By the end of January every year, the Treasury generally publishes its borrowing plan indicating the projected borrowing requirements of the Maltese government for that particular year. In January 2020, the Treasury had indicated that the total amount of issuance of Malta Government Stocks (MGS) during 2020 was not expected to exceed €450 million since the new bonds being issued were intended to finance the redemption of six MGS issues during 2020 amounting to €461.5 million.

However, as a result of the huge impact on government finances brought about by COVID-19, the government resorted to much higher borrowing levels to fund the various initiatives to provide assistance towards targeted sectors of the economy. This is very much in line with developments internationally where most governments resorted to huge levels of additional borrowings to shore up their economies decimated by the pandemic.

Shortly after the onset of COVID-19 and the various measures introduced, including the temporary closure of the airport, Malta’s finance minister presented a Bill in Parliament to amend the previous Budget Measures Implementation Act 2020 and increase the borrowing requirement to a maximum of €2 billion.

By the end of the year, the government issued a total of €1.4 billion in additional debt, including the issuance of a further €95 million in 62+ Government Savings Bonds. Apart from the subsidised bonds to pensioners, the Treasury tapped the primary market on six separate occasions with the new issuance each time structured via an auction aimed at institutional investors. All the auctions were very well-received with demand abundantly exceeding the available amount on offer on every occasion.

The statistics published by the Treasury indicate that local credit institutions were by far the buyers of the large majority of MGS available. This is not surprising given the very high levels of liquidity held by local credit institutions which continued to increase during the pandemic as deposits from retail customers surged. In fact, the latest data provided by the Central Bank of Malta as at the end of June 2020 shows that total deposits held by Maltese residents increased by €826 million during the first half of 2020.

The maturity structure of the various issues that took place during 2020 ranged between three and nine years with the exception of the first 25-year sovereign bond issue in Malta. In February, the government issued an MGS maturing in 2045 at a coupon of 1.5 per cent and a further tranche was issued again in November. In total, €153.7 million was issued in the longest-dated security during the year.

An analysis of the overall amounts issued during the year also reveals that between €130 million and €183 million in additional debt was issued in each maturity profile between 2023 and 2027 as well as 2045. The manner in which the amounts were spread across the maturity cycle also enables the government to avoid having an excessive amount of bonds maturing in any single year. Following the additional issuance of €161 million in bonds maturing in 2029, the highest amount now up for maturity is of just over €510 million in eight years’ time.  

Following the record issuance of €1.4 billion in additional government bonds in 2020, the total amount of outstanding MGS and 62+ Savings Bonds is now slightly above €6 billion.

Government avoided an excessive amount of bonds maturing in any single year

An amount of just over €460 million is due for redemption in 2021. Apart from the need to raise new borrowings to finance these maturities, the government had already indicated during the 2021 Budget speech presented to Parliament on October 19 that the total amount of new borrowing anticipated for 2021 amounts to just under €980 million. It is therefore going to be another busy year for the Treasury to seek to raise this amount during the next 12 months. Hopefully, local credit institutions will maintain a strong appetite to increase their exposure further to Maltese government bonds to enable the Treasury to successfully raise such amounts.

The financial estimates published as part of the 2021 Budget speech also indicates that the outstanding amount of MGS is anticipated to continue to rise in the next few years, reaching €7.25 billion in 2023.

While this may seem to be an alarmingly high figure, it is worth highlighting that in recent years, Malta’s public finances strengthened materially and its debt to gross domestic product (GDP) ratio dropped to 43 per cent in 2019, which was far below the average across the eurozone economies. Prior to the pandemic, this positive trajectory of a decreasing ratio of debt to GDP was expected to continue with the government anticipating the ratio to drop to 34.9 per cent in 2022.

However, in view of the sizeable impact of the pandemic on the government finances, the debt to GDP ratio is now expected to increase to just above 60 per cent once again in 2023. Nonetheless, the current historically low interest rate scenario will make it easier for the country to sustain the servicing cost of the new debt issued in 2020. In fact, given the low yields, the additional annual interest payments to service the amount of new MGS issued in 2020 will indeed not be material.

MGS prices had performed strongly during 2019 with a gain of 4.32 per cent in the RF MGS Index (the best performance since 2014), mainly reflecting monetary policy decisions in the euro area as well as other economic and political factors across international sovereign bond markets.

This positive momentum continued at the start of 2020 with the RF MGS Index climbing by a further 1.9 per cent by early March before plummeting almost six per cent to 1,094.606 points by mid-June.

Thereafter, MGS prices followed a consistent upward trend but this was not enough for the RF MGS Index to recover all the losses incurred in the first half of the year to end the year with a decline of 0.87 per cent.

Trading activity across the MGS market amounted to only €162.9 million across the secondary market compared to much higher levels in previous years. In fact, this level of activity was the lowest since 2006 while the average annual level of trading activity between 2007 and 2019 stood at €451 million.

The intense volatility across the MGS market can be explained in the price movements of the longest-dated bond (the 1.5% MGS 2045) which was first issued in February 2020. The price dropped from a weighted-average issue price of 113.22 per cent at the time of the auction in February 2020 to 95 per cent by mid-June.

Meanwhile, the weighted-average issue price of the 2045 MGS during the auction in November was 102.68 per cent while at the end of the year, the official price on the secondary market was 118 per cent.

One of the main topics debated during the year was the great disconnect between the indicative MGS prices quoted by the Central Bank of Malta on a daily basis and the prices traded on the secondary market, especially for the longer-term securities.

Given the very low yields across the MGS market mirroring the historically low interest rate scenario, very few retail investors are participating in the MGS market except for the 62 per cent Savings Bonds offering subsidised rates to pensioners. The Treasury, therefore, needs to continue to structure new issuance targeted towards institutional investors.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, ‘Rizzo Farrugia’, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report. 

© 2020 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.