Malta weathered the global recession relatively well though warning signs remain, according to the International Monetary Fund.
Output fell less than the euro area average and unemployment rose only modestly, partly reflecting government support, a report issued by the IMF on Friday night said.
Driven by external demand, a cyclical upswing is now underway and manufacturing and tourism, hit hard by the global recession, have recovered.
However, the recovery is not yet broad based and some sectors, including construction and retail, are lagging, said the IMF, an organisation of 187 countries, working to foster global monetary cooperation.
On the back of softer real estate prices, elevated unemployment, and higher uncertainty about job prospects, consumption growth slowed but has been supported by very low interest rates, the IMF said.
Investment, especially in construction, decelerated sharply and remains sluggish. Inflation has picked up as the ongoing rebound allows firms to rebuild profit margins and pass on higher energy prices, but underlying inflation is expected to remain contained.
Finance Minister Tonio Fenech lauded the IMF report, though he warned that the challenges remain.
“It’s a positive thing that we’ve managed to maintain low unemployment levels and that there are clear signs of an economic upswing,” he said.
According to the report, in 2010 revenue performance was boosted by another tax amnesty and relatively strong corporate profits, which contributed to higher income taxes, also reflecting the economic recovery.
Only few and targeted stimulus measures were executed, including some measures to support investment and the tourism sector, some support to households compensating for the sharp rise in utility tariffs, and some increase in childcare benefits, the IMF said.
The Maltese banking sector has weathered the global financial crisis relatively well, but vulnerabilities are rising, it said. Relatively, conservative funding models and little exposure to US toxic assets have kept spillovers from the global financial crisis to banks in Malta at bay.
However, a long real estate boom contributed to a significant increase in private sector debt and as a result domestic credit risk.
Real estate prices and collateral values experienced some correction and appear to have stabilised more recently, but excess supply remains in segments of the market.
Household debt has grown rapidly but still remains somewhat below the euro area average.
Banks have tightened lending policies and bank credit growth has decelerated but remains strong compared with the euro area average. In parts of the banking sector the growing exposure to debt securities poses additional risk.
The economy is now showing signs of a robust cyclical upswing and the challenge ahead will be to achieve strong and sustainable growth. This will require strategic fiscal consolidation and prudent risk management.
Continued progress with structural reforms will also be important to establish high value exports and to raise productivity and employment rates.
The IMF endorsed the government’s “ambitious” fiscal consolidation plans in response to the increase of public debt and guarantees and implicit liabilities to relatively high levels.
It agreed that further structural reforms will be critical for increasing Malta’s competitiveness, productivity and attractiveness to foreign direct investments.
Measures to enhance the education system and encourage women and older workers to participate in the labour market will be important to raise employment while further liberalisation of the regulated sectors will boost economic efficiency.
The finance minister acknowledged that the government needed to do even more to encourage Malta’s female work participation, the lowest in the EU.
Asked to respond to criticism that the IMF’s clean bill of health for the Maltese economy was still not trickling to the man in the street, Mr Fenech said said: “People’s expectations will always be high, and we cannot compare ourselves to the many feeling the economic pinch in Europe.
“However, we need to acknowledge that several workers’ jobs are no longer under threat, and exporters are benefitting from the economic swing. We have to be patient... and as the economy grows more people will feel the benefits.”