Curmi & Partners

Safeguarding Malta’s capital markets in a corona world

By David Curmi 

If there is one thing that the coronavirus has done, it has almost instantaneously halted the generation of cash within businesses. And without cash, businesses do not survive. No matter how good a business model is, if cash dries up, businesses will fail. This is the key element that government is now battling, in a race against time. 

On the one hand, the economy has been put ‘on ice’ or perhaps in pause mode in order to save lives. Certainly a good thing. Yet, on the other, a key balancing act is underway where the government needs to do enough to keep businesses alive, not for the sake of supporting them, but to prevent an even bigger external shock. Its key focus must be to plough substantial amounts of cash back into the economy. 

Currently there is a common thread running through the collective mind. Conservation of cash. While savings or cutting costs may bridge part of the cash shortfall businesses are faced with, these are unlikely to be enough. The scale of the challenge is immense, made more difficult by the uncertainty of how long this will last for. 

Quite rightly, the government has focused its first efforts on those sectors at the epicentre of the storm. Businesses in tourism and retail, among others, have been forced to close and deserve assistance. Without government help, the temporary loss of business and jobs will become permanent, making for an even more challenged recovery when it does come. 

There are other considerations to make though. Malta’s capital markets have grown to be an important alternative source of finance.

Today, there are 43 different corporate groups that have raised finance in the form of bonds representing total bond issuance by corporates of €1.8 billion. Until recently, this was growing to be an important alternative source of funding, in addition to that provided by the banks, acting as an important contributor to recent economic growth. 

A closer look though at the type of companies that have issued such bonds reveals that some 23 issuers, with €637 million of bonds, operate in those same sectors which the government has put in the front of the queue. A further €431 million emanate from the property sector, a sector that is also to be hard hit.

Where has this funding come from? Directly or indirectly, it is the average man in the street that has provided this finance. Pensioners who have seen interest rates collapse and who needed to supplement their income with income from such corporate bonds. Banks, for their own books, do not participate here. They do so by lending directly. 

We are now fast approaching a crossroad. Unfortunately, due to the external shock of COVID-19, these companies are faced with an eyewatering drop in revenue figures, yet many of their costs are largely fixed.

Making ends meet is going to be a challenge of almost biblical proportions, made even more difficult by the lack of certainty on the how long this period will last. It is only the government that can help in any material way. No amount of cost cutting can and will plug the shortfall that they will be faced with.

It is at this point that planning needs to take hold. What if scenarios that policy makers are probably fast becoming expert at plotting on their overused excel sheets need to take into account scenarios beyond payroll assistance.

It is becoming increasingly clear, if this is possible at this junction, that the plan needs to be multifaceted, dynamic as things change, and sustainable.

The economic consequences that we are currently seeing will take months if not years to recover from. The risks that companies face potential bankruptcy scenarios is not an out of this world idea. Today it is fast becoming a real medium term risk. 

This is what planning must take into account. Not for the sake of the companies, but the thousands of investors who have funded them, and the hundreds of workers whose jobs depend on the existence of these companies. This is not about investment risk. We are well beyond that point. This is about surviving an external shock the size of a tsunami. 

It is this balancing act that government must get right. A balancing act that requires pausing the economy to save lives, whil also saving livelihoods. Ensuring capital markets see this period through without defaults is key to the latter.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.