As a financial analyst I really appreciate the presentations made by the Central Bank Governor on current economic developments. The presentation made by Josef Bonnici on the publication of the 2012 annual report was a paradigm of clear economic thinking that puts common sense and prudence in the core of the way we should communicate on such matters.
The setting up of a development bank should now be a top priority
In the first part of his presentation the Governor gave a very lucid explanation as to why the Maltese banking model is so different from the Cypriot model. This is important as the international media could spread irrational panic in the market that may ultimately affect Malta.
The facts about our financial sector speak for themselves. But this does not mean that journalists will accept them as such. We need to continue to spread the word that our banking sector has a sustainable model since the local economy is served by ‘core domestic banks’ that are distinctly different from the other international banks that operate through Malta.
The views of the CBM on how the local banking sector can be strengthened are very sobering. The Governor rightly pointed out that in the short term “banks should be encouraged to increase their loss provision” and maturity structure of deposit liabilities should be lengthened. This may affect short-term profitability – a near obsession with most banks worldwide – but adds shareholder value in the long term and guarantees financial stability.
The Bank of England and the Bank of Ireland have similarly advised their banks to strengthen their capital bases by increasing provisions. The ‘extend and pretended’ strategy that some banks might have adopted in the past to boost their short-term profitability is detrimental to the sanity of any banking system.
The Governor went on to say that “banks should enhance their capital buffers through higher profit retention”. Put in a simpler way, retaining earnings to boost capital is preferable to distributing dividends. Banks often face unknown risks. It is a sad reality that all the banking crises we experienced in Europe in the last six years were not predicted by any of the stress tests that regulators demanded. It is for this reason that one cannot rely solely on the result of stress tests but should rather cultivate a culture where risk management is at the heart of how a bank is managed.
The subject of the local banks dependence of property for collateral was also discussed at some length. The local property market is going through a tough phase and it is a fact that most of the local bank’s collateral is in the form of commercial and residential property. The Governor very rightly made the point that although banks adopt prudent ‘haircuts’ to the value they give to hypothecated property, this does not obviate the need for additional provisioning. Banking on prudence is the best banking that one can practice in times where both local and internal economic conditions are challenging.
Turning to the state of the economy, one very interesting point made by the Governor was the distorting effect that the prices of accommodation is having on the HICP inflation index. I totally agree with Prof. Bonnici that the National Office of Statistics needs to beef up its resources to come up with better statistics that reflect what is really happing in our economy.
A rather worrying comment was that the unit labour costs in Malta are outpacing those in the euro area. The number of collective agreements signed recently will continue to fuel labour cost inflation with the risk of deteriorating our competitiveness. In the last several months productivity of Maltese businesses started to deteriorate when that of the euro are is improving. At the same time compensation per employee in Malta is accelerating at a faster rate than is the case in the eurozone. All these factors need to be examined by the MCESD as the Maltese economy continues to face formidable competitiveness challenges.
Leading indicators on the health of our public finances are also less encouraging than what was forecast when the 2013 Budget was presented in Parliament last November. The debt mountain continues to get larger especially as a result of the substantial debt of Enemalta. The annual deficit is also once again above the critical three per cent mark. There is certainly no place for complacency in this area.
Finally, the setting up of a development bank to put some sustainable structure in public infrastructural projects should now be a top priority.
johncasarwhite@yahoo.com