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Acceleration in economic growth
driven by the electronics industry
The Central Bank of Malta has just published the December 2000
issue of its Quarterly Review, which analyses economic and financial
developments in Malta and abroad during the third quarter of
the year. The review also includes a summary of the results
of the latest Business Perceptions Survey conducted by the bank,
an overview of the latest Budget and the texts of two speeches:
one delivered by the governor at the annual dinner of the Chartered
Institute of Bankers, and the other given by the deputy governor
at a seminar organised by the Chamber of Commerce.
In analysing economic developments during the third quarter
of 2000, the review notes that growth remained prevalently export-led,
as consumption expenditure was channelled primarily towards
imports. At the same time investment in a number of export-oriented
manufacturing sub-sectors appears to have picked up somewhat.
The review then focuses on official GDP data for the nine months
to September which show that the Maltese economy had expanded
at a faster rate than in the same period of 1999, despite the
negative impact of the rise in oil prices on the profitability
of government enterprises. This acceleration in economic growth
was largely driven by the electronics industry, both in terms
of exports and in terms of investment
Meanwhile, the 12-month moving average inflation rate stabilised
at 2.7 per cent in September, mainly reflecting the absence
of inflationary pressures during the first nine months of the
year. At the same time the unemployment rate fell to 4.4 per
cent, its lowest level in more than three years.
Turning to government finance, the review observes that developments
during the third quarter of 2000 continued to indicate a narrowing
of the fiscal deficit, implying that the deficit-reduction target
for the year would be met. In fact, during the first nine months
of the year the budgetary shortfall contracted by nearly Lm22m
to Lm62m. This improvement in the fiscal position reflected
a buoyant tax revenue performance that outpaced expenditure
growth.
Provisional data on the balance of payments showed that the
deterioration in the current account registered in the first
half of the year continued during the September quarter, but
was more noticeable in the services account, as tourism earnings
were down from the l999 level. On a cumulative basis, the current
account balance swung from a surplus of Lm9.7m in September
1999 to an estimated deficit of Lm85m in September 2000.
This was mainly due to a rise in imports of capital goods and
industrial supplies, though the hike in international oil prices
also contributed. Since net inflows on the capital and financial
account were insufficient to cover the current account deficit,
the official reserves declined over the nine-month period.
Commenting on monetary developments, the review says that despite
the issue of securities by both the government and the private
sector, the slowdown in monetary expansion evident during the
first half of the year was checked during the quarter reviewed.
Monetary growth was driven almost entirely by credit to the
private sector as the net foreign assets of the banking system
declined. Within the banking system liquidity levels fell as
banks participated actively in the primary Treasury bill market.
Nevertheless, as the Central Bank intervened actively in the
market and kept official interest rates unchanged, money market
interest rates remained stable. In the capital market, however,
long-term bond yields rose while equity prices continued to
fall.
Focusing on developments in the banking system, the review observes
that increased investor interest in the capital market and higher
outflows into foreign portfolio investment contributed to a
slowdown in resident deposit growth. This resulted in a more
modest expansion of the balance sheets of the deposit money
banks.
The banks’ profitability fell as their gross income declined
and provisions for bad debts were increased. The capital structure
and liquidity levels of the domestic banks nevertheless remained
healthy. At the same time, the international banks continued
to expand vigorously.
Turning to the international scene, the review notes that during
the quarter global economic conditions continued to improve,
supported by the strength of the US economy and robust expansion
in Europe. Nevertheless, imbalances in the three main currency
areas remained large while higher oil prices became an increasing
concern.
Against this background, both the Federal Reserve and the Bank
of England kept interest rates unchanged while the European
Central Bank raised interest rates further. Meanwhile, the foreign-exchange
markets were characterised by the US dollar’s general strength
and the persistent weakness of the euro, which was undermined
by a continued flow of capital out of the euro zone to the US.
Reflecting these developments, the Maltese lira appreciated
against the euro but weakened against the US dollar – as
well as the yen and, to a lesser extent, the sterling.
(The December issue of the Quarterly Review will be available
on the website of the Central Bank of Malta at www.centralbankmalta.com)
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