Judicious control of government expenditure was essential since some important government revenue streams may be past their peak and may need to be replaced by new initiatives, Central Bank of Malta governor Mario Vella has warned.
He was speaking at the annual Institute of Finance Services (IFS) Malta, the traditional venue for the speech highlighting the CBM’s concerns and endorsements about various aspects of the economy.
In his first speech since he was appointed governor, Dr Vella said the economy was doing well but added that this was partly the result of exceptionally strong government investment, with a key role played by EU funds, which had both a temporary and permanent effect as it created capital stock.
Addressing the audience of representatives from all the financial services in Malta, including audit and advisory firms, Dr Vella also warned that fast economic growth did not come without some pain and costs.
“Infrastructure development has not kept up the pace and translates into practical problems. There are no easy solutions to such problems. Building infrastructure takes time and adopting urban development policies is inevitably complex, especially in a very small island where every space is somebody’s back yard,” he said.
The governor spoke at length about the banking system, repeating the oft-mentioned mantra that the key to sustainability was asset quality. He noted that non-performing loans, especially to the non-financial corporate sector, declined by almost 12 per cent and that, as a result, the non-performing loan ratio declined to 6.5 per cent by mid-year and was expected to decline further to below six per cent later on this year.
However, he announced that there were proposals to give banks with NPLs higher than six per cent five years in which to bring them below that level, failing which the institution would be forced to “shore up its resilience through the accumulation of an additional capital reserve”.
He also reiterated his predecessors’ complaint that there remained scope for payment services charges within the banking system to respond to more competition for further pass-through of the current low interest rates to customers, noting that there had been “encouraging reductions in recent months”.
The CBM is also piloting changes to pre-insolvency procedures in an effort to curb unnecessary liquidations and save businesses that deserve a second chance through financial restructuring.
“We are also leading efforts to amend legislation to achieve more efficient contract enforcement procedures to address the long duration of NPLs on bank balance sheets. These initiatives will help us climb the admittedly steep ladder of international rankings measuring business efficiency,” he noted.
He did not ring any alarm bells about the construction and property sector, noting that the CBM was monitoring the situation closely. However, he warned that other asset classes needed close observation to avoid formation of asset bubbles.
“In the current low-interest rate environment, investors’ search for yield may stimulate excessive risk-taking behaviour. More investors’ education is needed to ensure that there is better appreciation of the risks of unrated corporate debt, especially where markets are somewhat thin,” he stressed.
He also spoke about the role of the CBM and said that its research capability was a priority.
“This enhancement of our capability to produce reliable knowledge will benefit all discerning stakeholders including the policymaker (who we are statutorily committed to advise) and the potential investor (who abhors any vacuum of knowledge concerning the target location),” he said.