There was almost €450 million accumulated in the National Development and Social Fund, which was acting as a buffer in case of a rainy day in economic terms, Central Bank chief economist Aaron Grech explained on Wednesday.

Government debt stood at €5.66 billion at the end of 2018, just €75.2 million lower than its 2016 level – in spite of the fact that the government has registered a surplus of €638 million since then.

However, the government debt has to be seen in terms of the liquidity it offers to investors, he explained, noting that there was a huge thirst for government paper such as stocks and bonds.

“It issues more paper than it needs to cover its debts, for example the bonds for the elderly, which is done with a social objective in mind as a way to help pensioners save,” he said.

Dr Grech was speaking at the media launch of the CBM’s annual report for 2018, where trends across the various aspects of the economy were analysed.

Governor Mario Vella summed up the overall trends, saying that 2018 was a complex year and that this one would carry on in the same vein.

“[The European Central Bank in] Frankfurt is not seeing signs of any recession, but the European economy certainly did not bounce back as much as we expected,” he said, referring to the wider context.

The report in a nutshell:

• Economic growth may have slowed down slightly (to 6.6% in real terms), but it is still putting pressure on resources. This is most evident in the tight labour market, with jobs growing at a dynamic rate of 5.4% in the last quarter of 2018.

The CBM looks at this pressure by measuring whether production is using resources at a ‘normal’ level or whether there is above-average use of them, such a high levels of overtime and additional production shifts. At the moment, this ‘production output’ is out of the green range and edging into amber, although it is not as bad as the levels in 2015.

• The tight labour market will almost certainly drive up wages eventually, which will feed into inflation, although the CBM is forecasting a rate of 2% by 2012, still within the comfort zone of the ECB. The Harmonised Index of Consumer Prices averaged 1.7% in 2018, up from 1.3% in 2017.

• The debt-to-GDP ratio was calculated in best-case and worst-case scenarios, and in either case would not exceed 50% in the long-term, well below the 60% target set by the Maastricht Treaty criteria. The figures could be affected mostly by the possible slippage of locally-funded investment projects on the one hand, and by overruns of expenditure on the other.

• Housing prices went up by 5.4% in the first nine months of the year covered by the report, while last quarter figures were 5.7%. These levels are considered by the CBM to be slightly higher than the ‘fundamentals’ of the property market – but no alarm was expressed, with the CBM saying that the situation had been far worse in 2007.

With the Planning Authority issuing even more permits in 2018 than it did in 2017, the CBM said that the indications were that once this supply became available property prices would normalise.

• The banking sector remains solid, although banks’ profitability overall is weakening. The CBM looks at their liquidity and capital ratios, both of which are comfortably above the minimum thresholds. Banks have also worked hard to clean up their portfolios of non-performing loans, which are down to just 3.4%. Household mortgages are even less of a problem, with only 2.5% of them falling into arrears at a level that worries the banks.

Nevertheless, the CBM is keeping a watchful eye on the high level of property-related loans dished out by banks, and a new directive comes into force on July 1, which will distinguish between the terms offered to, for example, first time buyers, and those buying property for speculative reasons.

Banks are far less comfortable with risk than they were, the CBM acknowledged. However, this is a deliberate decision, meant to allay the reluctance of correspondent banks to take on small jurisdictions like Malta. Correspondent banks which handle euro-dollar transactions are crucial for Malta because a considerable amount of exports are handled in dollars.

• The CBM made a profit of €38.3 million in 2018 (2017: €51.6 million) of which €28 million went to government. The rest was put into provisions which the CBM has been accumulating for a ‘rainy day’ since 2012, a pot which now holds €97 million.

The annual report is available at


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