An IMF report released recently, noted Malta’s improvements in the banking sector, along with its booming economy – all good news for the island. However, the same report also pointed out places that need continued improvement, noting that the high exposure to property-related loans and rising house prices, pose a risk to the financial system’s overall health and resilience. Similarly, a recent report from the European Commission indicated, that while Malta’s economy continues to grow, the country is challenged to ensure that its development remains stable over the long term.
There is plenty of good news: core domestic banks remain well-capitalised, liquid, and profitable; although both reports indicate that Malta has made only limited progress in addressing the IMF’s 2018 country recommendations. The biggest challenge remains housing and wage growth, and the goal is to make sure that any financial risk is contained.
“Core domestic banks’ high exposure to property-related loans, together with the rapid house price appreciation, poses a risk,” the IMF observed. Property prices in Malta have risen dramatically since 2014. Malta’s construction boom means that many foreign workers find jobs in Malta. Many of those foreign workers are from Turkey, and require domestic housing.
While foreign workers’ needs are good for the real estate market, and importing cheap labour is useful for the construction and restaurant sectors in the short term, where most foreign labour on Malta is found – the result is that this depresses wages across the board for all workers, leading to slower wage growth overall. (TACA construction company is one that has been noted by multiple sources to hire Turkish workers for wages below the minimum set by government. Most of these workers are engineers.)
Because there has been such an influx of foreign workers as well as foreign investors, there has been a shortage of affordable housing for them. The majority of the construction projects are focused on high-end luxury residences. Former Finance Minister, Tonio Fenech, notes, “The unemployment rate is low, but this does not mean that the level of wages workers are paid is adequate. Unfortunately, with the pricy rise in the property market, people with an average wage are finding it difficult to buy. Even rents are very high.”
While high rents aren’t a people pleaser, this is no cause for panic: most Maltese citizens either own their homes, or access rent-controlled homes – the latter accounting for about one-fifth of the total population. Nearly 80% of the Maltese own their own homes. Interest rates remain low, so buying a home is still on the table for most. Only a small percentage – about 3-4% of the total population – rent from the open market, and are therefore susceptible to rent hikes.
Malta’s government and the IMF remain concerned about the economy overheating, but noted that what weaknesses exist in the banking sector are limited to a few small banks, saying that “the system is sufficiently capitalised to absorb losses in the event of a severe macroeconomic shock, but risky exposures would lead to potential losses at a few small banks”.
“It is a challenge to meet the increasing demands of supervising the growing number of financial institutions, in an evolving and more complex regulatory environment. The MFSA (Malta Financial Services Authority) is substantially understaffed, which undermines its effectiveness and operational independence,” the IMF said. The IMF also levelled criticism in regard to Maltese bank supervision and regulation, echoing EU criticisms on the increase in permanent public expenditure with temporary income.
However, Prime Minister, Joseph Muscat, took exception to these reports, saying that they should be viewed in the context of the situations in other countries – comparatively – while also adding that the reports show Malta in a good light. While he acknowledged that Malta’s government has to continue improvements, he noted that “These reports are like the results of an exam, where the examiner tells you both where you went well and where you didn’t.”
“The local council and European Parliament elections are difficult. We need to do our best to determine what the people are feeling and to be in contact with them. It is this which is crucial, not surveys”, he remarked.