Experts say Malta will weather financial storm

Financial analysts say Malta may have to strap itself in for a bumpy ride on the economic front but the financial system should be able to weather the prevailing international upheaval with relative ease.

The turmoil is expected to usher in a global economic recession, which will hit Europe and inevitably impact Malta negatively. However, financial experts in Malta seem to concur that local banks and the financial system in general are in a position to withstand the current crisis without any major hang ups.

The cautious confidence comes as global stock markets again spun into chaos yesterday following the decision by the US Congress to reject the $700 billion bailout package for Wall Street, the biggest since the Great Depression.

The sentiment was reflected, even if less dramatically, on the Malta Stock Exchange where banks, particularly, lost share value. Corinthia Finance plc saw €0.50 shaved off its share price but the dip only represents 0.5 per cent of the price quoted on Monday.

Bank of Valletta, on the other hand, lost €0.20 on its previously quoted price of €4.20, HSBC lost €0.15, closing at €3.11, while Lombard Bank lost just under €0.5, ending yesterday's trading session at €3.

Still, financial adviser Alfred Mifsud says the Maltese financial system has weathered global recessions in the past and is well positioned to do so this time round.

"Malta is obviously part of the world and we will feel the pinch on the economic and financial front but, while economically it may be too early to say what the damage will be, from the financial point of view the effects will mostly be felt on the investments which the Maltese have in the international financial markets," he said.

From the perspective of the local financial institutions, there is no "major default suggesting that this is something which will not pass," he added.

The biggest problems in this respect will be faced by the big banks, which have large investment portfolios.

However, the word problem, Mr Mifsud was keen to point out, is taken to mean that the banks' profits are going to suffer from the crisis and not that they face any real major threat to their operation.

In the same vein, Finance Minister Tonio Fenech reiterated in Parliament last night (see page 13) that the analysis carried by the regulatory authorities shows that the banks are in a relatively safe position.

Their investments are in stocks and bonds of financial institutions which have good ratings, he said, adding that both banks have a policy of diversification that safeguards them from major losses as a result of single institution crashes such as the recent bankruptcy of banking giant Lehman Brothers.

BoV, in fact, was exposed to the Lehman crash but The Times reported last Thursday that the investment in the financial giant only represented 0.5 per cent of BoV's portfolio. When contacted by The Times, a bank spokesman did not deny the report, implicitly confirming it.

Edward Rizzo, from Rizzo and Farrugia Stockbrokers, says that, while the timing is bad for BoV, which is expected to post this year's results by the end of October, the long-term outlook is that this should be no more than a blip for the bank and the financial system in general.

Most of the losses on the stocks and bonds held by the banks internationally will be paper losses on investments that have taken a dip as a result of international uncertainty.

In the long run, unless the international institutions in question go bankrupt, the banks' investment will be recouped in full, Mr Farrugia said.

Economic analyst John Cassar White concurs with the forecast regarding the financial sector but warns that the economic impact is likely to be very significant. "My worry is that people who are not into the international financial markets may not realise how serious this situation is," he said.

The slump in global confidence is likely to usher in a long recession faster in Europe, which will not spare Malta's open economy.

That is likely to affect the country's exports and tourism but, at the same time, consumption internally is likely to be affected from dwindling confidence and from investors who would have lost money on the international market over the past months, Mr Cassar White added.