Those infamous red lights

The resilience and ability of the Maltese economy to withstand shocks emerges once again from the Macroeconomic Imbalance Procedure (MIP) Scoreboard published by the European Commission last week. 

Malta is one of 8 member states who had two or less macro-economic imbalances in 2020, while the rest of the bloc had an average four imbalances, with the scores ranging from three to six.

In its Alert Mechanism Report, the Commission concludes that In-Depth Reviews (IDR) are warranted for 12 member states, including such economic giants as Germany, France and Italy. These member states had already been subject to an IDR in the previous round of MIP surveillance, having been found to be experiencing imbalances or excessive imbalances. Two new ones have been added.

It is not remiss to recollect that the only time that Malta was subject to an IDR was under the previous Nationalist Administration in 2012 and was taken out of the surveillance through the tempestuous actions of the incoming Labour Government.

The only time that Malta was subject to an In-Depth Review was under the previous Administration in 2012.

The MIP Scoreboard consists of fourteen indicators relevant for the early detection of existing or emerging macroeconomic imbalances. It supports an Alert Mechanism Report that identifies those Member States for which in-depth analyses are required on the basis of an economic reading of the scoreboard indicators, complemented by other auxiliary indicators.

The MIP aims to identify potential macroeconomic risks early on, prevent the emergence of harmful macroeconomic imbalances, and correct the imbalances that are already in place. The system enables the Commission to monitor economic policies and detect potential harm to the proper functioning of the economy of a Member State, of the Economic and Monetary Union, and of the European Union as a whole.

The scoreboard consists of a combination of stock and flow indicators which can capture both short-term rapid deteriorations as well as the long-term gradual accumulation of imbalances.

In the previous round of the MIP in 2020, no macroeconomic imbalances were identified for Malta. In the scoreboard for 2020 two indicators are above their indicative thresholds, namely the private debt and unit labour cost (ULC) growth.

The MIP report shows that unit labour costs (ULC) grew markedly in 2020 amid a sharp fall in productivity as the Maltese Government introduced measures to support employment during the height of the COVID pandemic. This created the first imbalance. However, the Commission expects ULC to remain broadly unchanged in 2021 and slightly decline in 2022.

The second imbalance related to the private debt-to-GDP ratio, which in 2020 increased to about 139% and thereby mildly exceeded the scoreboard threshold. The ratio is expected to remain around the same level in 2021. Corporate debt increased in 2020 from an already high level but is forecast to start declining slightly in 2021.

Household debt, consisting mostly of mortgages, increased strongly in 2020 and is expected to remain broadly unchanged in 2021, at just over 100% of household gross disposable income. House prices have grown in a sustained way in recent years, with some indications of potential overvaluation although their growth was lower in 2020. Data for the first half of 2021 suggest the growth is picking up again.

Though private and government debt increased, on balance the Commission does not consider it necessary at this stage to carry out further in-depth analysis in the context of the MIP.

FATF consequences seen as limited by the EC

While Malta has been added to the list of jurisdictions under increased monitoring by the FATF, the consequences of this decision are expected by the Commission to remain limited if the identified shortcomings are swiftly addressed as Malta is committed to do. 

Most of the other indicators are positive to very positive.

For example, the net international investment position (NIIP) is strongly positive.  Although Malta’s current account turned into a deficit of -2.9% in 2020, mainly due to a decline in tourism, this was after three years of strong positive surpluses. It is expected to remain in moderate deficit over the forecasting horizon.

Like in most other member states, Government debt in Malta increased as the Government responded to the COVID economic shock. It rose by 13 pps in 2020, to 53.4% of GDP, reflecting the depth of the recession and in particular the government support measures. It is expected to continue increasing in 2021 and 2022 but fall back to just above 60% by 2031.

Another positive observation is that the banking sector is well capitalised with a strong liquidity position. Banks increased their provisioning levels and their coverage ratio improved even though profitability plummeted in 2020. At 3.6%, the non-performing loans ratio remained moderate in 2020.

There is no doubt that Malta is well positioned to recover and position itself for a post-COVID spurt of sustained growth.

The Commission notes that it will be important going forward to monitor closely the effect of the phasing out of public support measures, such as the loan moratoria and the guarantee schemes. There is an ongoing review of the insolvency framework. The exposure of banks to the real estate sector is substantial and continues to be somewhat worrying.

Of course, we all know that, in spite of the large shock, the employment situation in Malta remained remarkably stable. The unemployment rate slightly increased to 4.4% in 2020, reflecting the effects of the COVID-19 crisis, but is still low. Moreover, as recovery takes hold, it is expected to start declining in 2021 and decrease to almost pre-crisis level in 2022.

Though we are not out of the woods yet, due to continuing uncertainties regarding the evolution of the pandemic and the possibility of further shocks, there is no doubt that Malta is well positioned to recover and position itself for a post-COVID spurt of sustained growth.

When one considers that the majority of the member states have some quite worrying imbalances, Malta’s scoreboard is impressive.

No wonder that the Opposition’s criticisms of the Government’s handling of the economy is falling flat and has no credibility. People have not forgotten the infamous red lights predicted years ago and whose spectre is raised from time to time in the Opposition’s bid to stay in the headlines.

They keep getting egg in their face.

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