18 September 2014

Subsidising Energy ‘not a good economic policy’ – Central Bank Governor

 - Wednesday, 25 April 2012, 00:00

by Noel Grima

The reply given by the governor may not feature in the One News report on the news conference and the governor himself added it almost as an afterthought, but say it he did, thus demolishing a key plank in the Labour Party electoral platform.

The news conference, held at the Hotel Phoenicia, was to present the Central Bank’s annual report to the media and most of it consisted in rarefied comments about macroeconomy. But at some specific points, like the above, it touched on the bread and butter issues of the Maltese.

More was to come in the Q&A session at the end.

Economist and commentator Alfred Mifsud raised the off-the-balance-sheet parts of the national accounts.

Beyond what is classified as government debt, there is a wider swathe of debt which cannot not be ascribed to the government as well. A case in point, he said, is Enemalta, which has a debt of between €700 million and €800 million which is guaranteed by the government but does not form part of what is considered as sovereign debt.

Another case regards the forthcoming Special Purpose Vehicle with which the government intends to finance the Renzo Piano project for City Gate. This project can never earn the government any revenue.

Prof. Bonnici replied one must distinguish between proper government debt and debt through other causes which should be repaid. These other debts would have assets.

In his speech last November to the Institute of Financial Services, Prof. Bonnici had suggested the creation of a development bank which would be managed on a commercial basis and which would take over government initiatives not part of the core government functions. Such a bank could attract finance from abroad, such as through Islamic banking and the loans it provides would not be considered as part of the government debt.

This idea, he added, could take over the role being prepared for the SPV, however, he preferred to wait until the government explained more about the SPV it will be launching. There is so much on the government books that is not being optimized and some foreign investment could be attracted in this direction, rather than such initiatives being funded by the Consolidated Fund.

Mr Mifsud countered, with regard to Enemalta, that such a commercial approach would be based on the debts being repaid. Prof. Bonnici agreed: Enemalta must be economically viable. He gave as an example, the drydocks: when it was beyond help, it was sold and today is economically viable.

CBM vice-chairman Alfred de Marco pointed out that the way government debt is classified in Malta is the same as is done abroad – where an enterprise is not wholly owned by the government, its debts do not form part of the government debt.

Prof. Bonnici added that the country has assets, such as St Luke’s Hospital and White Rocks which must not be dissipated (or encroached upon, he added).

He was also asked by Mr Mifsud about the European Central Bank’s stance in this crisis. He claimed that with LTROs, the ECB was just buying time until the election season is over and governments can resume seeking a solution for the crisis in the eurozone.

Europe needs more fiscal consolidation, but it also needs some sort of eurobonds. One idea is to have bonds of up to 60% funded by the individual countries and anything above that funded by eurobonds. This idea has been supported by the German Monetary Council but curiously not by the German government.

Besides, the virtuous countries can contribute to eurozone instability as the weaker countries can. Germany is moving towards zero deficit but it should use this extra capacity to foster growth in the other countries.

Prof. Bonnici replied that the ECB has been very prudent, compared to other central banks, such as the UK’s, in its attitude to sovereign debt. The ECB only lends to the banking system through the LTROs and it is not lending to governments. The ECB consists of 17 central banks responsible to 17 governments and 17 budget deficits. Through the LTROs, it has provided financial liquidity to the financial market so as to stop it from collapsing.

He reminded the audience that prior to the last Greek election, employment with the government increased by 400,000 persons with its predictable consequences.

Monetary policy can indeed help, but it is the role of governments to take other action to bring back order into the national accounts.

Replying to questions by this newspaper, Prof. Bonnici said only ‘a couple’ of Maltese banks took up the ECB offer of LTROs and even then in a very limited manner.

Maltese banks are flush with cash and the Central Bank, through which the deal was made, monitored the collateral that was offered.

As regards supervision of the banking system, he reminded the audience this role is now that of the MFSA, which ‘is doing a very good job about it’ but he admitted there is work being done in an area which may fall in between the roles of the CBM and the MFSA. A Financial Stability Committee is being set up by the two institutions to deal with this area.

As regards the criticism that most of the ECB’s two offers of LTROs were taken up by Spanish and Italian banks which promptly invested in sovereign bonds, Prof. Bonnici said this was not so at all. A German bank may ask for LTROs for its subsidiary in Spain which may then invest in sovereign bonds but this is not like what was happening before the crisis hit Europe.

People in Malta have told him they could get cheaper finance elsewhere, not necessarily through the ECB’s LTROs but the main aim behind this initiative was to compensate for the fact that the velocity of circulation of money declined significantly as a result of the crisis.

Current economic environment

2011 was a year of continued recovery in the Maltese economy in the face of a further slowdown in major export markets.

The outlook is for slower growth ahead, and in that context, the preservation of international competitiveness becomes even more essential against a background of heightened uncertainty and volatility in the financial markets.

GDP growth moderated in the major economies during 2011, being negative only in the euro area, weak in the UK, US and Japan, and better in Brazil, India and China.


Unemployment remained high, averaging 10% in the euro area, 8.5% in the UK, 9% in the US, just under 8% in Brazil and around 4% in China and India.

Inflation remained elevated, highest at over 8% in India, under 6% in China, and 2% in the euro area. Mostly, this is driven by higher energy prices, which have been around the $110 mark for Brent crude for most of 2011.

In the euro area, growth is expected to remain weak. It averaged 1.4% in 2011, is expected to range from 0.3% to -0.5% in 2012 and to range from 0% to 2.2% in 2013. Even if this growth happens, there is concern it may be a no job creation growth. However, inflation seems to be peaking off, despite commodity price increases.

Also in the euro area, monetary and credit growth have decelerated, with interbank activity in decline. Key interest rates initially increased but were then lowered. The ECB continued to implement enhanced credit support measures.

Fiscal imbalance

The euro area fiscal imbalances continued to narrow, with Ireland’s decreasing from -30% in 2010 to -12% in 2011, still remaining the highest, followed by Greece (-10%), with Malta along with Luxembourg, Estonia and Finland being the only ones above the 3% mark.

Debt ratios however continued to increase with Greece’s going over the 160% ceiling, followed by Italy (120%), and Ireland and Portugal. Malta’s general government debt increased slightly from 68% to 72%.

At the same time, too, borrowing costs rose in countries like Greece, Portugal, Ireland, France and Italy while they have remained constant and quite low in Malta. Malta is privileged because 97% of its borrowing comes from Malta itself.

As for the Maltese economy, this has grown at a faster rate than that of the euro area and while the latter is still below the 2008 level, Malta’s has improved on the 2008 level after a dip in 2009.


Growth in Malta in 2011 was once again driven by net exports.

The unemployment rate has remained relatively low, far less than the euro area average, whether one takes the Eurostat and the ETC’s Labour Force Survey.

The rate of female participation rose from 35% in 2004 to 46% in 2011.

Inflation has decelerated but the positive inflation gap between Malta and the euro area is now turning negative.

Unit labour cost growth continued to be broadly in line with that of the euro area but the rate of compensation in Malta rose at a faster pace. However, productivity growth continued to exceed that of the euro area.

As regards wages and productivity, Prof. Bonnici warned that:

Caution must be exercised to ensure that compensation increases are driven as much as possible by productivity growth.

Consideration should therefore be given to measures that would permit a greater degree of flexibility in the application of the COLA mechanism.

In particular, COLA increases should be incorporated as part of the negotiations in collective agreements. The primary determinant of wage increases has to be productivity increases, if wages are to be sustainable.

COLA increases should only be mandated through a wage order for workers not covered by collective agreements.

At a time when various countries are reducing labour market rigidities, greater caution is therefore required when considering any upward adjustment to the current wage structure. (This could be interpreted as a direct reference to recent public declarations that the minimum wage must be increased).

Besides, the current account deficit has narrowed mainly on account of a reversal in the goods and services balance, reflecting a strong increase in exports of services and the growing share of services in GDP, particularly non-tourist services.

In the financial account foreign direct investment continued to increase, partly reflecting a steady rise in FDI flows into the non-financial sector.

The fiscal deficit fell below the 3% deficit/GDP ratio while the general government debt ratio reached 72% in 2011.

As to the CBM projections for the coming years, it points to growth deceleration in 2012, picking up in 2013. (The PDF of the presentation is available on the Central Bank’s website)

CALIBRI BOX ——————- CBM projections:

GDP: 2.1% in 2011, 1.6% in 2012, 2.0% in 2013.

HICP inflation: 2.4% in 2011, 1.9% in 2012, 1.6% in 2013

Unemployment: 6.4% in 2011, 6.3% in 2012, 6.1% in 2013

Current account as % of GDP: -3.3% in 2011, -3.5% in 2012, -4.9% in 2013

Fiscal deficit as % of GDP: 2.7% in 2011, 2.4% in 2012, 2.4% in 2013

General government debt as % of GDP: 72% in 2011, 69.4 in 2012, 69.4 in 2013.

(The Central Bank has revised Malta’s economic growth projection for this year to 1.6%. That is above a projection of 1.2% made by the IMF last week but below the projections made by the government in the Budget speech (2.3%).)


Risks to growth

The risks to the growth outlook are mainly on the downside:

Downside risks:

High uncertainty in the international and financial environment, particularly in the euro area countries

Sovereign debt crisis in the euro area

Prolonged slowdown in the euro area economies

Upside risks:

Depreciation of the euro could boost exports to the non-euro area

A resolution of the euro area sovereign debt crisis could lead to more business confidence.

In the domestic financial sector, deposits have continued to grow while credit to the private sector has expanded although at a slower pace.

Financial stability conditions remained positive. The domestic banking system emerged from the international financial crisis relatively unscathed:

Adequate capital buffers – capital levels remained well above regulatory minima

Solid liquidity ratios – well above the statutory requirements

Credit growth decelerated, but no signs of credit supply restraints

Positive profitability levels, despite some valuation losses.


Central Bank’s operational highlights:

The CBM continued to participate in the formulation and implementation of euro area monetary policy.

It continued to assess potential risks to financial stability and together with MFSA carried out a stress test on a major domestic bank as part of a EU-wide exercise.

It continued to oversee payment and securities settlement systems and to perform its currency-related functions, with large increases of payments processed through TARGET-2.

It realized an operating profit for 2011 of €52.5 million, compared with €57.6 million in 2010; however the latter included an amount of €11 million mainly reflecting a one-off payment related to the demonetization of the Maltese lira coins and notes.

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