Malta needs to bring down its debt ratio "at a faster pace", Central Bank governor Josef Bonnici insisted this afternoon.
"With a government debt ratio that is expected to exceed 70% in 2012 and 2013, it has become even more important to bring this ratio down at a fast pace. A strong case can be made for continued caution in Malta's fiscal policy and for further measures that would help to ensure the achievement of the government's targets," Prof Bonnici told a Finance Malta conference.
He said that the outlook for the fiscal situation called for continued vigilance and caution. Official projections of the deficit ratio for 2012 and 2013 had been revised downward, remaining below the Maastricht threshold of 3%. However debt forecasts had been generally revised moderately upward, to levels projected above the 70% level in 2012 and 2013, Prof Bonnici said.
The budget deficit ratio had fallen each year from the high of 4.6% reached in 2008. But with official forecasts of the debt ratio having been revised upward, it had become even more important to bring this ratio down at a fast pace.
Prof Bonnici noted that the recent IMF Article IV Report for 2012 acknowledged that "Malta has taken effective action to correct its excessive deficit, shoring up confidence in Malta's public finances", but it also recommended a return to a fiscal balance in the medium term.
The optimal way to reduce the ratio of the deficit to GDP, he said, was through economic growth. In turn, faster growth called for improvements in productivity. In this respect, there needed to be a greater degree of public awareness of the importance of productivity and competitiveness, and a consensus on steps that could be taken with minimal social disruption to enhance the country's international competitiveness.
In recent quarters, he said, Malta's unit labour costs had pulled ahead of those in the euro area.
He reiterated his argument that cost of living adjustments imposed by the government should not be superimposed on wage increases agreed in collective agreements, but should form part of the negotiation process, so as to ensure that firms are able to match all wage increases with productivity increases.
"A further requirement for economic growth is the smooth functioning of the financial system.
"Particularly during these turbulent times, continued economic growth depends also on the uninterrupted supply of credit by the financial sector to firms and households, and to that end the stability of the financial system is essential," he said.
"It is important to note that although its rate of growth has declined, bank credit has continued to increase in Malta, unlike the situation across the euro area, where widespread deleveraging by financial institutions has led to a contraction in the volume of credit."
The choices that must be made between the various national priorities have to be compatible with the economic and fiscal limits, and these limits can become less constraining only through improved competitiveness and faster economic growth- Prof Bonnici
The recent IMF report, he said, noted the strong performance of Malta's financial sector but also stressed the importance of strengthening the resilience of the sector.
"The elevated levels of credit and concentration risks call for stronger financial buffers, through higher provisioning and retention of profits. Such measures would strengthen the banks' ability to absorb potential shocks and would also allow them to prepare themselves for compliance with stricter Basel III regulatory requirements."
On the positive side, he said, credit risk was being mitigated by prudent credit standards and cautious lending behaviour on the part of the banks.
On the funding side, the resilience displayed by the banking system in the face of adverse international conditions was explained by the business model that has been a traditional characteristic of domestic banks, which rely strongly on retail deposits.
Another indication of the overall prudent bias of the Maltese domestic banks was the fact that leverage ratios of Maltese banks were considerably lower than in euro area in general. While the euro area average has declined on account of widespread deleveraging, the ratio remained significantly higher than the Maltese ratio, which had been quite stable.
A further indication of the traditional funding model was the loan to deposit ratio which was significantly low when compared with the major economies.
"While taking on the changes that are needed to remain competitive and improve efficiency, the domestic banking sector must also continue to build upon the strengths of the traditional model.
"Among the many lessons that may be drawn from the experience of the international financial crisis, one that stands out is the importance for each banking institution to keep a prudent mix of dependable sources of funding, to limit the level of financial leverage and to maintain a sound balance sheet," he said.
His appeal, Prof Bonnici said, was to maintain international competitiveness and continued vigilance of the banking sector.
"Although the relative performance of the Maltese economy has been encouraging, the challenges ahead are to be treated seriously and with caution."
"The choices that must be made between the various national priorities have to be compatible with the economic and fiscal limits, and these limits can become less constraining only through improved competitiveness and faster economic growth."