Facing the Business Liquidity Crisis

The Malta Independent on Sunday 

Elections come and go, governments come and go (or in our case stay), but problems remain. As we gradually set into the routine of a new legislature and new realities bring a better sense of co-operation to tackle endemic problems at a national level, it is desirable, I dare say imperative, that we raise awareness on such problems. Simply ignoring them piously hoping that they would resolve themselves out will not work,

Take the problem of business cash flow which is stifling economic development and growth. Whilst the banking system remains flooded with liquidity that cannot be applied in the normal course of business and has to be invested in marketable securities forcing down yields and interest rates, businesses across the board are under pressure as the cash flow cycle seems to have slowed down immensely and shows no signs of normalisation.

As always there is never a single cause to these problems. I can suggest three major ones. Firstly, businesses lost what hitherto used to be an easy and cheap source of credit – payments due to government. As tax-collecting departments have improved their systems and introduced rigorous fines for defaulters, businesses had to respond by up-dating their payments to governments and delaying their payments to private sector suppliers and banks.

Secondly the substantial slowdown in the economy has by itself slowed down the cash flow cycle. Bartering has become quite common especially in the construction sector where contractors are paid by developers through transferring some of the project property units. Property sales outside the residential market have practically stagnated. Showrooms, offices and warehouses up for sale far exceed the demand for such commercial property.

“Elections come and go, governments come and go (or in our case stay), but problems remain.”

Thirdly banks, as the major providers of development and working capital finance have not only lost appetite for new financing (which is quite understandable as in the context of an over-supplied market it is difficult to commercially justify further increase in the supply even if this could be financed at low interest rates) but more perilously they seem to be turning quite rigid in re-scheduling existing exposures to take account of new market realities.

Having identified the three sources of the problem it is possible to hypothesise solutions. There is not much one cannot do about the first cause. Government has its own financial constraints and it is certainly fair for public dues to be collected on time. The second cause cannot be addressed instantly. Economic growth will take time to generate and further time to translate itself into better cash flow throughput. We need a healthier tourism industry, we need fresh foreign direct investment in manufacturing, financial services and in retailing and we need more consumer confidence to bolster demand and balance the over-supply situation.

Whilst this is the ultimate sustainable solution to the problem it takes time to engineer and no immediate contribution to ease the cash flow problem can be expected from this source.

“Consumers, entrepreneurs, banks and regulators have to come through the economic downturn with the minimum damage whilst a new national spirit at the macro-level permits a better scenario for performing the re-structuring which has been avoided too long.”

It is the third cause that must be the source of some immediate easing of the cash flow crunch until this country can engineer a better macro-economic performance. Before we can get to the long term we have to go through the short term and in a micro-economy like us where business access to capital markets is very limited, banks play a major role in deciding whether we can get through the cash flow crisis in one piece or whether the problem gets precipitated pushing the recovery point further into the future and making the recovery road more arduous and painful.

And the major responsibility here lies on the two major banks, HSBC and Bank of Valletta. Between them they control a very large part of the lending market and I would say they almost entirely share the whole portfolio of business credit to Maltese entrepreneurs. In these difficult economic conditions business borrowers, who by tradition have looked at banks as their major source of external finance, are totally at the mercy of their lending bankers for managing and resolving their cash flow problems. The banking market is just not wide enough to offer fair competition.

The arrival of the HSBC on the market with some 45% market share of the total loan portfolio therefore gives them not only a strategic hold but also great national responsibility. Can a global bank, that prides itself to adopt a local mentality, truly shows that it does so in practice in Malta by realising that their near monopoly powers gives them responsibilities beyond anything they are used to in any other territory they operate from, where they come nowhere near to such high market shares?

The banking regulator has a significant role to play beyond its traditional duties. It must use its moral suasion powers on the banks not to precipitate the cash flow crisis unnecessarily by making rigid conditions for re-scheduling of loans that are still being regularly serviced by borrowers and that are well backed by asset security which needs to await better economic conditions for realistic realisation. Whilst each case has to be treated on its own merits the general policy has to be to get tough with the new (not to increase the oversupply situation) but go soft on the old (not to kill business which could survive the economic downturn if allowed more time).

Consumers, entrepreneurs, banks and regulators have to come through the economic downturn with the minimum damage whilst a new national spirit at the macro-level permits a better scenario for performing the re-structuring which has been avoided too long.