Uncertainty in certain sectors of the economy is the main cause behind a decline in bank loans to businesses, according to the Chamber of Commerce, Enterprise and Industry.
Shifting the blame away from the relatively high interest rates on loans charged by the commercial banks, the chamber said the subdued demand for credit came from larger businesses.
“Uncertainty has led to a reduced appetite for investment in certain affected sectors such as manufacturing, import and distribution,” it said.
The organisation was reacting to the warning by Central Bank governor Josef Bonnici in Parliament on Monday that insufficient credit growth could threaten economic forecasts.
At the end, it is quite probable that the drop in credit is bad news primarily for the banks themselves
Opinion is mixed on the reasons for the lack of credit, with Prof. Bonnici laying part of the blame on the banks’ high interest rates and economist Gordon Cordina arguing the development could also be an adjustment to a past of over-reliance on bank credit by business.
The growth in bank lending slowed down year on year since 2009 and entered negative territory by the end of last year, according to the Central Bank.
It is a trend that mimics that of the better performing eurozone countries that also went into negative territory at the same time as Malta.
The figures show that the slowdown in credit growth was more pronounced in the construction sector where it languished in negative territory for more than two years.
The chamber believes large manufacturing firms were losing business because of high operating costs, mainly driven by the third most expensive energy rates in Europe. “New product lines are being channelled to other more competitive countries or regions.”
Another concern was the unfair competition for the import and distribution sector caused by the illicit importation from Sicily of goods without paying VAT and other taxes.
This has diminished the “appetite for investment” in this field, the chamber said.
Elaborating on his remarks, Prof. Bonnici said the negative turn in credit growth last year was driven mainly by weak lending flows to the non-financial corporate sector. “The household mortgage market has been the only sector to register a positive performance,” he said.
However, he does not believe the problem is insufficient demand by borrowers. He pointed to the success of the Jeremie programme, an EU-guaranteed loan programme for businesses run by Bank of Valletta, which had to be “topped up” by additional funds on several occasions.
“Recent intelligence from the Bank Lending Survey suggests that demand for credit by small and medium enterprises has been positive,” he added, acknowledging that demand was more difficult to gauge than supply.
However, he did mention the relatively high interest rates on commercial loans as a possible factor that discouraged businesses from applying for a loan.
“Bank lending rates to Maltese businesses remain relatively high compared to the euro area average, especially in the case of SMEs,” Prof. Bonnici said.
Not everyone agrees that the drop in credit is necessarily a signal of economic stress.
Dr Cordina noted that the economy was growing through new sectors, such as remote gaming, ICT and financial services.
“These are not at all credit hungry but are indeed cash generators, especially if their activities rely mainly on human skills rather than investment in heavy machinery and equipment,” he said
While pointing towards the success of the Jeremie scheme as evidence that small businesses needed cheaper loans that asked for less collateral, Dr Cordina insisted domestic banks should not wait for EU incentives and guarantees to offer more of this type of financial product.
“At the end, it is quite probable that the drop in credit is bad news primarily for the banks themselves because they will find that their main product line, namely credit to the local economy, is facing a shrinking demand.”