Brief Overview: The current financial & economic situation in Malta
from the Central Bank of Malta

CENTRAL BANK QUARTERLY REVIEW (Sept. 2004)
Issue Date: November 2004

The second issue of the Quarterly Review for 2004, just published by the Central Bank of Malta, analyses economic and financial developments both in Malta and abroad during the first quarter of the year. The Review also includes the results of the latest business perceptions survey conducted by the Bank and two articles, one on the European System of National Accounts and the other on core inflation measures. The topics of both these articles are examined from a Malta perspective.

The Review comments on the monetary policy stance during the first and second quarters of 2004 and notes that the Bank left the central intervention rate unchanged at 3%. Monetary conditions were generally stable with the Bank’s net foreign assets rising in the first quarter of the year before declining in the next three month period, partly because of the increased cost of oil imports. The premium on Maltese lira short-term rates remained stable throughout the first quarter, but narrowed gradually in the second quarter as money market rates abroad rose. At the same time, although inflation rose sharply at the beginning of the year, under the impact of the increase in the standard VAT rate, inflationary pressures subsequently moderated. Information available on money and credit aggregates, as well as data from the labour market, also pointed to subdued economic activity, though there were signs of a recovery in exports.

In its assessment of monetary developments, the Review notes that broad money expanded during the first quarter, reversing the drop registered during the previous quarter. Monetary expansion was driven by increased domestic credit which, in turn, was fairly evenly divided between net claims on central Government and claims on other residents, mainly mortgages to households. Otherwise, growth in credit to the private sector remained weak, while the net foreign assets of the banking system as a whole decreased slightly.

Although GDP data for the first quarter of 2004 were not available at the time of writing, the Review observes that various indicators pointed to a pick-up in economic activity with higher export receipts being registered by manufacturing and tourism. Conversely, a further drop in the gainfully occupied, and the resulting higher level of unemployment, indicated that domestic demand continued to be weak during the quarter. Local sales by the manufacturing sector and imports of consumer goods declined compared with a year earlier, reversing the exceptional rise that had occurred in the last quarter of the year, prior to the increase in the standard VAT rate in January. Despite this rise, year-on-year inflation fell slightly during the first quarter of 2004, driven by changes in food and clothing & footwear prices. The twelve-month moving average inflation rate, however, continued to rise.

Responses to the Bank’s latest business perceptions survey, conducted between April and May, show that, after three consecutive quarterly declines, business confidence recovered, with the majority of firms expecting an improvement in the performance of the Maltese economy. This renewed confidence was mainly driven by export-oriented sectors, which reported higher turnover during the first quarter of 2004. Overall, activity in the domestically-oriented sectors remained below normal, with a deterioration reported by the manufacturing and distributive trades, and some improvement in financial services and construction. Looking ahead, export-oriented firms projected substantial gains during the second quarter of 2004, whereas firms catering for the domestic market tended to be more cautious.

Turning to the balance of payments, the Review highlights the widening of the current account deficit when compared with the corresponding quarter of 2003. This was because the income account swung into deficit, offsetting a narrowing of the merchandise trade gap and an increased surplus on services. After excluding movements in the international reserves, net inflows on the capital and financial account increased, mainly driven by the transactions of the banking sector.

The Review observes that during the first quarter of 2004, the Maltese lira appreciated against the euro and lost ground against the US dollar and sterling, after having registered gains against both these currencies during 2003. These trends were partly reversed in the second quarter as the lira recovered against sterling and lost ground, albeit marginally, against the euro. Meanwhile the lira continued to depreciate against the US dollar.

Commenting on fiscal developments, the Review reports that during the first quarter the deficit on the Consolidated Fund increased marginally over the corresponding period of 2003. A rise in total expenditure, mainly reflecting pension-related outlays that were higher than in the same period of 2003 due to timing differences, offset higher revenues. However, the primary balance, which excludes interest payments from expenditure, improved, suggesting that the fiscal stance was relatively less expansionary. Moreover, data for the first five months of the year show that the deficit on the Consolidated Fund contracted over the corresponding period of 2003.