In April, the Central Bank of Malta’s BCI fell when compared with the previous month, suggesting notably weaker levels of economic activity with respect to the long-term average.

Similarly, the ESI declined sharply. Sentiment weakened in all sectors, with the largest falls recorded in the services and construction sectors.

In March, tourism activity contracted sharply as a result of the containment measures and the subsequent travel ban that was introduced on 21 March in response to COVID-19. The volume of retail trade also contracted, though by far less than tourism activity. Meanwhile, growth in industrial production slowed down.

The number of registered unemployed increased in March. However, the unemployment rate remained low from a historical perspective.

Consumer price inflation edged up in March, though still remaining at low levels, with the annual inflation rate based on the Harmonised Index of Consumer Prices rising to 1.2%. Similarly, inflation based on the Retail Price Index rose slightly to 1.1%.

The publication also looks at public finance developments and notes that the deficit on the cash-based Consolidated Fund widened significantly compared with a year earlier, partly reflecting the Government’s decision to defer the collection of a number of tax revenue components in view of COVID-19.

It also reports on recourse to the moratorium on loan repayments offered by domestic credit institutions by the end of March in response to COVID-19. The value of household and corporate loans subject to a moratorium at the end of the month was €487.0 million, equivalent to 4.5% of related outstanding loans.

The full Economic Update, which also reports on international trade and financial markets, is available here.

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The Central Bank of Malta (CBM) set up a public benefit foundation entitled the Central Bank of Malta Foundation on 5 July, according to a press statement the CBM published today.

The foundation falls under the Voluntary Organisations Act, Chapter 492 of the Laws of Malta, as provided for in Second Schedule to the Civil Code, Chapter 16 of the Laws of Malta.

“The Central Bank of Malta Foundation, having an autonomous Board of Administrators, will be administering funds intended to support projects of national stature with lasting visibility relating to education, culture, scientific research, preservation of Maltese national heritage, and social causes,” the press statement says.

The first administrators of the foundation are as follows:

• Chairperson: Marius J. Zerafa
• Yosanne Vella
• Marvin Formosa
• Pauline Lanzon
• Treasurer: Raymond Filletti

The post Central Bank of Malta establishes foundation first appeared on The Malta Business Weekly.

“Projections for economic activity have been revised upwards for 2019 reflecting stronger anticipated growth in private consumption, investment, and government expenditure,” the press statement says. Nevertheless, economic activity in 2020 has been revised marginally down, due to a downward revision in investment growth, the CBM adds.

The central bank expects GDP growth to be supported by domestic demand, reflecting robust growth in private consumption and investment, while the net export contribution to growth is expected to fall in the negative territory in 2019 and 2020. This latter reflects the weak international environment and a pick-up in import growth as a result of robust consumption and investment growth. However, the central bank expects this to return to the positive territory by 2021.

Strong but moderate job creation

“The pace of job creation is set to moderate, but remain strong. The labour market is expected to remain tight, with the unemployment rate projected at 3.8% by 2021. Annual inflation, based on the Harmonised Index of Consumer Prices (HICP), is projected to ease slightly this year, before edging up to 1.9% by 2021, reflecting a pick-up in services and non-energy industrial goods inflation (NEIG),” the press statement by the financial institution says.

The CBM expects government finances to remain in surplus over the coming years, such that the debt-to-GDP ratio is projected to decline to below 40%. Looking ahead, the external environment poses downside risks to the projections of economic activity and inflation, according to the press statement.

Domestic risks are seen to remain largely positive in the medium-term, with the risks to public finances being broadly balanced, as possible slippages in the implementation of investment projects could be offset by higher current expenditure, the central bank concludes.

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Professor Narwold, who is also affiliated with the Energy Policy Initiatives Centre, has an expertise in market economics and consumer financial decisions. During his stay, he conducted advanced classes on statistical methods for the construction of quality-adjusted house price indices for the Central Bank of Malta’s Economic Analysis Department.

Mr Narwold also gave two in-depth seminars to the staff of CBM and the National Statistics Office (NSO) on statistical techniques and applied empirical research. The professor also reviewed research by bank economists aimed at publication in a specialist as well as general dissemination, according to the press statement by CBM.

In line with CBM’s strategic support to the University of Malta — aimed at strengthening the economics profession in Malta —, the professor also held lectures on game theory, available to postgraduate economics students, an essential part of the intermediate microeconomics curriculum. These lectures covered decision theory, strategic form games, extensive form games, Bayesian games, mechanism design, infinite horizon games, repeated games and evolutionary games.

“Professor Narwold’s visit contributed to developing a sounder understanding of issues such as house price measures, which issue is very relevant to these fields of activity,” the central bank says.

The bank says it is poised to launch other bilateral academic exchange programs with some important UK universities.

The central bank hosted a US Fulbright Scholar for the first time, and the visit was due to the assistance of the US Embassy in Malta, the bank says.

The Fulbright program is sponsored by the United States Department of State’s Bureau of Educational and Cultural Affairs and is one of the most prestigious and competitive academic exchange programs in the world.

The two seminar presentations are available on the Central Bank of Malta’s website.

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The IMF report summarises the findings of its assessment of Malta’s financial sector known as the Financial Sector Assessment Program (FSAP), according to a press statement issued by the Central Bank of Malta (CBM).

The IMF report says that the local financial sector is large as compared to the island’s economy, holding strong connections with the “rest of the world”. The banking system is thought to be in “good health”, with current challenges, the report adds.

“Banks’ total capital adequacy ratio is high (21.2% of risk-weighted assets (RWA) in 2017; Tier 1 Capital ratio at 19%), and liquidity is ample,” the CBM cites the IMF report.

The IMF says the local banking sector “remains resilient under a severe scenario”, saying that weaknesses are limited to few small banks only. “The system is sufficiently capitalised to absorb losses in the event of a severe macroeconomic shock, but risky exposures would lead to potential losses at a few small banks,” the IMF report says according to the CBM press release.

The IMF calls for continued enhancements in the macroprudential framework. Beyond the recent strengthening of systemic risk monitoring, the IMF further raises attention on enhancing the legal framework, closing data gaps and strengthening nonbank risk assessment. In its report, the IMF welcomes the planned introduction of borrower-based measures to address the build-up of vulnerabilities in the housing and household sector.

‘Urgent action’ needed in bank supervision and AML

The IMF report outlines suggestions for the Malta Financial Services Authority (MFSA) to preserve efficiency. The report says that providing adequate resources is vital in maintaining the effectiveness and operational independence of the MFSA. At the same time, the report says that shortcomings in bank supervision system should be dealt with urgency.

According to the IMF, the MFSA “should take timelier supervisory actions, increase the frequency of on-site inspections, make more use of monetary fines as part of the sanctioning regime, and ensure supervisory action is not delayed through judicial appeal,” the CBM press release reports.

The IMF calls for further actions for supporting the use of early intervention and resolution powers, as well as addressing weaknesses in the bank liquidation and insolvency framework. “Containing financial integrity risks is critical to financial stability,” the report says according to the press release.

“A multi-prong approach is needed to address anti-money laundering and combating the financing of terrorism (AML/CFT) deficiencies. Enhancing the AML/CFT system is required to protect the financial sector and the broader economy from the ML/TF threats,” the IMF report says, cited by the CBM.

Officials welcome the report

“The Maltese banking sector was found to be well capitalised, liquid and operating with healthy profitability levels. The banking system was also found to be resilient under rigorous stress scenarios, with vulnerabilities limited to a few small banks under very severe stressed conditions,” says Dr Mario Vella, the Governor of the Central Bank of Malta.

“With respect to the recommendations made by the IMF, the combined initiatives taken by the Maltese Authorities, some of which are already underway, should strengthen further the resilience of the country’s financial system. Within a broader perspective, these recommendations will strengthen further Malta’s credential as a jurisdiction of repute and the Bank stands ready to contribute towards their effective implementation,” Mr Vella says.

“The IMF Assessment confirms the importance of the financial services sector to the Maltese economy and its strong connections to the rest of the world. Banks continue to be key players in the financial sector which remains healthy and resilient despite the challenges,” says Professor John Mamo, Chairman of the Malta Financial Services Authority.

“The MFSA also takes note of the key recommendations made in the report, namely to strengthen supervisory and enforcement capacity through increased resources, investment in technology and a number of operational and technical initiatives intended to enhance sectoral risk-based supervision, enforcement and judicial processes. Going forward the report also provides valuable inputs into the ongoing improvement processes undertaken by the MFSA in conjunction with other national authorities and stakeholders to continue to safeguard stability and address the risks that may stem from different sectors of the financial market,” Mr Mamo says.

About the report

The International Monetary Fund Financial Sector Assessment Program (FSAP) encompasses an in-depth and comprehensive assessment of a country’s financial system, with the intentions of assisting countries to identify key sources of systemic risk in the financial sector and to propose the implementation of policies to enhance country resilience to shocks and contagion.

The Maltese authorities requested the IMF to undertake an FSAP for Malta in 2017 given that Malta had initiated its first FSAP in 2002. The Malta FSAP exercise formally commenced in March 2018. The IMF expert team conducted assessments by Principles for Effective Banking Supervision, Insurance Supervisory Principles, Objectives and Principles for Securities Regulation, and Financial Action Task Force’s (FATF’s) 40+8 Recommendations, and other relevant standards and codes, the CBM press release says.

“The results of the Malta assessment are published in the Financial System Stability Assessment (FSSA) which also focuses on issues of relevance to IMF surveillance. The FSSA was discussed at the IMF Executive Board together with the country’s Article IV report and was approved by the IMF’s Executive Board on 22 February 2019. It was published on 27 February 2019, and the report is available on the IMF website,” the Central Bank of Malta says.

The report is scheduled to be followed by the publication of Technical Notes by the IMF on specific topics covered in the FSAP.

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