BusinessToday Previous Editions

25.04.19 5 NEWS INTEREST rates on both depos- its and loans to Maltese residents fell last year, with the spread be- tween the two rates narrowing slightly from elevated levels, the Central Bank's Annual Report for 2018 indicates. e report, published on Wednesday, shows that the weighted average deposit rate of- fered to households and non-fi- nancial corporations (NFCs) went down by five basis points to 0.33% by the end of the year. is was mainly driven by a drop in rates on households' time deposits, partly offset by higher rates on shorter-term time deposits held by NFCs. Meanwhile, the weighted av- erage lending rate paid to local monetary financial institutions by households and NFCs fell by 9 basis points, reaching 3.55%. Both households and NFCs paid lower rates, though lending rates to NFCs remained above those charged to households, possibly reflecting differences in credit risk. e report shows that, in the primary market, domestic yields rose during 2018. Similarly, yields on five-year and ten-year Maltese government bonds in- creased, contrasting with down- ward movements in the corre- sponding euro area yields. In 2018, net government bond issues were negative. e private sector's net issues remained pos- itive, but decreased compared with 2017. In the equity mar- ket, the Malta Stock Exchange (MSE) Equity price index rose marginally when compared with the level registered at the end of December 2017. e total assets of domestic MFIs in Malta rose during 2018, contrasting with a drop in the asset holdings of international banks. Shift to liquid overnight deposits Meanwhile, Maltese residents' deposits continued to expand, remaining the main source of funding for resident monetary financial institutions. e shift away from longer- term deposits towards more liquid overnight deposits per- sisted, in an environment of low interest rates and robust income growth. At the same time, growth in credit to residents expanded fur- ther, driven by faster growth in loans to the private sector. Lending to households was supported by a further expan- sion in mortgage loans, while lending to NFCs recovered fol- lowing recent weakness. NFCs also continued to in- crease their usage of capital markets as an alternative form of financing. Potential output growth down to 5.7% e potential output growth of the Maltese economy eased from 7.0% in 2017 to 5.7% in 2018, mainly reflecting a small- er contribution from capital. Nonetheless, it remained high from a historical perspective. e output surplus is estimat- ed to have widened to 1%, from 0.2% in 2017, but remained well below the most recent high esti- mated for 2015. e Bank's Business Condi- tions Index (BCI) continued to indicate above-average condi- tions in 2018, but the index was down marginally from the previ- ous two years. GDP continued to grow at a fast pace. In 2018 it rose by 6.6%, following a 6.7% increase in 2017. e expansion was large- ly driven by domestic demand, although the contribution from net exports was also positive. Nominal gross value added (GVA) data show that the expan- sion continued to be largely sup- ported by services, although the manufacturing and construction sectors also expanded. Labour Force Survey (LFS) data for the first three quarters of 2018 shows that – against the backdrop of a buoyant economy – employment continued to rise. Eurostat data for 2018 indicates that the unemployment rate de- creased further and remained well below that in the euro area. It was also lower than the Bank's estimate of the structural meas- ure. ese favourable labour mar- ket developments are corrobo- rated by data based on adminis- trative sources, which show that in 2018 the average number of registered unemployed fell by 653, to 1,847 persons, with the number in December standing even lower, at 1,765. Annual inflation based on the Harmonised Index of Consum- er Prices (HICP) rose to 1.7% in 2018, from 1.3% in 2017. is was similar to the rate registered in the euro area. In contrast, inflation measured by the Retail Price Index (RPI) eased to 1.2%, from 1.4% in the previous year. ese contrasting developments mainly reflected the inclusion of tourist expend- iture in the HICP basket. Meanwhile, domestic cost pressures accelerated further, with the annual average rate of change of the industrial produc- er price index reaching 4.6% in 2018. Malta's harmonised competi- tiveness indicators (HCIs) con- tinued to indicate a deterioration in international price compet- itiveness, on account of unfa- vourable euro exchange rate and relative price movements. Malta's unit labour cost (ULC) index registered moderate growth of 0.9% during the year Improvement in balance of payments surplus During the first three quarters of 2018 the surplus on the cur- rent account of the balance of payments widened when com- pared with the corresponding period of 2017. is improve- ment was primarily attributable to a rise in net services receipts and, to a lesser extent, to lower net outflows related to primary income. Together, these offset a widen- ing merchandise trade gap and marginally higher net outflows related to secondary income. Between January and Septem- ber, net inflows on the capital account increased marginally on a year earlier, while lower net lending was recorded on the fi- nancial account. Net errors and omissions turned negative when compared with the comparable period of 2017. When measured as a four-quarter moving sum, the current account registered a sur- plus equivalent to 10.6% of GDP, 0.5 percentage points higher than in the year ending in Sep- tember 2017 and above the 3.3% recorded in the euro area. e cyclically-adjusted current account balance was also esti- mated to stand at 10.6% during the period under review. Government revenue, expenditure up In the first three quarters of 2018, the general government registered a surplus of €241.4 million, up by €35.2 million compared with the correspond- ing period of 2017, the report further indicates. is was due to a strong increase in revenue offsetting higher primary ex- penditure. Government revenue grew by €257.6 million, or 8.1% in annual terms, reaching €3,445.2 million. Growth in revenue was mainly driven by higher tax receipts. Government expenditure in- creased by €222.3 million or 7.5%, due to an increase in both recurrent and capital expendi- ture items. Outlays on compen- sation of employees recorded the largest increase in absolute terms, as they rose by €76.7 mil- lion. e stock of general govern- ment debt was down by €158.6 million since the end of 2017, standing at €5,512.0 million in September. is was largely due to a €410.7 million decrease in the stock of long-term securi- ties (composed of MGS), whose share in total government debt declined by 4.9 percentage points to reach 82.8%. Central Bank's balance sheets continues to expand Central Bank governor Mario Vella noted in the report that, throughout 2018, the Bank had continued to implement the Eu- rosystem's monetary policy de- cisions in Malta, through stand- ing facilities, liquidity-providing operations and the Public Sector Purchase Programme (PSPP). Since liquidity remained am- ple, domestic credit institu- tions did not participate in the Eurosystem's main refinancing operations (MROs) and in the long-term refinancing opera- tions (LTROs), Vella said, and, at the same time, recourse to the deposit facility continued to in- crease. During the year, the Bank purchased €94.2 million worth of Maltese sovereign bonds through the PSPP, bringing total purchases before amortisation to €1,042.3 million by the end of 2018, he highlighted. In addition, the Bank continued to purchase securities for the ECB's PSPP) portfolio. In 2018, the Bank's balance sheet continued to expand, reaching €8,853.9 million at the end of 2018, from €8,582.9 mil- lion a year earlier, the report shows. Operating profit before trans- fer to provisions decreased to €38.3 million, from €51.6 million in 2017. is was mainly due to a reduction in net gains on the disposal of financial instruments and a lower amount of income in respect of the remaining bal- ance of Maltese lira fifth series currency notes, which were re- deemable until the end of Janu- ary 2018. Lower net interest income fur- ther contributed to the decline in operating profit. Interest rates on deposits and loans fell in 2018, Central Bank report shows Central Bank governor Mario Vella

• Cover