Governor of the Central Bank Josef Bonnici.

The government should consider diversifying its placement of Malta Government Stocks (MGS) and aim for private placements with international wealth funds, according to the governor of the Central Bank Josef Bonnici.

This was not possible before because there is actually a decades-old ordinance which specifies that MGS could not be sold outside Malta – although they can be bought by foreigners. However, following a suggestion by Prof. Bonnici, changes to this legislation are being considered.

Traditionally, the relative majority of MGS in Malta were held by banks, but over time there has been a slow but steady trend away from this model. In 2013 they held just over 40 per cent of MGS, but individuals held around 32 per cent, compared with 42 per cent and 30 per cent respectively a year before (see chart).

The European Banking Union does not want such close ties between banks and sovereign debt because the failure of a government could then bring down otherwise- healthy banks.

The shift away from banks is partly due to the banks’ own strategies to diversify their treasury operations, but also because of the way that the Treasury favours retail investors, meaning that banks cannot even buy as many MGS as they want. Prof. Bonnici gave no indication that his proposal was based on a fear that the percentage taken up by the banks might decline even further – for whatever reason – to the extent that the MGS might not be fully subscribed. He only said that it was never wise to put all one’s eggs in one basket.

Traditionally, the relative majority of MGS in Malta were held by banks, but there has been a steady trend away

“The local banks hold significant amounts of MGS as this provides good income for them, given that the rates are very attractive compared to what else is available. But I think in the medium to long term, we need to extend the market a little bit. I have recommended that the government should consider private placements, as do other countries like Slovakia, which also sells its bonds to international wealth funds.

“We have not had to do so thus far, but I think in the future it is good to diversify a little bit. We should not just limit ourselves to the retail market, good as it is, and appreciated as it is by the whole sector,” he said.

Prof. Bonnici said this should not be a dramatic move, but that the wealth funds could be offered a “small fraction” of the total.

The Treasury had always kept at the back of its mind that joining the eurozone meant MGS could be of interest to overseas investors. In fact, issues were consolidated in order to bring the totals up to amounts that might interest invest-ors who would otherwise ignore them completely. Rates here have been very competitive compared to those in the euro area (see chart).

But Prof. Bonnici said that to attract investors, the MGS should be specifically offered to wealth funds, such as those in Kuwait and Japan.

“Otherwise, can you imagine a wealth fund which might want to invest €100 million but which would have to compete with the retail sector to buy the stocks? It does not make sense,” he said.

“In terms of risk, one needs to diversify a little bit and not rely on a very concentrated market. As the economy grows it needs more loans, and obviously there are limits. We should not have such constraints posed on our economic growth potential because at the end of the day, it could also be a factor that limits the potential growth of the country,” he said.

Sources familiar with the sector said there were pros and cons to the proposal, adding that the current auction system was fair and provided a level playing field to all participants.

“There may be benefits in having private placements especially when tackling certain niche areas, when approaching potential (new) investors and when some one-off opportunity arises.

“Of course, the downside is that while one may negotiate the conditions for a private placement, one might actually be better off taking the best bids through the current auction system!”

Consolidating Malta Government Stocks

The government has a total net outstanding long-term debt amounting to £257 million. In 2011 it launched a three-year programme to lengthen and smoothen the interest payments and redemptions of existing MGS. Around a third of the MGS maturing in 2014 were converted into an €83.7 million MGS issue maturing in 2019 and a further €64 million issue maturing in 2020.