HSBC optimistic about Malta meeting targets for euro adoption

HSBC is optimistic about Malta's economic potential and ability to meet the Maastricht targets in time for the introduction of the euro in January 2008, its chief executive officer, Shaun Wallis, told a business breakfast last week.

The breakfast was the first of a cycle of Palazzo Capua Seminars organised by the Malta Today Group.

"I am not an economist, accountant nor Treasury dealer, but a long-time banker," Mr Wallis said; "my views are from the HSBC perspective."

The large local supply of cash/liquidity was "a great natural asset for the country's economic growth", Mr Wallis added. HSBC had seen continuing expansion in wealth creation and money supply, as well as corporate and personal borrowing to respectively finance business investment and private consumption.

"Malta's modern and competitive financial sector is well placed to meet the country's needs, and is relatively large compared to the nation's size," he continued. "New bankers flying in are a sign of growing prospects for Malta as an international financial centre."

With a "dynamic and diverse" economy, Malta's real gross domestic product (GDP) grew by 1.7 per cent between January and September 2005 (compared to EU's 1.9 per cent) - "somewhat below the rate needed to converge with the main EU economies, but still an improving trend". The inflation rate rose marginally to 2.9 per cent, while the trade gap widened - due largely to the export decline of one manufacturing company. However, tax revenues, advertising expenditures and foreign currency reserves increased last year, while foreign direct investment in the first nine months of 2005 reached the 2004 annual level of Lm146 million.

Progress on reducing the budget deficit and government debt contributed to an emerging feel good factor - "just as well, when set against this are the longer-term costs of pension and healthcare plans costs which need to be addressed as soon as possible, but all in good time."

HSBC's 'straw poll' this month of 867 senior executives showed that 65 per cent found their 2005 results better than 2004's.

The 40 per cent rise in property prices since 2000 did not cause HSBC concern "in some respects", while at 51 per cent, loan to value ratios were modest, as was average loan size (Lm30,000). There was no property 'bubble': instead he foresaw progressive convergence with relatively higher property prices in continental Europe.

However, global uncertainties - such as the oil price, or "wild cards" such as avian flu, terrorism presented a challenging international environment. Traditional business practices and employment arrangements were unlikely to endure, he warned.

Mr Wallis's assessment was more upbeat than the October 2005 International Monetary Fund (IMF) Malta Article IV Country Report. Highlighting four years of "languishing" growth from 2001 to 2004, the IMF warned that reversing increases in public debt was key. High-quality fiscal adjustment required "tough decisions" to lower public sector employment, shift part of health care financing to end users and rationalise the welfare system. Long-run fiscal stability hinged on "substantive pension reform", the IMF warned.

Unleashing Malta's growth potential needed reforms to address long-standing problems in the labour market, including releasing redundant public sector employment, enhancing human capital, boosting employment rates - particularly for women - and streamlining public bureaucracy.

While Malta was well placed to benefit from the adoption of the euro, provided fiscal consolidation was achieved, the strong and well supervised financial system "still required a number of additional regulatory measures, particularly regarding property-related financing, to strengthen its resilience".