While new economic niches such as AI and digitalisation are a critical part of Malta’s future economic model, most such heavily tech-dependent operations encounter more obstacles given that they are likely to have limited property or tangible assets to offer as collateral to credit institutions. Nonetheless, two of the largest loans that have been secured so far under our Guaranteed Co-Lending Scheme have gone to two projects in AI and digitalisation, says MDB chairman Prof. Josef Bonnici.
Recent data suggests that the Maltese economy continued to grow but new challenges are taking their toll. From a banker’s perspective, what is your assessment of the current economic situation?
For a comprehensive economic assessment, we need a holistic view of the impact on all stakeholders. From a business perspective, the recent years have been characterized by extraordinary events, including a pandemic, a brief recovery, and the war in Ukraine. These brought a combination of adverse effects, including soaring commodity prices and persistent disruptions in supply chains that led to significant inflationary pressures.
Despite this challenging environment, the MDB witnessed numerous businesses of various sizes investing through its programmes. The MDB COVID-19 Guarantee Scheme played a pivotal role by helping them to resume operations once the lockdowns and restrictions were lifted. Encouragingly, over 35 per cent of these loans have already been repaid, and borrower defaults have been negligible. To me, this demonstrates the resilience of Maltese businesses, as they have successfully overcome this demanding test.
Are there any economic sectors where the current challenges are more pronounced?
While sectors like tourism, finance, remote gaming, and aviation have experienced remarkable recoveries and unprecedented success, some crucial fields, such as AI, digital activities, and sustainable investments, still struggle to access finance. These sectors face challenges due to their heavy reliance on technology, resulting in limited tangible assets for collateral. The MDB can play a vital role in addressing this market gap. Notably, two of the largest loans secured under the Guaranteed Co-Lending Scheme are dedicated to AI and digitalization projects. With these initiatives, we will support investments of over €12 million in these tech-driven economic niches, including service exports, which are pivotal for Malta’s future economic model.
The most critical threat is climate change
Higher interest rates are not making business life any easier…
As interest rates rise, financing gaps tend to widen. However, the affordability of a loan depends not only on the interest rate cost but also on other factors. By offering guarantees to commercial banks handling our financial instruments, we not only lower interest rates but also help reduce collateral requirements and extend repayment periods. In our role as a development bank, we have already supported nearly 700 businesses, mainly SMEs, employing over 40,000 people. While smaller businesses benefit from lower rates and reduced collateral, we also focus on funding major infrastructural projects. Providing longer repayment periods enhances the bankability of these investments, making them financially viable.
What are the key factors shaping the economic landscape at present, and how do you foresee these factors evolving in the near future?
The global economy faces multiple challenges, including soaring energy prices, food supply crises, rapid monetary policy tightening, subsidies, and inflation. However, the most critical threat is climate change, impacting industries with rising operational costs from resource scarcity, disrupted supply chains, regulatory shifts, changing consumer preferences, and reputational damage as stakeholders adapt their behaviour.
Do you see opportunity in this?
Climate change presents opportunities for innovation, green technologies, and sustainable business models. However, a significant financing gap exists, not limited to Maltese undertakings. Stricter EU-level regulations on sustainability, green financing, and reporting are expected to widen this gap. While government intervention is crucial, the private sector’s involvement is vital to address the challenge effectively. To support such projects, the MDB is redirecting its financing opportunities and collaborating with the European Investment Fund to access guarantees under the InvestEU program, with a specific focus on sustainability. This involves mobilizing the InvestEU guarantee indirectly and working towards becoming a direct implementing partner, subject to a comprehensive assessment coordinated by the European Commission. Additionally, funding sources are increasingly tied to sustainable investments, and the MDB is in the process of procuring a loan from the EIB under the climate action domain to support sustainable projects in Malta. Through these measures, the MDB aims to bridge the financing gap and promote sustainable development in the face of climate change.
How have recent crises on business affect the Bank?
The MDB was established to aid the economy and firms when conventional lending options fall short, unforeseen crises have further emphasized its importance. Despite challenging economic conditions, in 2022, the Bank achieved a milestone by generating an operating profit while maintaining a low and stable risk profile. These successes have motivated us to expand our financial portfolio and maximize our impact in these opportune times.
What do you attribute this result to?
I attribute this accomplishment to the Bank’s prudent operations, sound banking principles and appropriate financial practices. The recruitment of a first-class team of experts has, of course, been the backbone of the MDB’s success. The strengthening of the capital base of the Bank by the Government has also been a critical factor in the success of the Bank. I also would like to mention the appointment of a Board of Directors, including two representatives nominated by the MCESD, who have understood and encouraged the development of a new, unique financial institution that is intended to fill financial gaps.