Central Bank reviews the years first
CENTRAL BANK OF MALTA LAST WEEK PUBLISHED ITS REVIEW
OF THIS YEARS FIRST QUARTER, WHICH ANALYSES ECONOMIC AND
FINANCIAL DEVELOPMENTS IN MALTA AND ABROAD DURING THE FINAL THREE MONTHS
OF THE YEAR 2000. THE REVIEW ALSO INCLUDES A SUMMARY OF THE RESULTS
OF THE LATEST BUSINESS PERCEPTIONS SURVEY CONDUCTED BY THE BANK.
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
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
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
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 years 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 quarters 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
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
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 Exchanges 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.
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
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.
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 quarters 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.