Business activity rebounds after elections

- domestic, export sectors positive

In its review of this year’s 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 in April.
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 in Iraq.
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 expenditure.
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 Review’s 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 sector’s 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 Bank’s 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 Malta’s relations with the European Union, and the economic policy disciplines implied by membership. The Bank’s 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