FIFTY-FIRST ANNUAL REPORT AND STATEMENT OF ACCOUNTS 2018 © Central Bank of Malta, 2019 Address Pjazza Kastilja Valletta VLT 1060 Malta Telephone (+356) 2550 0000 Fax (+356) 2550 2500 Website www.centralbankmalta.org E-mail [email protected] Printed by Gutenberg Press Ltd Gudja Road Tarxien GXQ 2902 Malta All rights reserved. Reproduction is permitted provided that the source is acknowledged. The cut-off date for information published in this Report is 28 February 2019 except where otherwise indicated. Figures in tables may not add up due to rounding. ISSN 0577-0653 (print) ISSN 1811-1262 (online) MISSION STATEMENT The Central Bank of Malta is an independent institution, which forms an integral part of the Eurosystem and, as a member of the European System of Central Banks (ESCB), has the primary objective of maintaining price stability. The Bank is entrusted with all major central banking tasks, particularly that of ensuring the stability of the financial system. It seeks to carry out its statutory responsibilities in the public interest and is committed to performing its func- tions effectively, efficiently and economically to the highest level of integrity, competence and transparency. In this regard it will continue to: i. undertake economic and financial analysis and research to support the Governor’s partici- pation in the decision-making process of the Governing Council of the European Central Bank (ECB) and provide independent advice to Government on economic and financial policy issues; ii. implement the ECB’s monetary policy through market operations conducted within the opera- tional framework of the Eurosystem; iii. contribute effectively to the stability of the financial system by identifying and assessing systemic risks and imbalances, and making the appropriate policy recommendations; iv. formulate and implement a macroprudential policy to fulfil the tasks of the Bank as the national macroprudential authority; v. promote and support the development and integration of financial markets in Malta through oversight of market infrastructures and by ensuring the availability of cost-efficient securities settlement and payment systems; vi. provide an adequate supply of banknotes and coin (the latter on behalf of Government) to meet the demands of the public, while ensuring high quality and authenticity of the currency in circulation; vii. collect, compile and publish economic and financial statistics in line with international standards; viii. act as banker to Government and to the banking system; ix. hold and actively manage financial assets with the aim of optimising returns, subject to prudent risk management practices; x. actively participate in the ESCB, the Eurosystem and other relevant European Union bodies, including their sub-structures. Finally, as a member of the Eurosystem, the Bank continues to subscribe to the Eurosystem’s mis- sion, strategic intents and organisational principles. BOARD OF DIRECTORS* Dr Mario Vella Governor and Chairman Mr Alexander Demarco Mr Oliver Bonello Deputy Governor Deputy Governor Monetary Policy Financial Stability Ms Philomena Meli Director Dr Peter J. Baldacchino Director Dr Romina Cuschieri Director Professor Frank Bezzina Director Executive Committee* Investments Policy Committee* Management Committee* Dr Mario Vella Dr Mario Vella Heads of Departments Governor and Chairman Governor and Chairman Mr Jesmond Pulé (Chairman) Mr Alexander Demarco Mr Alexander Demarco Statistics Deputy Governor Deputy Governor Mr Stephen Attard Mr Oliver Bonello Mr Oliver Bonello Financial Stability Deputy Governor Deputy Governor Mr Alexander Borg Mr Markus Alefelder Mr Markus Alefelder Administration Chief Officer Chief Officer Investments Investments Mr Saviour Busuttil Information Systems and Mr Raymond A. Bonnici Mr Raymond Filletti Knowledge Management Chief Officer Chief Officer Corporate Services Financial Control and Risk Mr John Caruana Monetary Policy & Operations Mr Francis Bugeja Mr Robert Caruana and Eurosystem Relations Chief Officer Head Internal Audit Financial Control Department Mr Robert Caruana Financial Control Mr Alan Cassar Mr Denis A. Micallef Chief Officer Head Mr Herman Ciappara Financial Stability Risk Management Department Payments and Banking Mr Paul Farrugia Mr André Psaila Mr Silvio Galea Chief Officer Head International Relations Human Resources Investments and Government Securities Department Dr Pauline Lanzon Mr Raymond Filletti Legal Chief Officer Mr Damien Ferrito Financial Control and Risk Manager Mr Aidan Massa Finance Office Internal Audit Mr Jesmond Gatt Chief Officer Mr Gerard Grant Mr Denis Micallef Banking Operations Manager Risk Management Financial Risk Management Office Dr Aaron G. Grech Mr André Psaila Chief Officer Investments and Government Economics Securities Ms Rita Schembri Economic Analysis Audit Committee* Mr Peter Paul Tabone Currency Services and Security Dr Peter J. Baldacchino Chairman Ms Wendy Zammit Financial Stability Surveillance, Professor Frank Bezzina Assessment and Stress Member Testing, and Risks Models Dr Romina Cuschieri Member *as at 30 March 2019 THE BOARD OF DIRECTORS* (left to right) Back row: Professor Frank Bezzina (Director), Ms Philomena Meli (Director), Dr Peter J. Baldacchino (Director), Dr Romina Cuschieri (Director), Mr Herbert Zammit LaFerla (Secretary) Front row: Mr Alexander Demarco (Deputy Governor), Dr Mario Vella (Governor and Chairman), Mr Oliver Bonello (Deputy Governor). *as at 30 March 2019 * as at Board Audit Committee 30 March2019 Internal Audit, Compliance Governor Internal Audit Dr Mario Vella and Legal Division Department Chief Officer Internal Audit Legal Department International Mr Francis Bugeja Communications Relations Department Department Social Research Governor's Office Unit Deputy Governor Financial Stability Deputy Governor Monetary Policy Mr Oliver Bonello Mr Alexander Demarco Human Investments CHART* ORGANISATION Financial Stability and Statistics Division Financial Control and Risk Division Economics Division Banking Operations Division Corporate Services Division Resources Division Division Chief Officer Chief Officer Chief Officer Chief Officer Chief Officer Investments Chief Officer Chief Officer Human Financial Stability Financial Control and Risk Economics Mr Markus Banking Operations Corporate Services Resources Mr Alan Cassar Mr Raymond Filletti Dr Aaron G. Grech Alefelder Mr Jesmond Gatt Mr Raymond A. Bonnici Mr Paul Farrugia Financial Stability Monetary Policy & Information Financial Stability Surveillance, Investments and Currency Risk Economic Operations and Payments and Systems and Human Policy and Crisis Assessment and Statistics Financial Control Research Government Services and Administration Management Analysis Eurosystem Banking Knowledge Resources Management Stress Testing, Department Department Department Securities Security Department Department Department Relations Department Management Department Department and Risk Models Department Department Department Department Department Monetary Policy and Surveillance Monetary and Operational International Payment and Information Operations and Currency Crisis and Financial Finance Risk Asset Banking Technology Collateral Operations Management Assessment Statistics and Office Management Management Operations Services Management Office Office Office CCR Office Office Office Office Office Office External Stress Payments Financial Risk Market Regulation Core Testing and and Security Management Analysis and Oversight Applications Risk Models Securities Control Office Office Office Office Office Office Statistics Office Statistical Collection Projects and Government and Applications Securities Information Development Office Management Office Office Knowledge Management Office Bank Ċentrali ta’ Malta Central Bank of Malta Eurosistema Eurosystem Il-Gvernatur The Governor 29 March 2019 The Hon Professor Edward Scicluna Minister for Finance Maison Demandols South Street Valletta VLT 1102 Dear Minister LETTER OF TRANSMITTAL In terms of article 21 of the Central Bank of Malta Act (Cap. 204), I have the honour to transmit to you, in your capacity as Minister responsible for finance, a copy of the Annual Report of the Bank for the financial year ended 31 December 2018. Yours sincerely Dr Mario Vella CONTENTS GOVERNOR'S STATEMENT 13 I FINANCIAL AND ECONOMIC DEVELOPMENTS 17 1 The External Environment and the Euro Area 18 Key advanced economies Economic and financial developments in the euro area Commodities 2 Monetary and Financial Developments 27 Monetary aggregates and financial conditions Box 1: Access to finance in 2018 The money market The capital market Box 2: Overview of the financial assets and liabilities of the Maltese economy by institutional sector 3 Output, Employment and Prices 48 Potential output and business conditions index Gross domestic product and industrial production Construction The labour market Business and consumer surveys Residential property prices Consumer price inflation Costs and competitiveness Box 3: Economic Projections 4 Balance of Payments 66 The current account Tourism The capital and financial accounts 5 Government Finance 71 General government accounts Headline and cyclically-adjusted developments Box 4: The sustainability of Maltese Government debt II BANK POLICIES, OPERATIONS AND ACTIVITIES 81 1 The Conduct of Monetary Policy and Financial Market Operations 82 Monetary policy operations Collateral management Liquidity management Euro short-term rate Reserve management Market-making operations