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.
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