio for NFCs in Malta has been 
gradually  declining  since  2004,  companies  face  a 
growing debt-servicing burden as indicated by the 
relatively high ratio of debt to the gross operating 
surplus,  which  exposes  them  to  interest  rate 
fluctuations. Even though major liquidity problems 
are  not  expected  in  the  short  term  due  to  the 
favourable 
some 
deleveraging  might  be  needed,  in  an  environment 
of  projected  slower  growth  compared  to  the  pre-
crisis years, in order to free up more resources for 
productive 
the 
economy's growth potential. 

investment 

improving 

structure 

thereby 

debt, 

the 

of 

(8)  2011  data  showed  that  Malta  had  the  highest  debt  bias  in 

the EU (EC 2012f). 

21 

 
 
 
                                                           
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Malta 2013 

2.5.  GOVERNMENT DEBT 

to 

the  run-up 

A  public  debt  above  the  Treaty  threshold  and 
an ageing population pose risks to the long-term 
sustainability  of  Malta’s  public  finances.  The 
government  debt  ratio  in  Malta  is  lower  than  the 
euro-area  average  but  exceeds  the  reference  value 
of  60%  of  GDP  and  has  been  on  a  rising  trend, 
reaching 70.9% of GDP by end-2011. In the period 
prior  to  EU  accession,  Malta's  government  debt 
increased steadily, up from around 34% of GDP in 
1995 to 69.8% of GDP in 2004, as a result of high 
the  euro 
primary  deficits.  In 
adoption,  Malta's  government  debt  fell  from  the 
peak  reached  in  2004  to  around  62%  in  2008, 
mainly thanks to an improving  fiscal position and 
proceeds  from  the  privatization  process.  In  2008, 
after  euro  adoption,  the  primary  surplus  turned 
negative  and 
ratio  started 
the  debt-to-GDP 
increasing again (see  Graph  2.14). The  worsening 
fiscal  position  reflected  the  onset  of  the  crisis  as 
well  as  substantial  deficit-increasing  one-off 
measures 
reclassification  of  Malta 
Shipyards  Ltd  within  the  general  government 
sector) and some slippages in current expenditure. 
Still,  the  increase  in  the  general  government  debt 
was  more  moderate  than  in  the  rest  of  the  euro 
area,  also  because  the  banking  sector  did  not 
require public support. 

(i.e., 

the 

The  government  debt  does  not  have  potential 
spillovers  to  other  countries  of  the  euro  area. 
Government  debt  in  Malta  is  almost  entirely  held 
by  residents,  with  non-residents  accounting  for 
only  2%  of  the  outstanding  debt.  Financing 
Malta’s  debt  has  so  far  not  posed  any  problems 
and spreads between yield on Maltese and German 
sovereign  bonds  have  not  been  significantly 
affected  by  the  tensions  in  financial  markets 
generated by the sovereign debt crisis. In fact, the 
apparent  cost  of  debt  (interest  expenditure  over 
total  nominal  debt)  decreased  over  the  period 
2008-2012 from 5.1% to 4.4%, in  spite of a  large 
(around  12  pp  due  to  the  real  GDP  contraction  in 
2009) increase in the debt ratio. In addition, short-
term debt has decreased significantly since the EU 
accession  and  in  2011  it  accounted  for  6.7%  of 
total  government  debt  (from  20.2%  in  2004). The 
lengthening  of 
structure  of 
government debt is expected  to further reduce the 
risk  of  a  sudden  increase  in  the  interest  rate  on 
government debt that may materialise in the future 
should  economic  conditions  deteriorate  or  sudden 

the  maturity 

22 

changes  in  interest  rates  and  market  sentiment 
occur. 

However,  population  ageing  will  result  in  age-
related expenditure growing faster than the EU-
average  (EC  2012h).  Age-related  expenditure  in 
Malta is projected to increase by 8.2 pps. of GDP 
between  2010  and  2060,  more  than  double  the 
increase  projected  for  the  EU  as  a  whole.  The 
increase  in  pension  expenditure,  incorporating  the 
impact  of  the  2006  pension  reform,  accounts  for 
more  than  half  of  the  total  projected  increase. 
Under  the  European  Semester  in  2011 (9)  the 
Council issued a country-specific recommendation 
to  Malta  to  take  action  to  ensure  the  long-term 
sustainability  of  the  pension  system.  In  response, 
consultation  with  social  partners  has  taken  place, 
but  concrete  action  has  yet  to  be  taken.  Another 
important contributor to the increase in age-related 
expenditure  is  health  care,  which  is  projected  to 
increase by 2.9 pps. of GDP over the period 2010-
2060, the highest increase in the EU.  

80

70

60

50

40

30

20

10

0

P
D
G

f
o
%

Graph 2.14:Government debt and primary 
balance

2

0

-2

-4

-6

-8

00 01 02 03 04 05 06 07 08 09 10 11

Total general government debt
Government guaranteed debt
Primary balance (rhs)

Source: Eurostat

level  of 

contingent 

liabilities 
The  high 
represents an additional risk for Malta's public 
finances. Government-guaranteed debt in Malta is 
high,  following  a  substantial  increase  since  the 
start  of  the  crisis.  At  16.4%  of  GDP  in  2011, 
contingent 
total  public 
guaranteed  debt  of  around  87%  of  GDP  in  2011. 
More than half of these liabilities, as well as most 

imply  a 

liabilities 

(9)  See 

http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:2
15:0010:0012:EN:PDF. 

 
 
                                                           
 
 
2. Macroeconomic Situation and Potential Imbalances 

of  their  increase  since  2008  are  accounted  for  by 
the public energy utility corporation (Enemalta). A 
debt  restructuring  plan  for  Enemalta,  adopted  by 
the  authorities  in  December  2012,  concerns  about 
half of the company's current debt (which, at end-
2010  and 
including  only  bank  and  other 
borrowings, stood at EUR 687mn, or EUR 836mn 
trade-related  and  other 
when  adding  also 
payables).  Currently,  Enemalta  remains 
in  a 
challenging financial state. 

downward  correction  started  at  the  end  of  2008, 
which  brought  prices  down  by  9%  by  the  end  of 
2009. Since then, prices appear to have stabilised. 
that  despite  some 
Graph  2.15  below  shows 
correction,  prices  in  Malta  are  still  considerably 
above their trough (the red line). This benchmark, 
however,  needs  to  be  interpreted  with  caution  as 
price  correction  may  not  necessarily  reach  the 
previous trough.  

2.6. 

PROPERTY MARKET DEVELOPMENTS 

The  real  estate  market  is  very  important  for 
domestic  financial  stability  due  to  the  high 
exposure of the banking sector to it. Real estate-
related lending amounted to more than half of the 
total  lending  portfolio  to  residents  in  November 
2012(10).  In  addition,  domestic  lending  is  heavily 
collateralised  with  real  estate.  According  to  the 
national  authorities,  the  valuation  of  real  estate 
collateral 
is  conservative  as  banks  apply  a 
significant  haircut  on  an  already  prudent  value, 
determined  by  third-party  experts.  This  creates  a 
significant  buffer  on  banks’  books  and  regular 
stress tests conducted by the Central Bank of Malta 
on  the  core  domestic  banks  (see  Section  3)  show 
that  it  would  take  a  further  drop  of  over  50%  in 
house  prices,  coupled  with  an  increase  in  non-
performing loans, to have a notable impact on the 
Core  Tier  I  capital  ratio  of  the  banking  sector 
(CBM 2012a). Moreover, banks are encouraged to 
monitor  the  value  of  their  collateral  on  a  regular 
basis,  which  further  mitigates  potential  risks 
arising  from the banking sector’s exposure to real 
estate. The stress tests, however, are top-down and 
therefore  do  not  exclude  the  existence  of  specific 
problems at individual-bank level.  

Housing  prices  have  been  rising  steadily  for  a 
prolonged  period  of  time.  Estimations  in  the 
December 2012 Quarterly Report on the Euro Area 
(EC  2012e)  show  that  the  latest  pronounced 
growth phase of house prices from trough to peak 
(Q2 2002 – Q1 2008) has largely been in line with 
the  average  for  the  euro  area  and  notably  milder 
than  countries  like  Ireland,  Spain  and  Estonia.  A 

(10) Loans  for  construction  and  real  estate  activities  and 
mortgage  loans  amounted  to  52.4%  of  total  lending  to 
residents  in  November  2012  (Source:  Central  Bank  of 
Malta). 

Graph 2.15:House price cycle

Cumulated growth from trough to peak (%)

DE

0

FI

LU

BE

50

100

IT

SE

150

FR

200

250

300

350

AT

PT

CZ
EL

SI

MT

SK

PL

HU

ES

NL
UK

DK

BG

EE

IE

RO

LV

Previous 
trough

10

0

-10

-20

-30

-40

-50

-60

-70

-80

)

%

(
a
t
a
d
t
s
e

t

a

l

o
t

k
a
e
p
m
o
r
f

l
l

a
f
d
e
t
a
u
m
u
C

l

Source: Eurostat, ECB, OECD

Estimations  show  that  in  the  years  before  euro 
adoption,  an  overvaluation  of  housing  prices 
developed.  Indeed  annual  growth  in  nominal 
housing  prices  accelerated  notably  in  the  years 
before  euro  adoption  and  averaged  around  20% 
over  2006-2007.  These  years  were  characterised 
by  fast  expansion  of  mortgage  lending:  between 
January  2005  and  December  2007,  the  annual 
growth  in  mortgage  loans  averaged  18.5%. (11) 
Faster  price  dynamics  was  also  fuelled  by  the 
increasing  demand  for  real  estate  from  abroad, 
either  from  Maltese  citizens  living  abroad  (also 
thanks  to  fiscal  incentives)  or  foreign  buyers. 
Additional factors supporting this trend have been 
the  demographic  developments  and  the  lack  of  a 
recurrent  property  tax  in  Malta  (see  Box  2.3). 
Overvaluation  estimates  carried  out  by 
the 
European  Commission  (EC  2012e)  show  that  the 
adjustment in housing prices that began at the end 
of  2009  is  at  a  relatively  early  stage  and  further 
downward  correction  can  be  expected  in  order  to 

(11)  For  reference,  the  average  annual  growth  in  mortgage 
lending  for  the  euro  area  in  2006-7  was  9.9%.  (Source: 
ECB). 

23 

 
                                                           
 
                                                           
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Malta 2013 

bring  prices  in  line  with  their  long-run  trend. 
However, in light of the recent modest rebound in 
house prices, reaching the conservative scenario of 
a  further  drop  of  over  50%  depicted  in  the  stress 
test by the Central Bank of Malta appears unlikely. 
There are downside risks related to a weaker-than-
expected  macroeconomic 
and 
depressed  domestic  demand,  and  also  in  view  of 
the  high  number  of  vacant  properties.  However, 
the  extent  to  which  the  latter  may  indicate 
oversupply  is  not  straightforward  as  a  significant 
amount  of  vacant  properties  are  not  for  sale  for 
different reasons. 

environment 

Graph 2.16:Mortgage lending (stock) and 
house growth

0
0
1
=
4
0
0
2

,
x
e
d
n
I

300

250

200

150

100

50

04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1

Lending for house purchase

House prices

Source: Central Bank of Malta, ECB, Commission services

24 

 
 
 
2. Macroeconomic Situation and Potential Imbalances 

Box 2.3: Immovable property taxation in Malta

Immovable property taxes include different types of levies. One important distinction is between recurrent 
taxes, which typically take the form of annual payments due by the owner, whose amount is linked to some 
measure of the value of the property; and transaction taxes that are typically charged on the occasion of the 
sale or transfer of the property.  

Taxes on immovable property represent 3.2% of total taxation in Malta (the EU-27 average is 3.6%). The 
Graph shows that Malta is the only EU country which does not have recurrent taxes. Looking at transaction 
taxes, the situation is exactly reversed for Malta, which raises a high amount of revenue (1.1 % of GDP in 
2010, almost double the EU-27 average, equal to 0.6% of GDP) from these taxes. 

Graph 1:Property taxation

Malta

EU27

EA17

1.2

1.0

0.8

0.6

0.4

0.2

0.0

Recurrent taxes on
immovable property

Transaction taxes on
property in general

Source: EC 2012f

Transaction  taxes  on  property  are  generally  considered  more  distortive  than  a  recurrent  tax.  Indeed,  a 
transaction  tax  reduces  the  number  of  transactions  and  hampers  the  price  discovery  process.  Moreover, 
revenue from transaction taxes is often highly volatile, as it tends to follow the business cycle. At the same 
time, a transaction tax on real property transactions could deter speculation and thus possibly help to reduce 
the risk of housing market bubbles. A recurrent tax on immovable property is generally considered the least 
distortionary  type  of  tax.  In  addition,  revenue  from  these  taxes  is  highly  predictable,  since  they  are  more 
difficult to evade than taxes such as PIT or CIT. This also makes them, at least potentially, attractive from an 
equity  point  of  view.  Recurrent  property  taxes  are  usually  characterised  by  low  compliance  costs  for 
taxpayers and, once a system is set up, administrative costs for tax authorities are also moderate.  

On  the  positive  side,  Malta  does  not  have  tax  deductibility  of  mortgage  interest  payments.  Normally,  tax 
deductibility of interest payments leads to a favourable treatment of debt, which, coupled with low taxation 
of  the  return  of  the  property  (i.e.  the  imputed  rent)  encourages  over-investment  in  the  housing  sector 
compared to other sectors and leads to growing incentives for debt accumulation by households. 

The increase in property taxes might theoretically offer some potential for limiting 'boom and bust' cycles in 
housing prices, by dampening excessive price increases in the build-up phase. 

25 

 
 
 
 
 
 
 
 
 
 
 
3. 

IN-DEPTH ANALYSIS OF SELECTED TOPICS 

total 

insurance  and  collective 

The  financial  sector  expanded  very  rapidly 
after  EU  accession,  with 
liabilities, 
excluding  equity,  reaching  around  850%  of 
GDP  as  at  end-2011.  The  majority  of  these 
liabilities,  over  600%  of  GDP,  belong  to  the 
banking sector. At the same time, the non-banking 
financial  sector  has  expanded 
rapidly,  with 
investment 
sizeable 
schemes,  each  with  liabilities  exceeding  100%  of 
GDP,  also  reflecting 
the  emergence  of  new 
activities  such  as  captive  insurance  and  asset 
management. In terms of total assets in relation to 
GDP,  the  Maltese  banking  sector  is  among  the 
biggest 
the  euro  area  (see  Graph  3.1). 
Regulatory  responsibilities  at  micro  level  lie  with 
the  Malta  Financial  Services  Authority  (MFSA), 
whereas  the  Central  Bank  of  Malta  (CBM)  is  in 
charge  of  ensuring  financial  stability  from  a 
broader perspective. To strengthen co-operation as 
well as to follow up on recommendations issued by 
the European Systemic Risk Board (ESRB), (12) in 
January  2013,  the  two  institutions  set  up  a  Joint 
Financial  Stability  Board  (JFSB),  which  will  be 
responsible  for  macro-prudential  supervision  in 
Malta.  

in 

interlinkages  with 

The  banking  sector  in  Malta  is  very  diverse  in 
terms  of 
the  domestic 
economy. The sector can be split into three groups 
according  to  the  extent  to  which  it  is  interlinked 
with the domestic economy: (i) five core domestic 
banks whose main activities are collecting deposits 
and  granting  loans  to  Maltese  residents,  (ii)  eight 
non-core  domestic  banks  that  have  some  business 
with  residents  but  not  as  their  core  activity,  and 
(iii)  thirteen  internationally-oriented  institutions 
that  have  almost  no  links  with  the  domestic 
economy.  In  terms  of  gross  liabilities,  the  third

(12)  See ESRB/2011/3. 

Table 3.1:

 group is by far the biggest and has assets of over 
500%  of  GDP.  The  core  and  non-core  domestic 
banks  have  assets  of  around  220%  and  80%  of 
GDP, respectively.  

Graph 3.1:Banking sector assets in selected 
euro-area countries in October 2012, % of 
GDP

800

700

600

500

400

300

200

100

0

P
D
G

f
o
%

SK SI EL IT BE AT DE FI PT ES NL FR CY IE MT

Source: ECB

to 

Core  domestic  banks  do  not  appear  to  be 
exposed 
international 
the  volatility  on 
financial  markets.  The  group  consists  of  five 
banks,  with  Bank  of  Valletta  (BoV)  and  HSBC 
Malta  owning  over  80%  of  the  220%  of  GDP  of 
total  assets  held  by  this  group.  The  Maltese 
government  holds  a  25%  stake  in  BoV.  The  BoV 
successfully  passed 
test 
conducted  by  the  European  Banking  Authority  in 
2011,  which  revealed  a  healthy  capital  position, 
with a Core Tier I ratio of 10.6% in June 2012, in 
line with the average for the group of tested banks, 
to  non-Maltese 
and  very 
debt. (13) 
sovereign 

the  EU-wide  stress 

limited  exposure 

(13)  Exposure to non-Maltese sovereign debt amounted to 7.7% 
of  the  gross  direct  sovereign  exposures  in  June  2012,  up 
from 6.3% in December 2011 (Source: EBA). 

Selected financial soundness indicators for Maltese banks

Core domestic banks 

Non-core domestic banks

Tier 1 capital adequacy ratio
Non-performing loans ratio
Return on assets
Return on equity

Coverage ratio
Distribution of total loans
   to residents as % of total loans
   to non-residents as % of total loans
Investment securities to total assets
   Domestic investment securities
   Foreign investment securities
Source:  Central Bank of Malta

2009
10.1
6.2
1.6
26.6

22.0

98.7
1.3

11.9
13.2

2010
9.2
7.5
1.4
22.4

19.8

98.4
1.6

12.3
11.9

2011
9.6
7.3
1.3
19.5

19.8

98.4
1.7

12.8
11.5

Jun-12
9.8
8.2
1.4
20.6

20.1

98.3
1.7

13.3
11.1

2009
30.5
2.4
3.1
14.0

84.3

9.7
90.3

2.9
27.0

2010
27.9
3.6
1.3
4.4

31.7

11.0
89.0

2.2
35.1

2011
27.4
4.5
0.5
1.4

42.8

13.1
86.9

2.2
36.1

Jun-12
25.9
4.3
0.5
1.5

Internationally-oriented banks
2009
31.8
0.5
1.7
22.6

2010
110.2
0.6
1.1
3.1

2011
114.4
0.5
1.2
3.9

Jun-12
103.4
0.3
1.1
4.0

38.3

63.8

76.0

107.7

101.5

13.6
86.4

1.8
41.5

0.0
100.0

0.0
100.0

0.0
27.8

0.0
28.8

0.1
99.9

0.0
31.5

0.0
100.0

0.0
32.8

27 

 
                                                           
 
                                                           
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Malta 2013 

The  core  banks  exercise  a  rather  conservative 
business  model  that  relies  mainly  on  resident 
deposits  for  their  funding  and  have  low  loan-to-
deposit ratios, at around 70%. This, combined with 
a stable deposit base, thanks to the high propensity 
to  save  by  Maltese  households,  helped  the  core 
domestic  banks  cope  with  the  financial  crisis  and 
international  wholesale 
the  volatility  on 
markets.  The  banks  did  not  need  government 
support  nor  did  they  need  to  resort  to  the  ECB's 
long-term refinancing operations to any significant 
degree to improve their liquidity.  

the 

loan 

losses 

The  core  domestic  banks  are  profitable  but 
specific  provisioning  against 
is 
rather low. About two-thirds of the private sector 
loans  extended  by  the  core  domestic  banks  are 
secured with real estate collateral. (14) Banks apply 
a rather cautious valuation of collateral: they apply 
a significant discount on its value and this value is 
regularly  monitored  through  third-party  valuation 
and  verification  by  the  regulators.  This  practice, 
added  to  a  still  conservative,  albeit  increasing, 
loan-to-value ratio, mitigate the concentration risk 
arising  from  the  high  exposure  of  the  core 
domestic banks to the real estate sector. Indeed, the 
slowdown  in  the  construction  sector  did  not  hit 
banks'  balance  sheets  particularly  hard:  the  share 
of  non-performing  loans  increased  moderately  in 
recent years, from around 5% in 2008 to just above 
8%  in  June  2012  (see  Graph  3.2).  The  return  on 
equity remained strong throughout the crisis and as 
a  result,  the  banking  sector  was  able  to  generate 
own  capital  and  no  significant  recapitalisations 
were  needed.  However,  since  banks  provision 
against only the unsecured part of an exposure, the 
coverage  ratio  is  relatively  low  at  about  20%. 
Higher  provisioning  to  strengthen  NPL  coverage 
as  recommended  by  the  Council  under  the  2012 
European Semester, (15) as well as discouraging an 
increase  in  the  loan-to-value  ratio  of  real  estate 
loans  would  further  improve  the  soundness  of  the 
core domestic banks. In addition, it is important to 
ensure  that  the  domestic  judiciary  system  is 
efficient.  The  recently  published  EU  Justice 
Scoreboard  (EC  2013a)  and  successive  World 
Bank’s  Doing  Business  reports  highlight  potential 
challenges  in  this  area.  Namely,  Malta  scores 

(14)  This refers just to the loan-replacement value of collateral, 

i.e. the value of loans fully backed up by collateral. 

(15)  Measures  to  address  this  recommendation  are  in  the 
pipeline,  but  the  authorities  are  awaiting  further  guidance 
from the European Banking Authority. 

28 

significantly  worse  than  the  EU  average  in  terms 
of  the  time  needed  to  resolve  non-criminal  cases 
and the clearance rate – i.e. the number of resolved 
cases  as  a  share  of  incoming  cases.  It  also 
compares unfavourably with the OECD average in 
terms  of  enforcing  contracts  and 
resolving 
insolvency,  due  to  the  long  time  the  procedure 
takes  and  the  limited  amount  of  assets  that 
claimants  are  able  to  recover  from  an  insolvent 
entity.  

Graph 3.2:Evolution of non-performing loans 
in the core domestic banks

mln. EUR
900

800

700

600

500

400

%
9

8

7

6

5

4

09 Q1

10 Q1

11 Q1

12 Q1

NPLs to total loans (lhs)

NPLs (rhs)

Source: IMF Financial Soundness Indicators

The group of international banks are profitable 
and well capitalised. The international banks have 
assets  of  over  500%  of  GDP,  mainly  owned  by 
branches  and  subsidiaries  of  large  international 
institutions. They fund themselves mainly through 
the  wholesale  market  or  through  the  parent  banks 
and deal mainly with intragroup activities. Overall, 
this  group  of  banks  is  profitable  and  very  well 
capitalised  with  their  risk-weighted  assets  more 
than fully covered by Tier 1 capital (CBM 2012b), 
mainly reflecting the healthy position of one major 
bank  that  is  almost  entirely  funded  with  equity. 
Furthermore,  these  banks  have  strong  liquidity  as 
evidenced by the very high ratio of liquid assets to 
short-term liabilities(16). Tax incentives, alongside 
a trustworthy regulatory environment (these banks 
are  subject  to  the  same  type  of  scrutiny  as  the 
domestically-oriented banks) and the advantage of 
having English as an official language appear to be 

(16)  The  ratio  of  liquid  assets  to  short-term  liabilities  was 
153.4% in June 2012, far surpassing the required 30% ratio 
(CBM 2012b).  

 
                                                           
 
                                                           
the main reasons attracting financial institutions to 
Malta. 

though 

registered 

in  Malta, 

the 
Even 
internationally-oriented  banks  hardly  do  any 
business  in  Malta,  which  limits  the  potential 
risk  to  domestic  financial  stability  that  they 
carry.  Total  resident  liabilities,  including  private 
sector  deposits,  represented  only  0.3%  of  total 
liabilities 
in  2011  (around  1.5%  of  GDP). 
Similarly,  the  international  banks  do  not  fund 
domestic businesses or resident households. Loans 
to  residents  represented  only  0.01%  of  their  total 
lending  portfolio,  while  they  did  not  hold  any 
domestic investment securities in June 2012. Links 
with  domestically-oriented  banks  in  terms  of 
liquidity  management are also very limited due to 
the  very  small  size  of  the  domestic  interbank 
market. In addition, while some banks have tapped 
the domestic bond market in the past, the obtained 
amounts represent a very small share of the  listed 
private  sector  bonds  and  equity  (CBM  2011). 
Overall, this group of banks carries out its business 
from  and  not  in  Malta,  which  significantly  limits 
their  impact  on  stability  of  the  financial  sector. 
Finally,  the  existing  tax  regime  sets  a  lower  tax 
rate  for  institutions  that  obtain  a  very  small  share 
of their profits from business with residents, which 
provides  a  further  disincentive  for  these  large 
international  banks  to  increase  their  exposure  to 
the  domestic  economy.  The  very  small  size  of 
business with residents as well as the fact that the 
big  institutions  are  foreign-owned  indicates  that 
the 
the 
internationally-oriented  banks  carry  are  minimal. 
As  a  result,  the  only  channel  through  which 
potential  problems  in  one  or  more  banks  that 
belong  to  this  group  could  impact  the  domestic 
economy  appears  to  be  through  possible  negative 
reputational  risks  for  Malta  as  a  safe  jurisdiction 
for the financial services industry. 

contingent 

liabilities 

fiscal 

that 

The  non-core  domestic  banks  also  display 
healthy financial soundness indicators, although 
they  invest  in  riskier  assets.  The  non-core 
domestic banks are the smallest group of banks in 
terms  of  size  with  total  assets  at  around  80%  of 
GDP.  Similar  to  the  international  banks,  their 
funding comes mostly from the wholesale market. 
Unlike  the  international  banks,  however,  these 
banks  are  much  more 
the 
domestic  economy  and  resident  liabilities  account 

intertwined  with 

3. In-Depth Analysis of Selected Topics 

significant  proportion  of 

for around 12% of the total, including deposits (17) 
and bonds and equity issued locally (around 9.5% 
of  GDP).  The  asset  side  is  rather  diversified 
between  non-resident  (largely  also  non-EU)  loans 
to  companies  and  banks  as  well  as  a  mix  of 
corporate,  government  and  other  banks'  debt 
securities.  A 
the 
investment portfolio (around  30% as at end-2011; 
CBM  2012a)  was  invested  in  bonds  issued  by 
residents of EU Member States currently receiving 
financial assistance under an EU/IMF programme. 
This illustrates the riskier business profile of these 
banks, although the  fact that  the  majority of these 
securities  are  not  government  bonds  can  be  a 
mitigating factor. On the asset side, resident assets 
account  for  around  9%  of  total  assets. (18)  The 
is  oriented  predominantly 
lending  portfolio 
towards the corporate sector and about half of the 
resident  loans  are  for  construction  and  real  estate 
activities.  This  portfolio  performs  better  than  that 
for  the  core  domestic  banks  as  the  ratio  of  non-
performing loans was relatively low at just 4.5% at 
the  end  of  2011  (CBM  2012a).  On  aggregate,  the 
shock absorbing capacity of the non-core domestic 
bank appears sufficient to absorb a deterioration in 
the  quality  of  its  assets  as  the  Tier  I  capital 
adequacy  ratio,  although 
the 
international  banks,  stands  much  higher  than  the 
ratio for the core domestic banks. As a result, due 
to their limited exposure to the domestic economy, 
the  non-core  domestic  banks  do  not  represent 
significant  contingent  fiscal  liabilities  and  do  not 
seem  to  pose  an  immediate  threat  to  domestic 
financial 
potential 
stability.  Nevertheless, 
reputational  and  confidence  risks  could  emerge 
should  one  of  these  banks  run  into  trouble.  Thus, 
strict  scrutiny  by  the  regulators  is  essential  to 
ensure that financial stability is maintained. 

than  for 

lower 

(17)  Resident  deposits  represented  around  10%  of 

total 
liabilities for this banking group but still remained less 5% 
of total resident loans as at June 2012 (CBM 2012b). 
(18)  In  total,  resident  loans  extended  by  non-core  domestic 
banks and international banks accounted for around 3% of 
total  resident  loans  as  at  end-2011.  Source:  Financial 
Stability  Report  2011,  Central  Bank  of  Malta,  September 
2012 

29 

 
                                                           
the 

lending 

increase 

relatively 

Improving 

in  check,  also 

bubbles. 
to 

mortgage 
through  a 
conservative  policy  on  the  loan-to-value  ratio,  is 
also essential in preventing excessive debt build-up 
loan-loss 
asset 
and 
provisioning 
low 
coverage  ratio  would  also  contribute  towards 
maintaining 
as 
recommended  by  the  Council  under  the  2012 
European Semester. Finally, the proper functioning 
of the financial sector would benefit from a review 
and,  if  necessary,  improvements  in  insolvency 
legislation  to  make  sure  that  collateral  rights  are 
enforceable when needed. 

soundness, 

banking 

sector 

in 

High  public  and  private  debt  warrant  policy 
attention.  Given  the  small  size  in  nominal  terms, 
public  debt  issuances  do  not  attract  significant 
interest from foreign investors, leaving the burden 
of  funding  the  government  almost  entirely  on 
Maltese  residents.  This  may  crowd  out  private 
investment and consumption in case of insufficient 
liquidity 
the  financial  system.  Therefore, 
ensuring  that  public  debt  is  put  on  a  downward 
path  and  addressing  the  challenges  to  the  long-
term  sustainability  of  public  finances,  namely 
through  timely  pension  and  healthcare  reforms, 
would  be  beneficial  for  domestic  stability  and 
would  ensure  that  financial  intermediation  works 
properly  to  finance  economic  growth  in  the 
medium  to  long-term.  As  regards  private  sector 
debt,  while  the  current  level  of  indebtedness  does 
not  appear  to  be  excessive,  measures  to  prevent 
unsustainable  increases,  such  as  by  limiting  the 
loan-to-value 
loans  and 
addressing  the  debt  bias  in  corporate  taxation, 
could be considered. 

for  mortgage 

ratio 

4. 

POLICY CHALLENGES 

The analysis in sections 2 and 3 identifies potential 
imbalances  for  Malta  in  the  financial  sector,  in 
particular as regards its exposure to the real estate 
market.  Against  this  background,  this  section 
discusses different avenues that could be envisaged 
to  address  the  policy  challenges  posed  by  these 
potential imbalances. 

Ensuring  the  proper  functioning  of  the  real 
estate  market  is  of  particular  importance  for 
financial  stability,  given  the  strong  link  with  the 
banking sector. Past dynamics of real estate prices 
may  have  been  partly  supported  by  the  taxation 
regime  in  Malta,  which  lacks  a  recurrent  property 
tax,  while  transaction  taxes  may  impede  the  price 
the  real  estate 
discovery  process.  Therefore, 
market would benefit from reviewing the property 
tax  system  to  ensure  that  it  provides  the  right 
incentives  to  market  participants.  Furthermore, 
regular monitoring of property price developments 
and  collateral  valuation  by  commercial  banks  is 
important 
stability. 
Supporting  the  development  of  the  rental  market 
towards  preventing 
would 
excessive  price  growth  and  the  accumulation  of 
price bubbles. 

in  maintaining 

contribute 

financial 

also 

Risks  to  domestic  financial  stability  appear 
small  but  continued  monitoring  appears 
warranted.  Risks  to  domestic  financial  stability 
stemming  from  the  presence  of  a  very  large 
financial  sector  appear  small  due  to  the  very 
limited  exposure  of  internationally-oriented  banks 
to the domestic economy. Nevertheless, continued 
regular monitoring and assessment, including more 
regular  data  dissemination  of  banking  soundness 
indicators,  of  the  activities  of  the  internationally-
oriented and the non-core domestic banks and their 
implication for financial stability is important. This 
is  particularly  relevant  for  the  non-core  domestic 
banks, which despite their smaller relative size and 
robust  financial  soundness  indicators  engage  in 
riskier  activities  that  necessitate  strict  supervision 
to  ensure  that  risks  are  adequately  provisioned 
against. 

The  stability  of  the  core  domestic  banks  would 
benefit  from  strengthening  the  provisions  for 
loan  losses  to  limit  risks  arising  from  their 
exposure 
the  property  sector.  Lending 
standards  for  construction  and  real  estate  services 
have  already  been  tightened.  Keeping  household 

to 

31 

 
 
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European  Commission  (EC  2012h),  The  2012 
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Central Bank of Malta – (CBM 2012a), Financial 
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European  Commission  (EC  2013a).  The  EU 
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