Curmi & Partners

Financing the Recovery

By David Curmi

We are probably a little sick and tired of the way COVID–19 suddenly took an overnight stranglehold over our lives and livelihoods.  The economic and personal destruction that this virus has caused will leave a scar on many individuals and economies for years to come. Against this background it is a relief to see that some restrictions are now being lifted. Or is it?

Government has reached a very significant junction in its journey through this pandemic.  The burning question of how long to keep the economy on hold for remains key.  The fact that we are now seeing some releases reflects the great leadership exhibited by those in charge of the pandemic management, and the fantastic work undertaken by all those dedicated healthcare workers who sacrificed much to help the collective. 

There is much to gain, and lose, from the right or wrong decision at this point.  Releasing too early risks throwing away much of the good work, leaving an even more painful recovery thereafter.  Releasing too late risks inflicting permanent damage to the economy, and people’s livelihoods.  It is not an easy decision.  There is also the angle of the size of government’s war chest in fighting the battle.

Malta has been fortunate in this respect. The country has benefitted from a number of years of above average growth. This has brought our debt levels down from a high of 70.2% in 2011 to 43.1% in December 2019 (source: Eurostat).  Yet such numbers also mask some important facts. The absolute level of government debt has gradually increased in the last 10 years from €4.8bn in 2019 to €5.7bn in 2019 (source: Eurostat).  What has changed, substantially, is the growth and therefore the size of the economy over this period. From a total GDP level of €6.8bn in 2011 to €13.2bn in 2019 (source: NSO).  Yet 2020 is going to be a different story. Government finances will face the dual hit of rising absolute debt levels, a need for €2bn in new debt is being indicated, together with a substantial drop in economic activity, and therefore tax receipts. Our debt to GDP levels will therefore, quite expectedly move significantly higher in 2020. Yet, despite this, government finances remain in relatively good shape, supported by strong savings within the country. This should allow government to utilise the stock exchange to bridge the shortfall that it will be faced with this year. So far government has issued €541.7m of new government bonds (net of redemptions), primarily to institutions since these are extremely liquid and currently their spare cash is earning negative interest rates at the ECB.  At some point issuance to the retail investor will also be made.  The challenge will be pitching these bonds at the right interest rate level in order to attract such investors.

A highly liquid market, driven by strong savings is critical for the government. The fact that predominantly Maltese investors are buying up this debt adds an extra level of comfort and government should utilise this to its maximum potential.  Not only to protect itself from external shocks but also in a way that gives itself greater longevity in the recovery process. The road to economic recovery is long and arduous.  The external shocks suffered by the economy are significant and a full recovery is likely to be many years away. This is why borrowing for as long as possible should be one of the main strategies for government. In this way it will have more breathing space to repay such debt – a key consideration that today does not appear to be high on the agenda. 

On a different note, and in order to end with a positive twist, the COVID-19 virus has given us a once in a century opportunity to pause the economy and whilst on pause we are allowed the luxury of rethinking the way we do things.  Our beloved planet has been the biggest beneficiary. My one hope is that we do not lose this golden opportunity to change things for the better. There are simple wins like promoting greater use of Remote Working to reduce traffic congestion and improve the quality of air, or upgrading our tourist offering. Let’s be brave and allow ourselves to look back on this period focussing on the silver lining, and not the grey clouds.

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.