Estimating a credit gap for non-financial corporations in Malta

Abstract

This paper documents two approaches that are used to estimate a credit gap, defined as the difference between actual developments in credit to non-financial corporations (NFCs) in Malta and a hypothetical path that would have been realised had the past historical relationships over the period 1995-2011 were to be maintained over the period 2012-2014. Both methods suggest that a credit gap emerged in 2012, which widened significantly in 2013 and 2014. As at 2014Q3, the credit gap is estimated between €680 and €830 million. In addition, the two approaches indicate that the credit gap will widen further over 2015-2016. Conditional on the projected path of NFC credit in the economic forecasts published by the Central Bank of Malta in December 2014, the credit gap is expected to widen to around €840 and €1,150 million by end-2016.