According to Eurostat, OECD and the IMF, Malta’s private debt consisting of corporate (non-consolidated) and household debt is estimated at nearly 220 per cent of Gross Domestic Product (GDP) with government debt reaching 71 per cent of GDP.

Malta’s level of private debt is almost as high as in Spain, the Netherlands, Belgium, and Portugal.

Cyprus, Ireland and Luxembourg have higher private debt levels but Malta’s private debt level is higher than the eurozone average with the private debt level in the German economy estimated around the 115 per cent of GDP.

Malta’s private debt mostly consists of corporate debt and includes inter-company lending. The latter should allay any immediate concerns about the level of private debt since they do not impact the local banking system. In terms of household debt, this is well within the eurozone average and mainly represents mortgage loans secured by real property in a property market that remains relatively weak but which could be boosted by projects and schemes aimed at attracting foreign buyers.

The European Commission argues that Malta’s private debt is leaning heavily towards an “internal imbalance” with debt rising faster than the rate of economic growth. The economic literature, however, does not provide any conclusive evidence on the optimal level of debt and we are nowhere near the situation in Italy where, according to the Global Financial Stability Report of the International Monetary Fund, 30 per cent of corporate debt in Italy is owed by companies that are facing serious repayment difficulties. Also, there is no evidence to suggest that there is an alarming increase in credit in the local banking system.

So why should we be concerned about the high level of private debt in the Maltese economy? The answer lies with firms and households borrowing too much relative to turnover or income. The risk for overleveraged firms is that companies are restricted from further investment and instead concentrate on paying off loans. Seen from a macro perspective, such actions restrict economic growth and therefore employment opportunities. Reducing private debts becomes all the more difficult to sustain when economies slow down.

The risk for overleveraged firms is that companies are restricted from further investment and instead concentrate on paying off loans

Nevertheless, it would be wrong to conclude that the cause of the latest statistic on unemployment with the unemployed numbering 7,594 in October, up by 581 or 8.3 per cent, over the corresponding month in 2012, is somehow related to the private debt level in the Maltese economy.

The performance of Maltese banks remains satisfactory, despite the economy performing below potential. Local banks also report adequate capitalisation, liquidity, and profitability, and in contrast to a number of European countries, domestic banks’ deposits continued to rise this year.

The concern (in terms of asset quality) appears to be the banking sector’s exposure to the local property market but, as stated earlier, the property market could be about to attract renewed interest from overseas buyers. Such interest, if translated into real investment would be a welcome boost to the local economy, as long as this is accompanied by efforts to enhance the banks’ credit approval and risk monitoring systems that ensure better risk control and therefore a further improvement in the banks’ asset quality.

In my view, the major constraint facing the local banking system is the fact that lending opportunities are limited by the nature and size of our business.

Though small business in the local leveraged market shows some potential for growth, small and medium-sized enterprises (SMEs) in Malta still need support from EU schemes such as Jeremie to ease financial stress. The new programming period 2014-2020 will no doubt see a renewal of similar EU-funded schemes which provide easier access to credit by SMEs.

In fact, despite concerns expressed by the European Commission on Malta’s private debt level, providing easier access to credit will continue to be critical for private initiative and start-up situations.

High collateral requirements required from traditional banking sources will simply deter new enterprise.

Needless to say, local banks will need to be wary about bad debts also in regard to household debt. In Spain, for instance, the main cause of bad debts is the property market and property prices valued at less than mortgage value. Malta’s property market may be relatively weak at the moment but there are no signs of large numbers of local property owners being pushed into negative equity.

I mentioned earlier that economic literature does not provide conclusive evidence on the optimal level of debt. This notwithstanding, continuous monitoring of Malta’s private debt levels is paramount for avoiding the risks and malign effects of high private debt experienced by a number of eurozone member states.

Philip von Brockdorff is the head of the Department of Economics at the University of Malta.

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