Central Bank of Malta Quarterly Review September 2000 Vol. 33 No. 3 The Quarterly Review is prepared and issued by the Economics Department of the Central Bank of Malta. Opinions expressed do not necessarily reflect the official views of the Bank. Articles appearing in this issue may be reprinted in whole or in part provided the source is quoted. For Copies of the Quarterly Review apply to:- The Manager Economics Department Central Bank of Malta Castille Place Valletta CMR 01 Malta Telephone: (356) 247480 Facsimile: (356) 243051 (356) 234546 Internet: www.centralbankmalta.com ISSN 0008-9273 Printed by Interprint Limited CONTENTS ECONOMIC SURVEY 1. General Overview 5 2. The International Environment 7 3. The Domestic Economy 14 4. The Balance of Payments and the Maltese Lira 22 5. Government Finance 30 6. Monetary and Financial Developments 33 7. The Banking System 41 THE CENTRAL BANK'S BUSINESS PERCEPTIONS SURVEY : RESULTS FOR THE 46 THIRD QUARTER OF 2000 PREPARING FOR ECONOMIC AND MONETARY UNION (EMU) : 53 A MALTESE PERSPECTIVE NEWS NOTES 59 FINANCIAL POLICY CALENDAR 62 STATISTICAL TABLES 71 Note: The cut-off date for information published in the Economic Survey is September 1, 2000. For figures published in the Statistical Tables, the cut-off date is September 7, 2000. ECONOMIC SURVEY Labour market data are consistent with a recovery 1. GENERAL OVERVIEW in economic activity during the first half of 2000. Employment in construction, the export-oriented The latest economic indicators point to a manufacturing sector and services increased, generally sustained rate of activity during the first while the unemployment rate dropped to 4.5%. half of 2000, although higher oil prices had a dampening effect on the profitability of the The fiscal deficit is declining in line with energy and transport sectors. Manufactured projections. The improved fiscal position is almost exports expanded significantly, driven in the main entirely attributable to increased tax revenue, as by the major firms in the sector, which are also growth in recurrent expenditure remains investing heavily in plant and equipment. Tourist sustained. activity recovered during the second quarter, making up for the weak performance reported In the external sector, there was a deterioration in earlier in the year. The results of the business the current account during the second quarter of perceptions survey conducted by the Central 2000 as the expansion in exports failed to keep up Bank indicate that the expansion in manufactured with import demand. The latter was, however, exports is likely to continue, but the outlook for boosted by higher imports of capital goods that tourism seems less certain. Construction activity are expected to improve the economys export should continue to recover, while business in the base. The current account was also adversely distributive trades should remain stable. affected by the increase in oil prices. At the same Employment data seem to confirm a moderate time, the capital account was characterised by pick-up in overall activity. At the same time, the continuing portfolio investment outflows, in part gradual but steady tightening of fiscal policy reflecting the liberalisation of exchange controls. should prevent overheating demand pressures from building up. As a result of these balance of payments developments, the Central Banks external Indeed, inflationary pressures remained generally reserves declined during the period. This was, subdued. The headline inflation rate edged up to however, made up for by a rise in foreign assets 2.7% during the second quarter of 2000, but this held by the rest of the banking system. At the continued to reflect the lagged one-time effects of same time, the demand for domestic bank credit changes in indirect taxes that are expected to be remained subdued, leading to a further slowdown deflationary in the longer term. It is estimated that in the rate of monetary expansion. The latter was underlying inflation, a measure that excludes the conditioned by investor interest in non-monetary effects of changes in indirect taxes and of financial assets. Capital market yields edged seasonal fluctuations on prices, actually declined. upwards during the period, mirroring This not only reflected the current state of developments in interest rates abroad. domestic markets, characterised as they are by relatively weak demand and increased In setting interest rate policy, the Central Bank competition, but also a drop in imported inflation took account of the developments in the on account of the low rates of inflation in trading countrys balance of payments and the persistent partner countries and the weakness of the euro in but narrowing fiscal deficit. On the other hand, it recent months. noted that import demand was in good part Central Bank of Malta, Quarterly Review, September 2000 5 oriented towards capital goods and industrial year rather than in 2000. However, an excessive supplies, inflationary pressures were subdued, rebounding of domestic demand should be and interest rates on the component currencies of curtailed by the tightening of the fiscal stance. the Maltese lira basket remained steady. For this reason, the Central Bank kept official interest Against this economic scenario, the Central Bank rates unchanged during the June quarter. The expects Maltas real GDP growth rate in 2000 to be Bank, however, continues to monitor closely the moderately higher than that estimated by the Bank effects of developments in the countrys for 1999, though this will largely depend on the balance of payments position and in interest extent to which rising oil prices continue to erode rates abroad. the profitability of the energy and transport sectors. The unemployment rate is expected to The Central Banks projections for 2000 continue stabilise later in the year, while inflation may be to indicate that economic growth will be strongly somewhat higher than in 1999, conditioned by underpinned by export activities. Domestic domestic demand developments and by an demand may recover moderately on account of increase in imported inflation fuelled by higher oil increased construction activity, in part reflecting prices. In these circumstances, the Central Banks the commencement of a number of capital monetary policy will continue to strive to achieve projects. The timing of expenditure on these long-term balance in macroeconomic conditions, projects is, however, as yet somewhat uncertain. particularly with respect to price stability and the They may impact more strongly on demand next sustainability of the balance of payments. 6 Central Bank of Malta, Quarterly Review, September 2000 policy in order to pre-empt inflationary pressures, 2. THE INTERNATIONAL particularly in view of rising oil prices. In Japan, a ENVIRONMENT number of economic indicators pointed to the initial stages of a recovery in the first half of this year. The World Economy During the second quarter of 2000, the world In the meantime, economic recovery continued to economy continued to rebound strongly from the gather momentum in almost all the other Asian 1997-98 slowdown associated with the crisis in countries, except Indonesia, while most countries emerging-market economies. Indeed, the major in South America also continued to recover new risk was that the increasingly rapid global strongly. expansion would gather an excessive pace. Against this background, the IMF was projecting The United States economy continued to expand world-output growth of 4.7% in 2000, up from vigorously during the quarter under review, with 3.3% in 1999. GDP growing at 6% on a year-on-year basis, compared with 5% in the first quarter of 2000. The US economy continued to register above- This growth was fuelled mainly by strong potential growth, while economic recovery in the business investment and inventory building, euro area strengthened further. Although the which outweighed a slower growth in consumer inflation environment remained relatively benign, spending. Productivity, meaning the output per central banks continued to tighten monetary hour of workers outside the farm sector, rose by Table 2.1 INTERNATIONAL ECONOMIC INDICATORS Inflation Real GDP Current account balance (Consumer prices) % change US$ billions % change 1 1 1 1998 1999 2000 1998 1999 2000 1998 1999 2000 Canada 3.1 4.2 4.3 1.0 1.7 2.1 -11.1 -2.9 3.0 United States 4.3 4.2 4.9 1.6 2.2 2.5 -221.0 -340.8 -444.3 Japan -2.5 0.3 1.7 0.6 -0.3 0.1 120.8 107.0 117.5 France 3.2 2.9 3.7 0.8 0.5 1.3 40.7 37.7 32.5 Germany 2.2 1.5 2.9 0.9 0.6 1.2 -4.7 -19.8 -10.5 Italy 1.5 1.4 2.9 2.0 1.7 2.2 23.2 12.0 17.3 United Kingdom 2.2 2.1 2.9 3.4 1.6 2.0 -1.1 -20.7 -25.7 Advanced countries 2.4 3.2 4.2 1.5 1.4 1.9 43.1 -133.7 -212.9 Developing countries 3.2 3.8 5.6 10.1 6.5 5.7 -89.9 -32.7 -11.6 Countries in transition2 -0.7 2.4 4.9 21.8 43.7 19.5 -24.8 -5.3 -7.5 1 Forecasts 2 Includes countries of Central and Eastern Europe and the former USSR. SOURCE: IMF, World Economic Outlook, Spring 2000, Autumn 2000. OECD, Economic Outlook, June 2000. Central Bank of Malta, Quarterly Review, September 2000 7 Chart 2.1 SHORT-TERM INTEREST RATES * (monthly averages) 8 7 6 5 4 percent 3 2 1 0 JFMAMJJASONDJFMAMJJASONDJFMAMJ 1998 1999 2000 United States United Kingdom Germany Japan Italy Euro area * TYPICAL THREE-MONTH MONEY MARKET RATES IN MAJOR INDUSTRIAL COUNTRIES SOURCE: OECD FINANCIAL STATISTICS AND IMF 5.1% year-on-year during the quarter, the highest throughout the quarter.