IMF Upgrades Malta to ‘Advanced Economies Group’


As stated in The Malta Business Weekly, in the April 2007 edition of the report, Malta had been included in the ‘Emerging Europe’ group of countries that were at the time in the process of integrating their economies with those of the rest of the European Union.

While the upgrade in economic category is a mere technicality, it nevertheless speaks volumes for the fiscal progress the country has made as it aligned itself with the eurozone economies, and for the levels of fiscal discipline entailed under the Maastricht Criteria.

While Malta’s upgrade was primarily the result of its euro adoption, it also reflects Malta’s growing importance on the international stage.

The Advanced Economies Group comprises 31 countries – the entire eurozone 15, including Malta, ‘newly industrialised Asian economies’, the G7 major advanced economies, and nine ‘other advanced economies’. The other non-eurozone EU member States have remained in the ‘Emerging Europe’ category.

According to the report’s global findings, the world economy has entered “new and precarious territory”. The US economy continues to be mired in the financial problems that first emerged in sub-prime mortgage lending but which, the report notes, have now spread much more broadly.

Strains that were once thought to be limited to part of the housing market, the report observes, are now having considerable negative effects across the entire economy – with rising defaults, falling collateral, and tighter credit working together to create a powerful and hard-to-defeat financial decelerator.

In addition to serious problems at the intersection of credit and the real economy, the report observes, the United States remains plagued by profound errors in risk management among its leading financial institutions.

Problems that were once thought to be limited to issues surrounding liquidity in short-term money markets – and thought capable of being dealt with as such – have cascaded across much of the financial sector, triggering repeated waves of downgrades, upward adjustment of losses for both US and European banks, and now an apparently unstoppable move toward some significant degree of global deleveraging.

The effects, the report warns, on the rest of the world are likely to be significant. The IMF had already reduced its expectations for growth in Europe and much of the emerging world. The IMF’s revised global growth forecast is 3.7 per cent, down from 4.9 per cent in 2007, which represents a pronounced slowdown.

But, the report’s authors stress, achieving growth even at this level will require that most advanced economies experience only mild slowdowns and that many emerging economies be able to keep their rapid pace of growth largely on track.

Problems ailing the financial sector aside, the IMF sees two main short-run vulnerabilities for the global economy: housing and commodity prices.

Housing prices, the report notes, may adjust downward significantly in many other advanced economies. Although the report demonstrates the particular dynamics of the housing market in the United States are not matched by those in other countries, it also shows that housing may now play a more marked role in the business cycle more broadly – as the nature of mortgage financing has changed and as valuations have increased almost everywhere over the past 10 years.

The second potential vulnerability of commodity prices, and the report examines the role of commodity prices in contributing to the strong performance of many emerging and developing economies in recent years.

The report describes as “striking” that the surging tide of commodity prices over the past five years has lifted almost all commodity-based boats around the world. Although there is some reason to believe that the countries exporting commodities are now better able than in the past to withstand a serious downturn, the report cautions that commodity prices have fallen, on average, by 30 per cent during significant global slowdowns over the past 30 years.

Within the scenario, the report observes eyes turning to the world’s leading emerging economies – those that have come of economic age over the last five years by diversifying their exports, strengthening their domestic economies, and improving their policy frameworks.

But at the moment these emerging economies, the report notes, find themselves beset not by impending recession, but rather by inflation pressures. In particular, the financial dynamics of dollar depreciation and increasing financial market uncertainty have combined with continuing strong demand growth in the emerging economies and sluggish supply responses by commodity producers in such a way as to keep upward pressure on food and energy prices despite the darkening clouds over the global economy.

Turning to Malta’s group of Advanced Economies, the report notes how monetary policymakers in such economies, in Malta’s case the European Central Bank, face a delicate balancing act between alleviating the downside risks to growth and guarding against a build-up in inflation.

In the euro area, the report observes, although current inflation is “uncomfortably high”, prospects point to its falling back below two per cent during 2009, in the context of an increasingly negative outlook for activity. As such, the report finds that ECB could afford some easing of the policy stance.