IMF Urges Malta to Closely Monitor Local Property-Exposed Banks

Malta must closely monitor its banks, which are exposed to the local property market, and also needs to watch liquidity risks for financial companies abroad that do business there, the International Monetary Fund said.

The euro-area member has shown “remarkable resilience” during the European fiscal crisis, the Washington-based fund said today in a report. The island nation in the Mediterranean Sea has maintained one of the best growth rates and lowest unemployment rates in the euro area, expanding at 0.8 percent in 2012 as unemployment stood at 6.3 percent.

Risks from Malta’s large international banks “appear contained because of limited balance-sheet exposures to the domestic economy,” the IMF said in the report.

Still, “economic growth slowed in 2012 and remains below potential, reflecting a weak external environment and subdued domestic demand,” according to the report, part of an annual review. Fund directors recommended that Malta make “stronger efforts to monitor developments in all banks, given the size of the banking sector relative to GDP.”

While banks have performed satisfactorily despite turbulence in the euro area, and all banks report adequate capitalization, liquidity and profitability, banks are “heavily exposed” to the local property market and loan loss provisions are low, the fund said.

“Recent events in Europe have heightened perceptions about risks of hosting a large banking segment in a small country,” the fund said. A group including the European Central Bank and IMF in March agreed to a deal to pull Cyprus back from the brink of crisis, after banks heavily exposed to problems in Greece suffered huge losses.

The IMF projects that Malta’s real gross domestic product will climb 1.3 percent this year and 1.8 percent next. Growing domestic demand will drive the increase, the fund estimates.

Malta joined the European Union in 2004 and has been a member of the euro-zone currency bloc since 2008. The nation’s economy is 22 percent trade and communication, 18 percent industry and construction, and 44 percent other services, the IMF said.

To contact the reporters on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net; Rebecca Christie in Brussels at rchristie4@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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