Since its first appearance in December 2019, COVID-19 has rapidly circled the globe and eventually affected every continent except Antarctica. In general, pandemics are not only a serious public health concern, but also trigger disastrous socio-economic and political crisis in all infected countries.
The COVID-19 pandemic and the economic shutdown worldwide have disrupted billions of lives and jeopardises decades of development progress. As per the European Commission’s Summer 2020 Economic Forecast, published on July 7, the EU economy is forecast to contract by 8.3 per cent in 2020, then grow by 5.8 per cent in 2021.
The global economy has experienced 14 global recessions since 1870. As indicated in the accompanying chart, the World Bank projects that the COVID-19 global recession will be the fourth deepest during this period, and the most severe post-World War II.
In view of the serious disturbance caused by the pandemic, the European Commission set up the Temporary Framework for State Aid measures to support the economy in the current COVID-19 outbreak. The aim of this framework is to remedy the liquidity shortage faced by undertakings and ensuring that the disruptions caused by the outbreak do not undermine undertakings, especially small and medium-sized enterprises. This framework is separate from the additional funding introduced by European institutions to mitigate monetary policy, to aid hospitals and to develop a vaccine.
The temporary framework includes aid in the form of direct grants, repayable advances or tax advantages, aid in the form of guarantees on loans, aid in the form of subsidised interest rates for loans, guarantees and loans channelled through credit and financial institutions, aid for wage subsidies for employees to avoid lay-offs during the pandemic and aid for COVID-19 research, development and products. Certain conditions need to be satisfied to be granted this aid, which is available until December 31, 2020, unless further extended by the European Commission.
In Malta, the outbreak brought several sectors that drive the economy to a complete standstill. The economic repercussions may be disproportionately high for a country that is highly dependent on foreign trade and tourism.
The pandemic has also exerted its impact on the Maltese capital markets, which has a reputation of retaining stability even during financial crises. The corporate bond index on the Malta Stock Exchange showed a sharp decrease in investor confidence, especially during March to April 2020.
The global economy has experienced 14 global recessions since 1870
In view of this, the Malta Development Bank (MDB) has implemented the European Commission’s temporary framework to offer three schemes to local businesses hit by the outbreak. These are the following:
• The COVID-19 Guarantee Scheme (CGS), which provides guarantees to commercial banks to enhance access to bank financing for working capital requirements of businesses facing liquidity shortages because of the pandemic;
• The COVID-19 Interest Rate Subsidy Scheme, whereby all beneficiaries under the CGS are eligible for a grant of up to 2.5 per cent on the interest on the loan (provided under the CGS) for the initial two years of the loan;
• The COVID-19 Small Loans Scheme, where the MDB provides additional protection to the banks providing loans to smaller businesses.
Furthermore, there was a specific, ad hoc circumstance whereby the Malta Development Bank provided additional support to a local company. On July 8, Mediterranean Investments Holding plc announced that the European Commission had approved a bond subscription facility by the MDB to support the issue of a €20 million bond that this company was issuing. Upon this approval, the MDB was able to cover the part of the bond issue which remained unsubscribed by the market, up to a maximum of €18.7 million. The issuer did not make use of this facility eventually, as the bond issue was oversubscribed.
Despite the swift and comprehensive policies implemented by the EU and member states, this disease will continue to have a significant impact on the economy, at least for this year.
Many people wonder how long European institutions can keep pumping money to save the economy and whether the temporary framework will have to be extended if the outbreak goes on longer than anticipated.
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.
Noelle Micallef, analyst, Curmi and Partners Ltd.