The CEO of HSBC Malta sees the glass of the Maltese economy half full. Not only that but he adds verbatim: “There are a number of commentators and observers who have a political view, which tends to cloud their comments on the economy. If you are positive you are pro-government; if you are anti-government, you are anti- economy.”
It is always unrealistic to depict a complex situation in such black and white terms, as if to suggest that there could be no objective observers and commentators who can have a view of the economy different from the rose-tinted one depicted by the HSBC chief.
By doing so, the Governor of the Central Bank has been placed in the anti-government box. Two days before the HSBC head’s interview was published the Governor announced his decision on local interest rates following a meeting of the Monetary Policy Council. The press release stated: “The Council expressed concerns that the GDP growth was driven by domestic demand, with external sector posting a negative contribution. The widening of the current account deficit, in turn, would indicate an excess of consumption. These concerns will have to be taken into consideration as the Council reviews the monetary policy stance going forward.”
Coming hot on the heels of other warnings regarding excessive consumption and fall in savings ratios, the Governor registered his express concern that growth, small as it may be, is based on unsustainable internal factors rather than the more desirable type based on production and exports. Consequently, he warns that monetary policy will have to be tightened soon by raising interest rates to discourage consumption and promote savings. Long term bond investors should take due note.
In short, what HSBC chief is seeing half full the Central Bank Governor is seeing half empty. Does that merit labelling the Central Bank Governor anti-government because he exercises independence of judgement, which his position requires by statute and by ECB regulations?
The reason for the different points of view is in reality not hard to find and is directly linked to the vantage point of the respective position of the two senior bankers.
The Governor is responsible for the entire spectrum of monetary policy, which takes account the overall balance between savings and investment, production and consumption, internal and external demand, inflation, foreign reserves and employment. The only tool left at his disposal to exercise monetary policy function is interest rates. In the good old days when the Central Bank was also the regulator of the banking sector, the Governor had the very important tool of moral suasion, rendered more effective by the backing of a legal armoury available to a Regulator.
If the Governor ever felt that the banks’ lending policies regarding consumption loans were unduly stimulating demand thus creating a threat to price stability and balance of payments sustainability, a meeting over lunch with the CEOs/chairmen of the banks was normally enough for the banks to take note and adjust their policies in line with wider macro-economic objectives rather the narrow view of their own bottom line.
Once regulation migrated to MFSA, which is not tasked with the responsibility of monetary policy or other macro-economic objectives, this moral suasion tool has lost its punch. Banks have consequently lost the overhead controls to attune their own policies with the wider economic objectives.
As head of a commercial bank, the CEO of HSBC sees an opportunity where the Governor perceives a threat. The excessive liquidity of the Maltese economy should cause sleepless nights to whoever is tasked with executing monetary policy but provides banks with an opportunity to sell financial products.
The over-consumption mode of the consumer is an opportunity to promote loans for big-ticket items, from homes to yachts, from cars to home furnishings. On the other hand, for the Governor such over-consumption is a threat to the stability of the foreign reserves and a source for apprehension about a ballooning deficit in the balance of payments.
The absence of opportunities in the productive sector means that the banks have limited demand for business loans outside the personal and property sector and therefore find themselves with more capital than their business requires, leading to over-generous dividend policies to return such excess capital to the shareholders. Such aggressive dividend policies in an unsophisticated and over-liquid market like ours, causes dangerous equity asset price inflation which in normal circumstances, whoever is responsible for monetary policy would wish to avoid by using moral suasion over banks to trim down their dividend distributions.
This half full half empty complexity makes me question the wisdom of divorcing bank regulation from monetary policy. Without effective moral suasion the Central Bank has no tools left to give effectiveness to its monetary policy, and the result of all this is a run-away asset price inflation that could well cause our economy to over-boil.
If one needs a contemporary example of what happens if the economy over-boils one could well look at the current experience of Iceland where a deficit of 15 per cent of the GDP in the Balance of Payments instigated high interest rates, which attracted hot investment money that suddenly rushed out, crushing the Icelandic economy as soon as it became evident that the rate of exchange of the Icelandic krona was unsustainable.
Rather than argue whether the bottle is half full or half empty, our senior bankers would do well to put their heads together to see how they can fill the bottle close to its capacity.
www.alfredmifsud.com