The amount of loans from banks could be as much as €1,150 million lower by 2016 than it would have been given the projected economic growth, according to a research paper published by the Central Bank of Malta.

The calculations were done by Brian Micallef, a senior research economist in the Modelling and Research Department of the Central Bank of Malta.

He used different models and factored in variables to conclude that the credit gap was expected to widen to around €790 and €1,000 million by end-2015 and between €840 and €1,150 million by end-2016.

The credit gap is defined as the difference between actual credit to domestic non-financial corporations (NFC) and the hypothetical path this would have followed had past historical relationships over the period 1995-2011 been maintained.

Credit growth has been on a downward trend since 2008 and turned negative since 2012, widening significantly in 2013 and 2014. As at the third quarter in 2014, the credit gap was estimated between €680 and €830 million.

“Despite the resilient performance of the domestic economy, credit to the private sector has been on a downward trend in recent years, driven mainly by developments in loans to NFCs. From a sectoral perspective, the contraction in credit was mostly due to developments in construction, and to a lesser extent, to wholesale, retail and the hospitality industry. From a medium-term perspective, however, domestic banks have been gradually shifting their loan portfolio from NFCs towards households, with the share of the latter increasing from 37.8 per cent in 2005 to 47.6 per cent in 2014,” he wrote.

Credit growth has been on a downward trend since 2008... As at the third quarter in 2014, the credit gap was estimated between €680 and €830 million

“The decline in bank credit can be a combination of both demand and supply side factors. Evidence suggests that changes in the banking sector landscape, higher pricing of loans and somewhat tighter credit conditions, all of which supply related, have played an important role.

“In addition, the interest rate pass-through to lending rates to NFCs has declined after the crisis, with estimates suggesting that only around 50 per cent of the ECB rate cuts since September 2008 have been transmitted to domestic interest rates to businesses.”

Mr Micallef warned that the credit gap estimates were “a source of concern” for a country like Malta where the overwhelming majority of businesses are microenterprises or SMEs.

“In the absence of a deep and liquid capital market and without the access to external financing from parent companies, these are generally more reliant on bank financing than larger firms. If banks reduce their exposure to certain business lines, due perhaps to the pressures of a more difficult regulatory environment, to start-ups, SMEs or long-term financing of infrastructure projects, this could ultimately have an adverse impact on the economy’s supply potential,” he wrote.

The stock of credit to NFCs in mid-2014, at around €3.6 billion, was back to mid-2008 levels. As a ratio of GDP, this has declined to historical lows not seen since the mid-1990s.

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