Sunday, 30 April 2006

Change Pays Dividends

30th April 2006

The Malta Independent - Friday Wisdom

This was an odd title for Minister Austin Gatt to choose for his article published this week. The title is more suitable for an Alfred Sant contribution if only it could be fitted with his branded PRefix.

But it was not only the title that was odd. The content was bizarre as Minister Gatt argued that HSBC’s decision to invest in an international call centre, creating hundreds of new jobs, showed how misguided Labour was in criticising the sale of Mid-Med Bank to HSBC.

This is twisting history unnecessarily and misguiding. Labour’s criticism of the Mid-Med Bank deal was not that it was sold to HSBC but that the method for doing so was opaque and highly suspicious and, as a consequence, the price obtained was way below the bank’s true value.

Or is Minister Gatt suggesting that privatising on the cheap has some indirect benefit in bringing in second round investment from the foreign acquirers to compensate us for the bargain we offered them? Is the same reasoning being applied in the case of Maltacom’s privatisation at below market price in compensation for the investment in SmartCity by the same investors? I am reliably informed that this is not the case, so much so that Minister Gatt needed a lot of persuading before taking SmartCity approach seriously when it was proposed for his approval by Malta Enterprise.

Irrespective of who says it, I am prepared to subscribe to the thesis that change pays dividends on the proviso that change is well thought and implemented. The proposed constitutional changes to the electoral boundaries meant to re-integrate Gozo into a single electoral district do not unfortunately fall in this category.

The Constitution is not the sort of law that ought to be changed frequently to suit this or that particular requirement. Before embarking on any changes it is important to take a wide view of things to avoid having to make frequent amendments, especially given that many clauses require two-thirds majority and that changes could reduce the manoeuvrability of a future democratically elected government. Above all, changes have to pass the test of equity and reason and not just the test of law.

The argument that unless Gozo is considered as a single region, Gozo residents will be considered as second class citizens, by implication means that
Malta residents have long been second class citizens. Our tiny island is split into 12 electoral districts. We have lived with awful situations of villages split in two separate districts (Qormi, Zabbar and Paola certainly have had this experience) and we had the concept of contiguousness stretched beyond all reasonable limits to suit narrow political interests.

So what is all this fuss about part of Gozo migrating to the 12th district in order to respect existing electoral rules as provided for in the Constitution? Are we trying to isolate Gozo or integrate it?

The argument of a single district makes sense but only if applied on a national basis. This will have two great advantages. Firstly, it would reduce, hopefully eliminate, the gerrymandering in delineating electoral districts for partisan purposes. There will simply be no districts to delineate. Secondly, it will reduce the political clientelism by widening the voting pool promoting voting oriented on merits to represent the people at national levels, rather than through relations with voters at micro-level.

So if our political formations are after fair and reasonable constitutional changes in order to guarantee a better and more serious electoral process, they cannot play around with the Constitution purely to play the Gozo heroes but need to seriously consider the wider aspect to produce a lasting solution.

Malta as a single electoral district raises two important issues which need to be addressed. Firstly, there will arise the question of what minimum national threshold has to be reached before being entitled to parliamentary representation in order to avoid Italian style political fragmentation. From this week’s press comments it seems that the two main political formations were considering a 7.5 per cent national threshold. While this is better than the 17 per cent threshold currently applicable at district level, it is too high by international standards, which are more oriented towards five per cent. In a 65-seat parliament, each MP carries 1.5 per cent of the population so a five per cent threshold raises the bar to over three times the underlying single seat quota. 7.5 per cent is far too high and democratically questionable.

There will also be the question of governability. By rendering the threshold to parliamentary representation more accessible to political formations other than the two main traditional parties we could end up in situations where governments have to be formed by coalition of parties represented in Parliament. It appears that there is a feeling that this could render the country ungovernable.

While I strongly believe that a party with an absolute majority has a right to govern out-rightly, and a party that has a relative majority where there are only two parties in parliament has also a similar right to govern out-rightly, where there are more than two parties in parliament, governing by coalition is an essential ingredient of democracy. Many countries are governed by coalition governments and they are far from ungovernable.

Maybe such constitutional changes could pay dividends by ending our routine five-year dictatorships.


Friday, 28 April 2006

Two to Go

28th April 2006

The Malta Independent - Friday Wisdom

The legislature is about to slip by its third anniversary and with two years to go, the next election is on the horizon of any decision being made by our political formations.

This time round, the date of the next elections can be predicted with reasonable accuracy, down to a narrow time envelope.

With the project to join the euro on
1 January 2008, holding an election before such date will bring about instability given that the opposition has expressed itself negatively on the exchange value chosen for converting the Maltese lira into the euro at 42c9 for every euro. The prospect of a change of government before the euro D-Day can stimulate holders of Maltese lira to switch to euro before the elections, causing problems for the level of our foreign reserves and for the sustainability of the chosen conversion rate. This could bring into question the realisation of the whole project to join the euro smoothly and effectively.

Holding the election too much beyond the changeover date, which in any event cannot constitutionally be beyond July 2008, could risk bringing to the surface some unpleasant consequences in inflation terms of the changeover to euro. So I quite realistically expect the next election to be held somewhere between February and May 2008, and hence two years to go.

Quite in line with this reasoning, the changeover to euro was this week the chosen flavour for the endless warfare between our opposing political camps. In particular, the argument was about the impact on the profits of the Central Bank of
Malta, up till now an important source of revenue for our government, by the changeover to the euro.

Among technicians, this is no discovery as the subject has been quietly discussed for some time and indeed was addressed by the deputy governor of the Central Bank in a technical briefing for financial operators held last year soon after the decision to join the ERM II mechanism.

One is therefore surprised by the claim made by the opposition that in the briefing it received from the Central Bank about the euro project, such a matter was not addressed at all.

There seems to be all round agreement that given our high level of currency in circulation the change over to euro, all things being equal, will negatively impact the profits of the Central Bank and consequently prejudice an important revenue source for the government. Difference of opinion seems to be about the timing of such impact, whether immediately upon accession to the euro or some time down the road.

Let me try to put in plain layman’s language the reason for such expected negative impact. In
Malta we have as at last December Lm520 million worth of cash in coin in circulation, equivalent to Lm1,300 per capita.

In theory, this is meant for transaction purposes, but the size and the composition (a large proportion of this is in Lm20 notes form) indicate clearly that a large part is really cash out of circulation hidden under the mattress for various reasons, not least that its owners are prepared to forego the potential interest they could earn thereon in order to remain anonymous and out of the taxman’s reach.

On this element of cash out of circulation, the Central Bank makes a nice clean profit as it pays no interest on hidden cash while it earns interest on the corresponding foreign reserves backing such cash. Once we join the euro and the hidden Maltese lira, all things being equal, are replaced by hidden euro notes (which coming in maximum denomination of E500 equivalent to about Lm215, makes their stacking under the mattress so much easier) the nice clean profits currently made by the Central Bank of Malta will be transferred to the European System of Central Banks and Malta would be compensated for a normal quota for currency genuinely needed for transaction purposes. This will be much lower than the current per capita quantum of Lm1,300.

Our challenge is to ensure that things do not remain equal and that we promote schemes that could permit the reduction of cash in circulation to a level that truly reflects transaction needs. One way of doing this is to launch a fiscal amnesty scheme offering protection from tax investigations (certainly not from criminal or money laundering offences) to holders of Maltese lira cash who transfer the balances to a medium/long term special government bond, either through payment of a percentage penalty or through the payment of sub-market interest coupon on such bond.

Such bond should not be marketable but should be repaid in graduated annual instalments in order to avoid the grave inflation risk for asset prices that will be caused by currency out of circulation suddenly rushing into circulation.

Such measures have to be well- planned and executed and as there is less than two years for the euro conversion date, it is certainly not too early to do something to protect an important source of government revenue.

Friday, 21 April 2006

Giving Gozo a Chance

21st April 2006
The Malta Independent - Friday Wisdom

The insularity that disadvantages Gozo means that without outside help its economy is unsustainable and that its young people will find it hard to integrate productively within its economy. To have some chance to overcome these disadvantages Gozo needs help through some positive discrimination.

Given that the traditional agricultural base cannot guarantee productive employment in the necessary quantities and is in any case not attractive to the aspirations of most youngsters, Gozo needs to build its economy round two modern areas where it has natural competences.

In tourism Gozo can and should compete as a destination with its own identity and attractions quite beyond the day trip visits for tourists accommodated in Malta. In other electronic based services the insularity is no disadvantage given the reliability and efficiency of electronic communications.

For the Gozo economy to shift to a sustainable platform offering reasonable employment prospects to its residents who choose to stay there, we need to do more to promote and develop such competences.

I don’t mean to provide a blueprint on how this can be done but I wish to suggest two particular areas where we need to boost our sister islanders with some positive discrimination.

Firstly we need to take measures to remove the additional expenses involved in transport and traveling between the two islands. This transport needs to be subsidized so that a trip to Gozo is not more expensive than the highest normal bus ticket from any point to point in Malta and that this should apply across the board tourists included.

If it is accepted that the State subsidizes inland public transport why should we expect intra-island transport to run on strict commercial lines? I am not in favour of long term subsidies as a matter of principle but there are particular circumstances which make such permanent subsidies necessary and sensible. Public transport is one such justified exception in order to control the environmental damage and economic inefficiencies being caused by the strong inclination to using private means of transport.

Rendering vessel crossing to Gozo not more expensive than a normal bus ticket will reduce Gozo’s disadvantage of being looked at as an pricy and distant location worth visiting occasionally but not too frequently.

I do appreciate that subsidies have to be funded and I quite prefer to create direct and sensible links between the funding and the application of such funds to the suggested subsidies. One should therefore consider some sort of surcharge for fuel at the pump at a national level in order to fund public transport subsidies in general and Gozo crossings in particular. It is only fair that those who insist on using private means of transport pay for those who opt for public transport thus helping to slow the pace of environmental degradation. In a way this will benefit private transport users as well who will benefit from smoother traffic flows and less blockages from accidents and road maintenance interventions .

Fiscal policy is another area where Gozo should merit positive discrimination. If Gozo can be considered as an entire tourist area should we not make all Gozo restaurants subject to a reduced VAT rate of 5%? Should we not consider giving fiscal incentives for Companies who opt to base their back office processing in Gozo? Can’t we consider an incentive to our pensioners who opt to retire and reside permanently in Gozo by allowing them to benefit from a reduced rate of withholding tax for their investment income?

I can imagine many of many readers who are dubious about such proposals both as a matter of principle as well as due to the difficulty to control abuse of such positive discrimination. I respect such views but still think that doing nothing is not a solution either. It is time to do something tangible and real to give Gozo a chance. 
Endless studies and discussion will never deliver.

Sunday, 16 April 2006

Tourism Patchwork

16th April 2006
The Malta Independent on Sunday

Government seemed rather surprised that following a top level meeting with the MHRA and other key operators in the tourism industry where the Prime Minister announced a set of measures meant to give an immediate lift to the tourism industry, the business associations concerned soon issued a statement claiming the measures were too little too late.

In a way this typifies the difference between the vantage point of politicians and business managers.

Politicians generally seek quick fix solutions. All decisions are meant to deliver their benefits within a specified time frame and as the election start getting visible on the horizon such time frames tend shorten unrealistically. It is one reason why I maintain that in a country like ours where the political schools are divided right down the middle, a government can only do what’s right and what’s necessary in the first half of a legislature. In the second half what is politically convenient gains overall priority.

Business managers on the other hand are free from such pressures – although in case of publicly quoted companies who report their financial fortunes on a regular basis such short term-ism to keep on the good side of investors is not unknown – and can take business decisions that are expected to deliver what’s good and what’s necessary within realistic time frames. They also realize that in applying curative measures to address identified problems, things may have to get worse before they can get better.

So whilst politicians seem to expect gratitude and praise for first aid measures which could give some temporary respite to tourism operators but cannot be expected to address the real underlying problems, business managers in tourism cannot but see such measures for the temporary respite they really are.

In a way this is the same problem that Berlusconi has in coming to terms with the election defeat he suffered in the Italian general elections of April 9th and 10th. Berlusconi is a hybrid businessman turned politician and he himself has problems in distinguishing between the two roles. His trying to run the country like a business fiefdom has not delivered for his political fortunes. He lost the elections even though he has to be credited with giving Italy its first full term government bringing political stability. He also deserves some credit for having started to address Italy’s real underlying problems even though at best the results are still in the pipeline.

Belusconi spent precious time in government trying to protect his personal interests with legislation that on more than one occasion had to be returned for parliament’s reconsideration by the President of the Italian Republic. He spent too much of the political capital from his 2001 election victory on personal agenda matters in the first half of the legislature when he really needed to spend such capital on restructuring measures he started taking in the second half and are still works-in-progress.

In refusing to accept the verdict of the Italian electorate Berlusconi is making the biggest mistake that politicians quite often make, i.e. that of expecting gratitude from their electorate. His behaviour in the election campaign as opinion polls showed him consistently trailing the centre-left grouping led by Professor Prodi was one of disbelieve and frustration. This made him loose the cool that politicians should preserve at all cost. In the election campaign Berlusconi behaved more like a short-tempered business leader rather than a statesman seeking a mandate to take the country forward. Given the narrow margin of his loss this temperamental behavior could well have made the difference.

If he can set personal ego aside Berlusconi should feel proud that his stint in politics has started a process of change which if continued will render the Italian economy flexible and competitive. He ought to move back with pride to the business world that is much more suited for his characteristics. He can turn his business empire in a global leader.

Reverting to our home problems with our core tourism industry, politicians need to understand that patchwork will be short-lived and nothing short of a re-invention of our tourist industry can guarantee growth at rates we have last seen in the nineties.

We need to decide in which market segment we have what it takes to compete successfully and then prepare a total solution to re-position ourselves to exploit the identified segment. There is no single issue which can fix our tourism industry. Golf courses on their own will not work. No frills airlines on their own will not deliver. Not even if we double or treble our advertising budget, it will not solve our problems.

On the contrary if we go by the business maxim that good advertising kills a bad product faster then we should perhaps be wary of too much advertising before we can bring our product up to scratch.

What we need is a holistic solution premised on the absolute necessity to offer a quality value-laden product to our tourists. We cannot have five-star hotel accommodation co-existing with two star hard and soft infrastructures.

When I see true liberalization in areas that are still suffocating our tourism, like our taxi and transport services than I will start believing we really mean business. When I can walk into Valletta without having to negotiate my life with a handful of bus drivers then I will start believing that we really care about our tourism.

Until then we seem condemned for quick fixes which are neither here nor there and which constrain to continue reducing our price in order to continue competing in a market segment where we no longer have what it takes to compete. Result is unsatisfied tourists who are not likely to return or to encourage others to visit, low profits for operators and little or no growth for the industry in general which will have to continue relying on students packed

Saturday, 15 April 2006

Beware Private Monopolies

15th April 2006
The Malta Independent - Friday Wisdom

Micro economies like ours cannot escape monopolies, duopolies, oligopolies or whatever name is given to having the commercial ability to corner the market in the absence of true competition.

When such monopolies are unavoidable due to the absence of economies of scale for promotion of a competitive environment, public ownership of such natural monopolies becomes a necessary evil.

Privatising such monopolies does not remove the disadvantages of lack of competition both for the consumer as well as for the economy at large.

It only transfers the monopoly powers from public ownership, subject to democratic checks and balances, to private ownership where the only checks and balances depend on a vigilant and effective regulator.

Take for example what happened through the privatisation of Mid-Med Bank. A bank with public ownership control that had a 45 per cent share of the total banking market had as its main competitor Bank of Valletta with an equivalent market share.

Although not publicly controlled through majority shareholding, the state had substantial influence over BOV through its 25 per cent holding, given the fractionalised spread of the private ownership and the right to appoint the BOV’s chairman.

Two banks with nearly 90 per cent share of the market is not an ideal situation for competition purposes, but given the micro-size of our economy such market shares are as natural as windy days in spring. Public ownership and/or influence over the two banks were a necessary evil.

However with the arrival of a third large player in 1995 through the full licensing of the then
Midland Bank, competition in corporate banking started to increase.

The takeover of Mid-Med Bank by Midland Bank, then renamed HSBC, effectively reduced competition in the market. The two large banks consolidated their market share and are practically operating in a duopoly situation, outside public ownership control and with limited public sector influence over Bank of Valletta till it gets fully privatised.

The result is evident through several letters to the editor in the print media complaining about excessive bank charges and lowering or removal of bank services that do not generate commercial return. Banks no longer seem to acknowledge their moral obligation to offer non-commercial services to give something back to society for the near monopoly status it has bestowed upon them.

We are experiencing something similar with
Malta International Airport. This is a straight monopoly, period. It operates the only airport we have. The government sold 40 per cent to a technical consortium that continued to buy shares on the market so that the consortium and its constituents now control more than 50 per cent of such unique and strategic resources which is of critical importance for our tourist industry.

The commercial sense of transferring such monopoly operation under concentrated private sector control is currently being silently questioned by tourism operators as they watch with dismay the grave consequences of government’s loss of control over the airport operation which cannot accommodate the demands of low cost airlines, without which our tourist industry is finding it hard to grow.

Something similar could be in the making with Maltacom. Whatever happens Maltacom will maintain a commanding position on the Maltese telecom market. It dominates the fixed line and data transmission business and is one of the two strong players in the mobile telephony market.

Its results show that although it is hampered by the bureaucracy of public ownership and has been distracted by the privatisation process that has diluted its resolve to offer competition in the cable TV market, it is still performing admirably with ample space for more efficiency gains through judicious investments and human resources policies to slim down and /or retrain its personnel complement to its current realities.

Efficient telecom services are crucial for the country’s development. Does it make sense to lose public sector control over Maltacom by awarding it to a partner whose competence seem to be financial resources and is not particular known for technological inputs? Thank goodness our private investors have shown that they have enough money to be willing to buy whatever part of Maltacom is placed on the market. Why should we be so rush to sell it, with effective control and all, to foreign financial partners at 25 per cent discount to what the Maltese are willing to pay for it? International financial ratios to justify the lower privatisation price ignore local realities that cannot and should not be ignored.

If it were the case that Tecom of Dubai is making its investment in Smartcity conditional on success for its Maltacom bid, then I can start to understand, though not necessarily justify, the case firstly for privatising Maltacom and secondly for doing so at a substantial discount to market price. But we have been assured that the two issues are not connected and consequently the questions and doubts loom larger.

Even with the liberalisation of fuel imports we could be ignoring local realities. Enemalta has consistently used its profits from fuel imports and distribution to subsidise its electricity generation and distribution which given our size and lack of economies of scale cost much more than in competitor countries. What is the sense of transferring the profits of fuel importation to the private sector and allowing Enemalta to carry the losses on the electricity sector which then will show up in exorbitant surcharges in our utility bills?

First hand experience shows that while in case of natural monopolies privatisation, it is necessary to protect us from political abuse of public ownership, the best way to do it is to spread private ownership to avoid concentration of monopoly power in private hands, with government retaining a sizeable minority control to ensure that the macro-economic view in the operation of such monopolies is never completely lost.

Friday, 7 April 2006

Privatising Properly 2

7th April 2006
The Malta Independent - Friday Wisdom

Private shareholders in Maltacom had the shock of their life this week when it was disclosed that the best binding offer in the privatisation of Maltacom values each share at Lm1.51c0 being a 30% discount to the last price of Lm2.15c0 on the Malta Stock Exchange before the announcement was made. After the announcement and up to time of writing the shares have not traded as there were no buyers for a price within the 7% price fluctuation band allowed by the Exchange. It is however sensible to assume that once normal trading resumes the price will drive down to within a reasonable range of the best offer price in the privatisation process.

Private investors would normally expect that whoever is buying a controlling stake in a dominant Company like Maltacom ought to pay a premium rather than expect a substantial discount. However this is on the assumption that the market price was realistically valuing the Company in the pre-privatisation stage.

The market bulls argue that the Maltacom price of Lm2.15c0 was a fair price in that it was way below the all time 2000 price record of Lm3.28c0 whereas the Malta Stock Exchange Index is way way past its 2000 peak before the market collapsed until 2003 since when it started to recover gradually and recently not so gradually.

On the other hand the market bears argue that taking international financial ratios for the telecom sector, a competitive price for Maltacom is close to Lm1.50c0 and therefore the market was showing irrational exuberance when it carried the Maltacom price to over Lm2.

True. there is no guarantee that the market price is a fair reflection of the underlying value of the share in question and there is no doubt that a privatisation bidder will pitch the price to the underlying value plus a margin for efficiency gains which may be possible post-privatisation.

In fact in my contribution of 24th February 2006 I had indicated that the Maltese equities were being priced on the market on a momentum basis rather than for their underlying value and had stated:

There is nothing wrong in being a momentum investor, provided one knows what one is doing. Whoever chooses such an investment strategy must however realise that if it is too good to be true, then it is generally not true, and when the whole process would have run its course, there will be winners and losers – but the sum of the parts will be the same. Such investors have to make sure that they leave the party when the champagne is still flowing – as, the moment the champagne stops, there will only be tears for the road.

It seems that the party champagne has stopped flowing for Maltacom shareholders sooner than many expected. But what is puzzling is that other big caps in the financial services sector have been growing on momentum rather than value on terms, which eclipse Maltacom’s record. Could this be the pin that pricks the over-inflated balloon or will the damage be restricted to Maltacom?

I cannot help feeling that the undue secrecy of the bidding process has forced various shareholders to make decisions in the dark when the process could have been handled more transparently to avoid undue speculation in the market. In my contribution of 17th February 2006 I had appealed that:

in the interest of financial transparency, serious consideration should be given to making the price setting process fully visible by means of bids opened in public or in a beauty contest type of bidding.

In this way, not only will the public be satisfied that the privatisation process is due and proper, but the investing public would not need to stay second guessing where the privatisation price is heading in making its decisions whether to buy, sell or hold Maltacom shares”

On the 12th February 2006 a front page article in the Malta Independent on Sunday had stated that

it is generally thought the share price (of Maltacom) at the beginning of the privatisation process (Lm 1.39) was a ‘fair price’… (but) the present price (Lm2.20) does not reflect the real worth of the company”. The article goes on to quote an unidentified source, which states that although Maltacom made significant progress in curbing expenditure and re-structuring its efficiencies, it has invariably not registered any major or strategic breakthrough which can justify such dramatic increase in its share price”

I find this quoting unidentified source more than a bit unorthodox and to my mind goes against the letter and spirit of the stipulations of the Prevention of Market Abuse Act 2005, which came into effect last year. This places on journalists the obligation to be prudent when expressing opinions on market valuations and to disclose clearly their source and ensure that it is qualified and licensed to express such opinions. Quoting unidentified sources could lead to hidden agendas that could involve market abuse, especially in the process of privatisation where bidders have every interest to acquire Maltacom on the cheap to the detriment of government and the nation at large.

Events of this week seem to indicate that the unidentified source wanted to tell the public something which should have been said in an official and transparent manner by making the bidding process public.

But there is more to this than the fortunes of private investors in Maltacom. There is the wider issue of whether the government is getting fair value for its 60% holding in Maltacom. Arguments that the best bid price is in line with international financial ratios cut no ice with me. When selling a controlling stake in a dominant company with ample room for driving efficiency gains the price ought to reflect a substantial premium on international ratios. Given the stability of Maltacom’s profits and its potential for growth in mobile, data and cable services I would have expected something much better.

At the end of it, if Maltese investors were prepared to pay a higher price than the strategic partner the government could have chosen the IPO route rather than a trade sale. And then one should question whether this is the right time to sell a telecom company. Telecoms have substantially under-performed the rest of the investment market during 2005 and probably this is negatively influencing the projected privatisation price. There must be a better time to privatise Maltacom.

Sunday, 2 April 2006

Half Full or Half Empty

2nd April 2006
The MaltaIndependent on Sunday

The CEO of HSBC Malta is seeing the glass of the Maltese economy half full. Not only that but he adds verbatim : “There are a number of commentators and observers who have a political view, which tends to cloud their comments on the economy. If you are positive you are pro-government; if you are anti-government, you are anti-economy”.

It is always unrealistic to depict a complex situation in such black and white terms as if to suggest that there could be no objective observers and commentators who can have a view of the economy different from the rose-tinted one depicted by the chief of HSBC.

By doing so the Governor of the Central Bank has been placed in the anti-government box. Two days before the HSBC head’s interview was published the Governor announced his decision regarding local interest rates following a meeting of the Monetary Policy Council. The Press Release noted that“ The Council expressed concerns that the GDP growth was driven by domestic demand, with external sector posting a negative contribution. The widening of the current account deficit, in turn, would indicate an excess of consumption. These concerns will have to be taken into consideration as the Council reviews the monetary policy stance going forward”.

Coming hot on heels of other warnings regarding excessive consumption and fall in savings ratios, the Governor registers his express concern that growth, small as it may be, is based on unsustainable internal factors rather than the more desirable type based on production and exports. Consequently he warns that monetary policy will have to be tightened soon by raising interest rates to discourage consumption and promote savings. Long term bond investors should take due note.

In short what HSBC chief is seeing half full the Central Bank Governor is seeing half empty. Does that merit labelling the Central Bank Governor anti-government because he exercises the independence of judgement that his position requires by statute and by ECB regulations?

The reason for the different points of view is in reality not hard to find and is directly linked to the vantage point of the respective position of the two senior bankers.

The Governor is responsible for the entire spectrum of monetary policy which takes account the overall balance between savings and investment, production and consumption, internal and external demand, inflation, foreign reserves and employment. The only tool left at his disposal to exercise the monetary policy function is interest rates. In the good old days when the Central Bank was also the regulator of the banking sector the Governor had the very important tool of moral suasion, rendered more effective by the backing of a legal armoury available to a Regulator.

If the Governor ever felt that the banks’ lending policies regarding consumption loans were unduly stimulating demand thus creating a threat to price stability and balance of payments sustainability, a meeting over lunch with the CEO/Chairmen of the Banks was normally enough for the Banks to take note and adjust their policies in line with wider macro-economic objectives rather the narrow view of their own bottom line.

Once regulation migrated to MFSA who are not tasked with the responsibility of monetary policy or other macro-economic objectives, this moral suasion tool has lost its punch. Banks have consequently lost the overhead controls to attune their own policies with the wider economic objectives.

As head of a commercial bank, the CEO of HSBC sees an opportunity where the Governor perceives a threat. The excessive liquidity of the Maltese economy should cause sleepless nights to whoever is tasked with executing monetary policy but provides an opportunity to sell financial products for banks.

The over-consumption mode of the consumer is an opportunity to promote loans for big ticket items from homes to yachts, from cars to home furnishings. On the other hand for the Governor such over-consumption is a threat to the stability of the foreign reserves and a source for apprehension about a ballooning deficit in the balance of payments.

The absence of opportunities in the productive sector means that the banks have limited demand for business loans outside the personal and property sector and therefore find themselves with more capital than their business requires leading to over-generous dividend policies to return such excess capital to the shareholders. Such aggressive dividend policies in an unsophisticated and over-liquid market like ours, causes dangerous equity asset price inflation which in normal circumstances, whoever is responsible for monetary policy, would wish to avoid by using moral suasion over banks to trim down their dividend distributions.

This half full half empty complexity makes me question the wisdom of divorcing bank regulation from monetary policy. Without effective moral suasion the Central Bank has no tools left to give effectiveness to its monetary policy and the result of all this is a run-away asset price inflation which could well cause our economy to over-boil.

If one needs a contemporary example of what happens if the economy over-boils one could well look at the current experience of Iceland where a deficit of 15% of the GDP in the Balance of Payments instigated high interest rates which attracted hot investment money which suddenly rushed out crushing the Icelandic economy as soon as it turned evident that the rate of exchange of the Icelandic Krona was unsustainable.

Rather than argue whether the bottle is half full or half empty our senior bankers would do well to put their heads together to see how they can fill the bottle close to its capacity.