An in-depth analysis by the European Commission of possible vulnerabilities of Malta’s financial sector found that the island does not face any immediate risks but warns that more monitoring and supervision is necessary to make sure that the property and banking sectors are kept in check.

It warned, however, that the long-term sustainability of public finances was at risk. Government debt amounted to 70.4 per cent of GDP in 2011, up from 60.9 per cent when Malta adopted the euro in 2008.

“The government is currently not experiencing problems with debt financing thanks to high domestic demand for issued securities, but sizeable state guarantees to state-owned companies, some of which not in a sound financial state, represent an important risk to the future dynamics of government debt. “Moreover, the long-term projections for both pension and healthcare expenditure in Malta significantly exceed the EU average.”

While commending the progress made in past years to lower the country’s deficit, the Commission reiterates the need for rapid reforms in the healthcare and pension sectors as these are putting the long-term sustainability of Malta’s public finances at risks. The in-depth analysis was carried out by the Commission following initial findings that the island was facing some economic risks, particularly in relation to its high private sector debt, current account balance and high government debt. While stating that its analysis showed that the situation was under control, it warned that more checks and balances were needed to avoid any possible slippages.

On the property market, the Commission states that despite some over-valuation and possible over-supply, “the property market does not appear to be exposed to an immediate risk of a bust”. Finding that over-valuation appears to have occurred in the years before Euro adoption, a correction has been taking place since then.

However, the Commission recommended “close monitoring of developments in the property market, in view of its exposure of the financial sector to it.” It also recommended that appropriate further measures are taken by the banking sector to strengthen loan-loss provisions in the domestically-orientated banks