Malta is expected to end the year with marginally negative growth rate, the Governor of the Central Bank, Michael C. Bonello, said today.
"The Central Bank's most recent forecast for the Maltese economy, which was based on information available in February and which anticipated GDP growth in a range of 0.5% to 1.1% for 2009, is currently being revised to take account of the further deterioration in external conditions since then.
"Everything now suggests that, barring unforeseen developments, this year is likely to end with a marginally negative growth rate," Mr Bonello told a conference organised by Finance Malta.
He added that just as there were increasing signs internationally that an adverse feedback loop between the real economy and the financial sector had taken hold, posing new challenges for financial stability, so also was it likely that Maltese banks would become increasingly susceptible to the negative feedback from the expected further slowdown in the Maltese economy.
"Non-performing loans, which had fallen to more manageable levels in recent years, are likely to increase as debt-servicing capabilities weaken. This expectation is linked in particular to the significant concentration risk to which banks in Malta are exposed stemming from both a direct exposure, and indirectly through collateral, to the construction, property development and mortgage sectors. Taken together, property-related loans account for almost 60% of loans by the banking system to the private sector," Mr Bonello pointed out.
He added that profitability levels were also likely to be affected by slower growth in business volumes and squeezed interest margins due to increased competition for customer deposits. And as the repricing of risk was expected to continue in the near term, further downside pressure on earnings growth would come from write-downs in investment portfolios resulting from fair value adjustments.
Mr Bonello said that while prudent credit risk assessment process had long been a characteristic of banking practice in Malta, the importance of ensuring that the risk potential of assets was adequately understood and controlled needed to be emphasised at this time of uncertainty.
"The results of such monitoring need to be translated into appropriate internal ratings, classifications and loss recognition to develop an accurate picture of credit quality. The concentration risk referred to earlier, combined with the prospect of a prolonged period of slow growth, also suggests that banks would do well to strengthen capital buffers further beyond statutory ratios."
Earlier, however, Mr Bonello praised the financial services industry for its growth and said the ingredients all seemed to be in place, for this industry to continue to prosper in the future.
Referring to the current international financial crisis, he said Maltese banks had weather the storm well.
"The steady supply of liquidity, combined with a sustained demand, have permitted the credit channel to remain intact, despite the ongoing global turmoil. As a matter of fact, bank lending to the private sector grew by 9.7% in the 12 months to April 2009, compared with 8.7% in the preceding 12 months," he pointed out.