Political uncertainty risks impacting public finances, Central Bank warns

The Central Bank of Malta’s positive forecast of the economy and public finances is dampened by the risks caused by recent political uncertainty

Shops in Valletta have felt the brunt of the political crisis as regular protests have kept people away from the capital
Shops in Valletta have felt the brunt of the political crisis as regular protests have kept people away from the capital

Political uncertainty risks having an impact on public finances if it is prolonged into the new year, the Central Bank of Malta has warned.

Turmoil erupted after the Prime Minister’s former chief of staff Keith Schembri was linked in some way with the murder of Daphne Caruana Galizia by two key suspects.

The developments have rocked the political establishment, forcing Joseph Muscat to announce that he will step down in January, amid protests calling for his immediate resignation.

In its outlook for the economy released on Monday, the CBM said it expected economic growth over the coming years to remain strong but warned that the recent escalation of domestic political uncertainty could compound the risks from abroad.

The CBM said that in the short term, the internal turmoil could lead to a possible postponement of private consumption and investment.

“The risks to public finances are tilted on the upside in 2019, but thereafter, especially in 2020, are tilted to the downside should the risks emanating from lower domestic demand materialise,” the CBM said.

Beyond the risks posed by the domestic political turmoil, the CBM expects economic growth over the coming years to average at 4.1% between 2019 and 2022.

“Growth in private consumption and government expenditure is expected to remain robust, while investment is expected to recover from the contraction recorded in 2018,” the CBM said.

However, it revised downwards its previous projections for GDP growth this year due to weaker than expected outturn in private consumption data in the first half of the year.

“Over the projection horizon, GDP growth will be supported by domestic demand, mainly reflecting robust growth in private consumption and investment. Conversely, the net export contribution to growth is expected to be negative in 2019, reflecting the weak international environment, and a pick-up in import growth as a result of strong domestic demand,” the CBM said.

It expects that the contribution of net exports should turn positive in 2020, reflecting acceleration in export growth and lower imports of capital machinery as investment.

“The pace of job creation is set to moderate, but remain strong. The labour market is expected to remain tight, with the unemployment rate projected at 3.8% by 2022,” it added.

Inflation is projected to ease slightly in 2019, before edging up to 1.9% by 2022, reflecting a pick-up in services and non-energy industrial goods inflation.

Government finances are expected to remain in surplus over the coming years and the debt-to-GDP ratio is projected to decline to just over 35% in 2022.

The CBM said that its forecast incorporates the measures announced in the Budget for 2020.

However, the CBM warned of downside risks on economic activity and inflation, particularly as a result of the impact of Brexit.

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