23 - 30 May, 2001

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Central Bank reviews the year’s first quarter


Economic developments
In its analysis of economic developments during the final quarter of 2000, the Review notes that economic activity remained in line with that registered in the first nine months of the year, with external demand continuing to be the main source of growth. This mainly reflected buoyant activity in the electronics industry, as conditions in the tourism sector remained generally sluggish.
At the same time, domestic demand also showed some signs of recovery, both with respect to consumption and to investment. Meanwhile, retail price inflation declined to 2.4 per cent, partly reflecting lower imported inflation as well as the absence of new indirect tax measures. On the other hand, unemployment edged up marginally, to 4.5 per cent, reflecting seasonal trends in tourism and a drop in employment in the manufacturing sector.

Labour market
Over the first quarter, the unemployment rate edged up to 4.5 per cent during the final quarter of 2000. While both the labour supply and the gainfully occupied population contracted, the latter dropped at a slightly faster rate than the former.
Thus, the labour supply declined by 0.50 per cent during the fourth quarter, a drop of roughly the same magnitude as that registered during the corresponding quarter of 1999, but the gainfully occupied population contracted by 0.52 per cent, more than twice the drop of the previous year. Lower private sector employment levels were mainly responsible for the contraction in the gainfully occupied population during the quarter, though temporary employment also fell, after having remained unchanged over the previous twelve months.
The drop in private sector employment in part reflected the normal seasonal correction in the demand for labour by the hotels and catering sub-sector after the expansion of the summer months. Employment in the wholesale and retail trades also fell, however, though on a year-on-year basis the number of full-time employees in this sub-sector was still up by 364 at the end of December, one of the largest annual increases in recent years.
On the other hand, there was a significant expansion in employment in the community and business sub-sector during the quarter.

Balance of payments
As regards the balance of payments, the Review notes that the deficit on the current account continued to widen during the fourth quarter of 2000. Although this was largely attributable to investment income outflows of an exceptional nature, the negative balance on the goods and services account also continued to widen. At the same time, net inflows on the capital and financial account were insufficient to finance the deficit, thereby giving rise to a further decline in the official reserves.

Government finance
The fiscal deficit at the end of 2000 has been provisionally estimated at Lm95 million, or 6 per cent of GDP, implying a larger improvement than was originally anticipated, as higher revenues outpaced expenditure growth. The improvements registered in the second quarter and those projected for the fourth were responsible for the overall fiscal consolidation registered during the year. In fact, the Lm32.8 million shortfall being projected for the fourth quarter is Lm6.8 million less than in that registered in the same quarter of 1999, though this is partly attributable to the different timing in the recording of certain expenditure components.

Revenue for the fourth quarter of 2000 is estimated at close to Lm154 million, Lm15.3 million more than in the same quarter of 1999. Income tax and social security contributions are expected to yield Lm45.5 million and Lm35.4 million, up by 20 per cent and 11 per cent, respectively, from the previous year’s levels. This mainly reflects the upward revision in the income tax bands and the drive towards greater efficiency in the tax collection process, together with the higher national insurance contribution rates introduced from the beginning of the year.
Revenue from indirect taxes is expected to rise to Lm60.1 million in the last quarter of the year, with the increase being entirely generated by Value Added Tax. Thus, revenue from customs and excise taxes and that from licences, taxes and fines is expected to remain unchanged from the levels reported in the same quarter of 1999. Meanwhile, non-tax revenue, at Lm12.9 million, is projected to be Lm1.7 million less than in the fourth quarter of 1999.

The increase in overall expenditure during the fourth quarter is due to a rise in recurrent expenditure which should be offset to some extent by a projected drop in capital expenditure. Recurrent expenditure is projected to increase by almost nine per cent, mainly on account of higher outlays on retirement pensions, though other recurrent expenditure is also expected to be up from the 1999 level. Interest payments, on the other hand, should remain largely unchanged from the year-ago levels. Meanwhile, capital expenditure is projected to decline by Lm2.7 million from the level of the fourth quarter of 1999. This is explained by a reduction in subventions to parastatal corporations and by the fact that certain expenditures incurred in 1999, such as those on oil drilling, will not be repeated in the year under review.

Government Debt and Financing Operations
During 2000, the government relied heavily on Treasury bill issues to finance its deficit. In the final quarter of the year, however, government also drew down Lm15.3 million from its deposits with the banking system. Treasury bills in issue at the end of the fourth quarter totaled Lm173 million, up by Lm28 million from the third quarter’s level. Compared to the 1999 closing position, the amount of Treasury bills in issue at the end of the year was up by Lm89.7 million. Furthermore, between October and December of 2000, repayments of foreign loans were expected to amount to Lm3.2 million. Meanwhile, the amount of Malta Government Stocks in issue remained practically unchanged from the year-ago level. The Gross Public Debt at the end of 2000 stood at Lm925 million, up by Lm85 million from the end-1999 level and equivalent to 60 per cent of GDP. The greater part of the debt was financed from local sources, with foreign borrowing providing only Lm39.3 million, or 4.2 per cent, of total financing.

The capital market
In the absence of issues of government stocks during the quarter reviewed, primary capital market activity revolved around corporate bond and share issues.
Excluding private placements, Lm20 million worth of corporate bonds were issued on the primary market during the quarter. In October, Eden Finance plc, part of a group of companies involved in the leisure industry, issued Lm10 million worth of ten-year bonds offering a coupon rate of 6.7 per cent. In the following month, Malta Government Privatisation plc issued Lm10 million worth of bonds with a term to maturity of five years.
These bonds, which offer a 15 per cent premium over the nominal value on maturity, give holders an option to subscribe to shares in privatised companies, as these become available. All these securities were listed on the Malta Stock Exchange during the quarter reviewed. In November, too, Datatrak plc, issued Lm4 million worth of shares, which were placed on the Exchange’s Alternative Companies List.
After having slowed during the previous quarter, secondary market trading in government stocks picked up during the quarter reviewed. Turnover rose by 14.8 per cent to Lm10.9 million, almost entirely on the strength of increased activity outside the Central Bank. In fact, the Bank bought stocks worth Lm1.5 million during the quarter and made negligible sales. Trading was spread across a range of bonds, with the 7.8 per cent MGS 2018 accounting for around a quarter of the total turnover.
According to data published by the Malta Stock Exchange, turnover in the secondary corporate bond market increased by 12.4 per cent to Lm1.2 million. Trading in two newly listed bonds accounted for the entire increase. Yields on long-term government bonds, which had risen during the previous quarter, dipped slightly during the quarter reviewed.
Thus, for example, the yield on ten-year bonds, which had risen by more than 30 basis points during the previous quarter fell by five points to 5.99 per cent in December. Similarly, the yield on twenty-year bonds fell from 6.7 per cent in September to 6.6 per cent three months later. The decline in the five-year bond yield, which began during the second quarter, persisted during the fourth quarter, ending the year at 5.33 per cent. In contrast, corporate bond yields generally rose. Trading in listed equities, which had fallen to Lm6.2 million during the third quarter, recovered during the quarter reviewed, reaching Lm14.4 million.
The issue of additional shares by International Hotel Investments explains more than a third of this increase. Trading in shares in Maltacom and in Bank of Valletta accounted for most of the remaining activity. Equity prices continued to fall during the quarter reviewed. The Malta Stock Exchange Share Index shed 127.54 points, or 3.6 per cent, to end the quarter at 3,375.72.

Monetary developments
Commenting on monetary developments, the Review observes that broad money expanded more rapidly than in the third quarter of the year. However this growth rate was lower than that registered in the corresponding quarter of 1999. As a result, the annual growth rate resumed its earlier downward trend.
Monetary growth during the quarter was mainly underpinned by higher net claims on government, as the net foreign assets of the banking system declined. During the quarter the Bank kept its monetary policy stance unchanged, leaving official interest rates at 4.75 per cent. In the capital market, long-term bond yields declined marginally, following the substantial rise registered in the previous quarter, while equity prices continued to fall.

Banking system
Meanwhile, in the banking system, growth in the aggregate balance sheet of the deposit money banks was mainly spurred by funds obtained through repos with the Central Bank, though time deposits rebounded from the previous quarter’s level. These funds were mainly channelled to the banks’ domestic and foreign securities portfolio, as credit expansion remained subdued. The banks’ profitability improved, while their capital and liquidity ratios remained well above the statutory requirements. At the same time, the international banks continued to record strong growth.

Global environment and the Lira
The Review also comments on the global economy and observes that conditions deteriorated during the final quarter of 2000, as US economic growth slowed down sharply. The situation in Japan remained uncertain while in the euro-zone growth moderated. These developments indicated that interest rates in the major economies had peaked and that major central banks were likely to embark on an easier monetary policy. Meanwhile, foreign exchange markets were characterised by the recovery of the euro and the further decline of the yen. Reflecting these developments, the Maltese Lira appreciated against the US dollar and sterling, but weakened against the euro during the quarter.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt