News - News Releases 2019


The Central Bank of Malta’s Annual Report 2018

The Central Bank of Malta has just released its Annual Report for 2018, including detailed financial statements. An opening statement by the Governor is followed by an analysis of economic and financial developments in Malta and abroad and a review of the Bank's policies and operations. The Report also carries articles on financing conditions in Malta, public debt sustainability, the financial assets and liabilities of different institutional sectors and selected results from the latest payment habits survey.

The Report notes that the Maltese economy continued to expand at a brisk pace, with real growth in gross domestic product (GDP) reaching 6.6%. The expansion was largely driven by domestic demand, particularly private consumption, which continued to benefit from strong growth in disposable income in the context of very favourable labour market conditions. Sector data show that the services sector remained the primary driver of economic growth, although the manufacturing and construction sectors also expanded. In contrast to GDP growth, potential output growth eased to 5.7%. Despite this deceleration, the latter remained high from a historical perspective. The positive output gap widened to 1.0% during the year, though the degree of overutilization of the economy's productive capacity remains well below that in 2015. Meanwhile, the Bank's Business Conditions Index (BCI) continued to signal above-average economic conditions.

The pace of GDP growth in Malta was more than three times that registered in the euro area. The Bank's latest projections suggest that economic growth is expected to remain strong from a historical perspective, though somewhat lower than in 2018. Growth is expected to average 4.2% over the period 2019 to 2021.

The strong pace of economic expansion was reflected in the labour market. Employment continued to rise, while the unemployment rate decreased further and remained well below that in the euro area. The Labour Force Survey (LFS) shows that employment expanded at an average annual rate of 6.5% during the first three quarters of 2018. Most of this increase was driven by full-time employment. The expansion in employment occurred despite a further increase in the activity rate. The unemployment rate averaged 3.8% in 2018, down from 4.0% in 2017. It stood below the Bank's estimate of the structural measure and hence continued to suggest a degree of tightness in the labour market. Data based on administrative records confirm the favourable labour market developments, as the number of registered unemployed fell by 653, to an average of 1,847 persons in 2018.

Turning to price developments, the Report notes that the average annual rate of inflation based on the Harmonised Index of Consumer Prices (HICP) averaged 1.7% during 2018, up from 1.3% in 2017. This increase mainly reflects an upward revision in the weight of accomodation services at the start of the year. By contrast, inflation based on the Retail Price Index (RPI), which excludes such services eased to 1.2% from 1.4% a year earlier. According to the Bank's projections, HICP inflation is set to pick up gradually over the projection horizon and reach 2.0% by 2021.

During the year under review, residents' deposits with monetary financial institutions operating in Malta continued to expand, remaining the main source of funding for these institutions. Similarly, credit growth expanded further, on the back of faster growth in loans to the private sector. Meanwhile, interest rates on both deposits and loans to Maltese residents fell during the year. On the other hand, yields on Treasury bills and government bonds rose. Meanwhile, according to the Bank's Financial Conditions Index (FCI), financing conditions tightened further in 2018 and remained tight by historical standards.

In the first three quarters of 2018, the general government surplus widened compared with the same period a year earlier, due to a strong increase in revenue which offset higher expenditure. In the four quarters up to September 2018, the headline and cyclically-adjusted government surplus-to-GDP ratios remained broadly unchanged when compared with those in 2017. The general government surplus-to-GDP ratio reached 3.6% in the third quarter of 2018, while the cyclically-adjusted surplus stood lower at 2.9% of GDP. Meanwhile, government debt as a share of GDP declined to 45.7%, from 50.1% in 2017. Developments in Maltese public finances continued to compare favourably with the euro area, where the latter's fiscal balance remained in deficit and the debt-to-GDP ratio stood at 86.1%.

During the year, the Bank continued to implement the Eurosystem's monetary policy decisions in Malta, through standing facilities, liquidity-providing operations and the Public Sector Purchase Programme (PSPP). As liquidity remained ample, domestic credit institutions made no use of the Eurosystem's main refinancing operations (MROs) and of the long-term refinancing operations (LTROs). At the same time recourse to the deposit facility continued to increase. During the year, the Bank purchased €94.2 million worth of Maltese sovereign bonds through the PSPP, bringing total purchases before amortisation to €1,042.3 million by the end of 2018.

The Bank's balance sheet continued to expand, with total assets reaching €8,853.9 million at the end of 2018, from €8,582.9 million a year earlier. Operating profit before transfers to provisions decreased to €38.3 million, from €51.6 million in 2017, largely on account of a lower amount of recognised income in respect of the balance of unredeemed Maltese lira fifth series currency notes which expired at the end of January 2018. Lower net gains on the disposal of financial instruments as well as lower net interest income also contributed to lower profits. The amount of €10.3 million was transferred to provisions, whilst an amount of €28.0 million is payable to the Government of Malta.

As regards financial stability, the Bank continued to advise Government on EU legislative proposals affecting the financial sector. It continued to monitor closely the financial system and implement the recommendations of the Joint Financial Stability Board and the Domestic Standing Committee. The Bank published two Financial Stability Reports based on its risk assessments, stress tests results and work related to macro-prudential policy. The Bank monitored further the lending standards of core domestic banks and private sector demand for credit. Furthermore, it launched a consultation on a proposed Directive on Borrower-Based Measures targeting mortgages and the resilience of banks and household balance sheets. Meanwhile, the Bank participated in ECB and European Systemic Risk Board (ESRB) meetings related to the financial sector as well as in meetings of the European Banking Authority (EBA) and the Single Supervisory Mechanism (SSM). The Bank participated in a MONEYVAL evaluation and in another evaluation carried out in terms of the United Nations (UN) Convention against Corruption. Meanwhile, a Financial Crime Compliance Unit was set up, with the aim of enhancing compliance with the regulatory framework related to anti-money laundering and the countering of terrorist financing.

The Bank continued to meet business firms and public sector institutions in Malta to gain a better understanding of economic conditions, partly through on-site visits to industrial estates. Further work was carried out to develop additional forecasting tools and the social research function, while the Bank's publications began to include commentaries on a number of variables estimated by the Bank, in addition to official data. The Bank launched a Research Bulletin and an additional publication on the Bank's first fifty years to commemorate its 50th anniversary. It also held a number of public lectures in economics and finance, history and law with contributions from Bank staff and external speakers.

During the year the Bank began to implement the AnaCredit project, which aims to provide a harmonised set of credit and credit risk data across participating countries. Meanwhile, it amended a number of directives implementing the revised Payment Services Directive (PSD2) and the Central Securities Depositories Regulation (CSDR), and signed an agreement enabling the Bank to administer part of the portfolio of the National Development and Social Fund (NDSF). It also switched to a new accounting system and upgraded a number of IT systems that connect the Bank to the rest of the European System of Central Banks (ESCB). The Bank also reviewed its processes in the light of the EU's General Data Protection Regulation (GDPR).

The Annual Report 2018 is available on the Central Bank of Malta's website.

Presentation delivered at the Annual Report 2018 Conference

The Central Bank of Malta’s Annual Report 2018

The Central Bank of Malta’s Annual Report 2018

The Central Bank of Malta’s Annual Report 2018

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