The Governor of the Central Bank of Malta has called for changes to investments in sovereign debt, saying that it would be advisable for “stable alternative options to be identified to complement current practice”.
Speaking during the annual dinner organised by the ifs-Malta (Institute of Financial Services), Josef Bonnici said that further diversification of Malta’s sovereign debt market may be warranted.
“In the aftermath of the sovereign debt crisis there is a heightened recognition that a more diversified investment portfolio would reduce the risk exposure related to the bank-sovereign nexus,” he said.
“Long-term placements with certain international wealth funds, for example, would ensure that government securities can have a more diversified investor base and possibly reduce the government’s borrowing costs at the same time.”
Prof. Bonnici took competitiveness as the central theme of his speech, conceding that diversification was often more difficult to achieve in relatively small economies.
“However, the degree of diversification in the private sector in Malta is remarkable and has resulted primarily from the growth of financial services, internet-related services and aviation servicing, along with the reorientation of both the tourist sector and manufacturing,” he said.
He warned, however, that Malta’s competitors were starting to benefit from the structural reforms and internal devaluation that they went through in response to the impact of the financial crisis on their economies.
“Costs in the stressed countries have been levelling off, so that Malta’s competitive advantage has somewhat narrowed,” he warned, referring in particular to Malta’s labour costs.
He also talked about the success that Malta had in implementing significant structural change, by diversifying into new growth sectors such as aviation services, pharmaceuticals and internet related activity, as well as upgrading its investments in traditional sectors.
The recently introduced incentives for female participation will continue to steer our labour market in the right direction
“For example, the tapping of new source markets for tourists in European cities that were newly serviced by low-cost airlines allowed the hospitality sector to overcome the recession-driven weak demand in already serviced markets. Similarly, the financial and other services sectors continued to expand, thanks to the right conditions for growth, including the appropriate legislative environment.
“The recently announced initiative to create space for a new commercial activity in the form of facilities for Islamic banking is consistent with this vision for Malta,” he said.
However, he also expressed frustration that the promised development bank had not yet materialised, saying that Malta lacked a consistent supply of long term finance for SMEs or to finance structural, economic, social and environmental policies in connection with the long term financing of priority projects.
“If we look at other countries, such as Germany and France, they managed to cater for SMEs as well as for other environmental and infrastructure investment through promotion or development banks.
“A development bank would contribute to economic growth by funding sectors and projects that are not catered for by commercial banks on their own. The Central Bank looks at such an initiative as a necessary diversification of our financial base. I understand that progress is being made on this initiative and I find this to be a very positive development,” he said.
Looking ahead, Prof. Bonnici said there were a number of reasons for being positive and optimistic about Malta’s potential growth in the future.
“In contrast to various developed countries, Malta has some structural issues that, if addressed, can provide opportunities for an on-going momentum to growth. Take for example the labour participation rate in Malta.
“Although it is among the lowest in the eurozone, Malta has gone a long way in achieving progress on this issue. Over the past 10 years, Malta registered the largest increase, among the Member States, in the female activity rate, which rose from 36 per cent in 2004 to over 50 per cent this year.
“The recently introduced incentives for female participation will continue to steer our labour market in the right direction, also boosting Malta’s potential economic growth.
“At the same time, we also observe a higher number of foreigners who are contributing to economic activity in a variety of sectors,” he said.