Business activity rebounds after
- domestic, export sectors positive
In its review of this years second quarter, the
Central Bank of Malta cites a positive outlook for business and the
economy in its latest Business Perceptions Survey carried out by the
Bank during the March-April period.
The replies from the business community generally suggest that while
the performance of the locally-oriented sectors during the March quarter
was fairly muted, activity rebounded following the general elections
Business sentiment also rose markedly across a broad spectrum of surveyed
locally-oriented enterprises. A similar mood change was registered in
the externally-oriented sectors, as operators expected increased turnover
during the second quarter, following the rapid conclusion to the war
The Review then focuses on domestic economic developments and notes
that after having stalled during the final quarter of 2002, the Maltese
economy contracted in the first quarter of 2003, reflecting a sharp
deterioration in the external balance caused by a decline in exports
and a large rise in imports of goods and services. At the same time,
domestic demand recovered, driven mainly by increased Government current
Although private consumption also expanded during the quarter, reversing
the drop recorded during the preceding quarter, the growth rate remained
subdued. Despite the drop in output, unemployment, as measured by the
Labour Force Survey, declined by 0.2 percentage points during the first
quarter of 2003 to 6.6 per cent in March. Meanwhile, the downward trend
in inflation observed since the middle of 2002 continued into the quarter
reviewed. The twelve-month moving average rate of inflation dropped
to just 1.5 per cent in March and fell further into May.
Turning to government finance developments, the Review observes that
fiscal policy was strongly expansionary during the March quarter. In
fact the deficit in the Consolidated Fund widened to Lm57.6 million,
nearly double the level recorded during the corresponding quarter of
2002. Revenue fell slightly, whereas both recurrent and capital spending
surged. Provisional data for the second quarter showed a continuation
of this trend, with the deficit widening further.
In analysing the external sector, the Review notes that during the first
quarter the shortfall on the current account of the balance of payments
rose substantially, mainly as a result of a larger merchandise trade
gap and a smaller surplus on services. In contrast the capital and financial
account showed a surplus, but this was smaller than that recorded in
the corresponding period of 2002. At the same time, the official reserves
rose further, albeit at a slower rate.
Meanwhile, with currency markets overseas characterised by the persistent
appreciation of the euro against the US dollar, the Maltese lira lost
further ground against the European unit while registering gains against
the US dollar and the pound sterling.
The Review highlights developments in the monetary sector and notes
that, despite a moderate pick-up in domestic credit and a small gain
in the net foreign assets of the banking system, monetary growth continued
to decelerate during the first quarter. In April, however, broad money
registered strong growth, driven by a robust expansion in domestic credit
that offset a decline in the net foreign assets of the banking system.
The Reviews report on financial stability mainly focuses on the
banking system. It notes that, apart from maintaining a high liquidity
position, domestic money banks strengthened their capital base further
during the quarter. Profitability levels remained adequate with the
return on assets recovering steadily. The ratio of non-performing loans
also declined during the first quarter of 2003. Meanwhile, the international
banking sectors balance sheet contracted when compared to the
same period of 2002, as during the later part of that year some institutions
ceased operations following strategic decisions by their parents, while
others integrated their business with their parents or began to operate
as deposit money banks.
Commenting on the stance of monetary policy, the Review explains how
throughout the first quarter of 2003 the Central Bank left official
interest rates unchanged, mainly as a result of the uncertainty that
prevailed in international financial markets and geopolitical tension
ahead of the war in Iraq. The latter had a negative impact on the outlook
for the global economy, heightening the risks to domestic economic growth
and the balance of payments performance. Nevertheless, the Central Banks
external reserves continued to rise during the first quarter, though
at a slower pace.
With tension abroad easing following the end of the conflict in Iraq
and further evidence of slow economic conditions both in Malta and abroad,
the Bank decided to lower official interest rates on two occasions during
the second quarter. The easier monetary policy stance was underpinned
by the ending of uncertainty over Maltas relations with the European
Union, and the economic policy disciplines implied by membership. The
Banks decisions also reflected the expectation that inflationary
pressures were unlikely to emerge in the near term and that economic
activity in Malta would continue to expand at below its potential rate.
The central intervention rate was thus lowered by twenty-five basis
points in May and by the same amount in June, bringing it down to the
3.25 per cent by the end of that month.
The Review also includes the results of the latest Business Perceptions
Survey, a financial stability report, which will henceforth be published
in the June and December issues, and an article on practical and policy
issues related to Economic and Monetary Union.
The Quarterly Review is available on the website of the Central Bank
of Malta at www.centralbankmalta.com