Summary: KEY ISSUES Malta has weathered the crisis well and its economic outlook is stronger than that of the euro area as a whole. Real GDP growth accelerated to 2.5 percent in 2013, and the external position remained strong. This reflects a relatively diversified economy and a stable banking sector, which withstood well the economic slowdown and shocks from international financial markets. The stronger than expected growth pushed the fiscal deficit in 2013 below 3 percent of GDP. Remaining vulnerabilities stem from high public debt, elevated non-performing loans, high cost of capital, and the need to maintain competitiveness. To raise growth in a sustainable manner and reduce vulnerabilities, the policy priorities are: ? Strengthening fiscal sustainability. The budgetary targets for 2015–2017 are welcome but meeting them is subject to risks. The authorities need to continue the progress towards meeting the medium-term objective of a balanced budget in structural terms. In particular, broad based reforms of expenditures, pensions, healthcare, state owned enterprises (SOEs), and fiscal governance are the priorities. ? Maintaining financial stability. Bank regulatory and supervisory frameworks have been recently strengthened in several areas. The largest banks passed the ECB’s recent Comprehensive Assessment (CA) without a need to raise additional capital. Priorities to preserve financial stability include: (i) vigilance over risks from the high concentration of core domestic banks’ exposure to the property market and high NPLs; and (ii) further improving the bank regulatory, supervisory, and contingency frameworks. ? Enhancing competitiveness and reducing the cost of capital. The priorities include improving labor participation and productivity, and reforming the judicial system to enhance the business environment. Measures, such as developing and implementing a strategy for NPL resolution and implementing the planned credit registry, will help lower the cost of capital.

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