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The post-COVID Maltese economy
19 Apr 2020

Amid all the current uncertainty engulfing global economies, few things about the future are certain, one of them is that the world we live in today is changing as billions of people globally are experiencing a tangible shift to their day to day life.

As we all adapt to this new normal, so will our economies. The Maltese economy will need to reflect important changes in production efficiency and consumer demands. Despite all the negatives, COVID could represent this generation’s opportunity to bring about positive change to our economy which will better allow it to prosper and grow sustainably into the future. The faster we can adapt, the smoother the economic recovery will be.

Save jobs now, ask questions later

Forget about 2020 growth rates, surpluses or deficits. The main economic focus of every government should be to save the highest number of jobs possible. The €1.8 billion financial assistance package recently announced by the Maltese government is almost exclusively targeted towards job retention and liquidity provision for local companies. The firepower is unprecedented, in essence, this package is almost 30% larger than the total planned expenditure on our health and education sector for the entire year.

Job retention is critical for two main factors. Clearly holding on to employees will allow local companies to kick start their operations rapidly once the pandemic subsides. More importantly, however, it allows salaried employees to keep generating income. This will help in deferring, rather than totally cancelling, future consumption.

This financial assistance programme will probably need to be extended to other sectors of the economy, particularly if this isolation period is prolonged and the economic impact keeps straining other businesses which are already struggling to retain their employees.

 

Too small to fail

Small, family-owned business are the backbone of our economy. These businesses tend to be high quality, long-standing businesses with very specific business models operating across a multitude of sectors. Because this crisis has a direct impact on both the supply and demand side facets of these businesses, many are facing an unprecedented situation which leads to a total dilution of their order book. The majority of these companies know that demand will return once the pandemic is over however this could take months. On top of this, short term liquidity has always been an issue for such entities and this is now evaporating fast. On the positive side, banks are being agile in their implementation of government-backed loans to support working capital issues.

The small size of our economy allows both banks and also the government itself to understand the problems being faced by these companies almost at a micro-level and offer adequate measures of assistance as deemed most effective. This happened in past crisis and no good quality business should be allowed to go under due to unforeseen cash-flow issues. The repercussion on confidence would be higher than the cost of short-term support.

 

Maintain a healthy capital market

The funding landscape of Maltese companies has changed significantly in the last decade. With banks facing tougher regulatory requirements on their lending books, many companies successfully turned to the local stock exchange to fund long-term projects and shore up their equity base. Compared to pre-financial crisis levels, the numbers are staggering, equity issuers have increased from 17 to 26 and companies with debt listed on the main listing of the Malta stock exchange have doubled from 22 to 45. Furthermore, actual debt issued by Maltese companies has almost quadrupled from less than half a million euro in 2008 to almost €1.8 billion today.

These numbers clearly highlight the pivotal role that the Maltese capital market is playing in ensuring that local entities can finance their growth. Given the implications, this aspect has on future funding needs of Maltese companies it is important to maintain a healthy capital market fuelled by adequate investor confidence.

Major Central Banks globally have been actively buying corporate bonds from capital markets for years now in a bid to inject liquidity in economies. The US Federal Reserve has even pushed the boundaries further last week as it announced it will start investing in poorer quality non-investment grade bonds. Another glass ceiling dogma for Central bankers.

Locally, the NDSF has been supportive of strategic investment in Maltese equities and corporate bonds in recent years. The fund is presently invested in 18 local equities to the tune of €88 million and slightly less than €7 million are invested in 15 Maltese corporate bonds. Despite this, the local exposure of the fund is concentrated in two major banking equities. Expanding the local investment pool of the dedicated NDSF portfolio will help to diversify the concentration risk of the sovereign wealth fund and simultaneously inject liquidity in the local market thus supporting investor confidence. This can be done without the government guaranteeing any debt or equity of private companies. The positive impact is magnified by the fact that the vast majority of the money invested in the local markets represent the hard-earned savings of local investor intended for the generation of additional income.

 

Nurture innovation, boost digitalisation

In a matter of days, COVID has managed to force digital change which CEOs and CTOs were toying with for years. Four weeks into this isolation phase people who never worked an hour off-site are now adapting to remote working, Zoom conferencing and Skype calls. Many are noticing office efficiency can be magnified once operational issues are settled. Imagine the multiplier effect that such digitalisation transition could have on our broader economy if we up the modernisation game.

Malta can benefit from a strong IT literacy in its service-oriented sectors. Coupled with a well-oiled ICT industry and a tradition for being nimble, our economy can be swift into adopting new technologic strategies that will better place our economy in a post-COVID world. Robotics, virtual reality, artificial intelligence, advanced manufacturing and biotechnologies are the sectors of the future.

 

Seek Value not Volumes

Even after COVID tourism and hospitality will remain essential for our economy. The Maltese islands will still be a wonderful place to visit. COVID could present us with the right justification for taking a pronounced approach towards a more balanced tourism policy based on more manageable volumes with higher spending. This shall not necessarily be to the detriment of the real-estate investment carried out extensively in recent years. If successfully executed, the modernisation of other economic sectors will still support the demand for rental property but with the benefit of a digital and more diversified economy. The opening up of the airport for all routes will take time and confidence for mass tourism will take even longer to be restored. This downtime could be invested in working towards a more sustainable and profitable industry.

Once this storm is over our economy needs to rapidly adapt to the new normal. IMF forecasts are encouraging but our strategic objective should be the attainment of sustainable growth for the future. In recent years, the Maltese economy kept on nurturing the foundations of a modern future-geared economy. The pandemic should be used to accelerate this transition.

 

Article was published on Sunday Times of Malta on 19 April 2020 and was written by Steve Ellul who is a Chartered Financial Analyst, a visiting lecturer at the University of Malta and Unit Head at BOV Asset Management.


The writer and the Company have obtained the information contained in this document from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate. BOV Asset Management Limited is licensed to conduct investment services in Malta by the Malta Financial Services Authority. 

Issued by BOV Asset Management Limited, registered address 58, Triq San Zakkarija, Il-Belt Valletta, VLT 1130, Malta. Tel: 2122 7311, Fax: 2275 5661, E-mail: [email protected], Website: www.bovassetmanagement.com. Source: BOV Asset Management Limited.

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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).