Issue link: https://maltatoday.uberflip.com/i/1161128
29.08.19 10 INTERVIEW Adoption of Euro critical to He brought to the Central Bank 32 years of professional and academic experience in the field of development of the real economy, an invaluable body of knowledge if one bears in mind that – in the final instance – financial stability and monetary policy are there to safeguard economic development. Business Today speaks to Dr Mario Vella, Governor of the Central Bank of Malta MASSIMO COSTA You were appointed Governor of the Central Bank of Malta after years in politics and at Malta Enterprise. How do you think your background helps you in your role today? e aim of the Bank, at the end of the day, is to ensure financial and price sta- bility and to implement monetary policy. ese aims are meant to be of benefit to the real economy. e fact that I worked for over 30 years in the real economy – with special attention to foreign direct investment, which has been my main focus – means that I bring to the Bank quite a wealth of experience. My academic experience in economics and development sociology is also a very valuable component of my 'baggage' as I strongly believe that central banks ought to care for the social impact of monetary policy. Sometimes central banks are accused of not bothering with the real economy, but this is not the case here. Speaking of your role, what are the main duties of the Central Bank's governor? Simply put, my role is to make sure the Bank works and does what it is meant to do. Financial stability requires the Bank to ensure that the financial system works, continues to work and is stable. is might sound terse, but mine is not, and shouldn't be, a sensational job. My role within the Bank and ECB is a statutory one, emerging from and clearly defined within the relevant laws. I should note that there is a distinc- tion here between our role and that of the Malta Financial Services Authority (MFSA). e MFSA is a regulator, and it supervises each of the banks and other related institutions. e Bank isn't in- volved in that, and instead focuses on the whole system. You could say that the MFSA looks at the trees, while we look at the woods. ere is, however, an institutional con- nection between the MFSA and Bank, through a body called the Joint Financial Stability Board (JFSB), which I chair, with the MFSA attending all board meetings. e Bank's role within the JFSB is to en- sure that there is a seamless connection between what the MFSA does and what the Bank does. For the past few years, Malta registered a surplus in its public finances. How sustainable is such a result, and is the country putting all of its efforts into one or two major industries, namely iGaming and financial services? GDP annual growth started from a low base, making the fast rate of growth at the beginning of this phase even more impressive. And the growth is also high by EU standards. Arithmetically, if a value increases, then every further increase takes a big- ger effort than when it started out. ere is empirical evidence for this. erefore, we expect a stabilisation of Malta's eco- nomic growth in the coming years. All things being equal, we will still remain in the upper ranges of growth in Europe, however. Another point to make is that Malta is a very complex country, economically speaking, with an extremely diversified economy compared to other EU coun- tries. Malta's economy is more than iGaming and more than most of the other sectors which are most commonly spoken about and which are easier to sensationalise. We sometimes forget that the back- bone of the economy consists of the productive sectors, including industry and industrial services, which have been strengthening for over half a century. And it's a good thing that this is so, be- cause Malta has not put all of its eggs in one basket. On average, our more important pro- duction establishments are around 50 years old. All the big industrial names in Malta have been here for a long time, although they might have changed their name over the years because global take- overs, mergers and acquisitions mean that country subsidiaries also change their name. It is interesting that they have remained here for so long, because it raises the question of what kept them here. One should remember that, in a productive economy, corporate taxation is a factor – but not the only one. Clearly, something keeps these companies here which goes well beyond the taxation incentive. e fact that the country always kept this strong industrial export backbone has kept us safe, and it is extremely im- portant that we retain this. My feeling is that there is consensus that this back- bone has to remain in place, and must be taken care of. At the end of the day, it's a question of competitiveness and of safeguarding our productivity, which is easier said than done. e important points here are firstly that GDP growth will plateau but still remain in the upper ranges, and second- ly that Malta has a diversified economy which has to remain so. In addition, we need to stay productive. In my view, the surplus is sustainable if we do the right thing. ere is enough evidence to show that the surplus is structural and not contingent on one- offs. e passport scheme comes and goes, but there are other things which Malta's economy does, and here diversi- fication is critical. Does this mean that the future looks all rosy? Most countries have a problem with unemployment. Malta's problem is the opposite of that – and it's not any less of a problem. We are concerned with the issue of la- bour shortages from a number of points of view. One is that, if the country encounters a labour shortage, it has to do its best to raise the skill levels of the Maltese, and to attract more labour. ere will be a period – and this is where the country finds itself at the mo- ment – that labour will come of its own accord, but this cannot last forever. e closer you come to the margins, the less automatic will be the inflow of foreign la- bour. So, we'll need to make sure that we make it worthwhile for people to come to Malta and for them to stay long enough. An issue which has been in the news, but rather superficially, relates to the fact that workers who come to Malta need not only a job, but also a place to live. This brings up the issue of rent. e problem is not only – and not primarily – that the demand for rented premises is bound to have some effect on the price of rents, but that this causes an issue of financial stability. is is why the Bank is constantly measuring the effects on the fundamentals of the economy. If foreign workers cannot afford rents – not the mention the impact this has on the Maltese – then we would constrict the rate of people coming to Malta. At the end of the day, workers want to live somewhere they can afford and that they like. But if rents increase beyond a certain level, a worker will think twice before coming in the first place, and if they do come, they'll stay for a shorter term. It is in companies' interests that work- ers learn the specifics of the job as fast as possible, which is a cost to the employer. And it is not in their interest that the worker leaves after too a short period. One of the most important things en- couraging workers to stay is that they have an affordable place to live and that they feel good in. The banks have been hit with criticism, including from the Prime Minister, regarding their reluctance or refusal to open bank accounts and offer services to foreigners and foreign companies working within the ICT industry in Malta. What can the country do? From the outset, I must point out that part of the Bank's role is to monitor the liquidity of banks and their ability to han- dle any downside risks resulting from the impact of trade and finance on the real economy. e Bank does not regulate the banking sector – this is the MFSA's role – and each bank sets its own risk appetite in the context of the compliance issues it faces. Furthermore, the MFSA as regulator has already taken action on this through an awareness campaign on measures relating to the right to a basic account, which was already enshrined in banking legislation. at said, it is true that banks are often criticised for being over-prudent, which isn't necessarily a bad thing – up to a point – because it leads to caution when lending and it is what got them through the global financial crisis unscathed. In fact, Malta's rates of non-performing loans have not only not increased, but have actually decreased. Does it mean that the banks couldn't be more creative? Of course they can. But in this particular case, it is good that banks do not place themselves at risk. And, I should note, they are managing to do this while remaining profitable. Can we blame the banks for deciding not to open accounts? No. Let's not be provincial and let's look at the rest of Eu- rope and the world. Banks are increas- ingly open to issues of money launder- ing. We cannot urge them to be more careful and to undertake 'know your client' (KYC) investigations and at the same time expect them to keep doing their business as usual. e world is go- ing through a difficult patch and it won't be over tomorrow. We can't blame them for being prudent enough. When people are waiting for a bank's decision as to whether it will open a bank account for them, it means the bank is doing its homework. Nowadays it's not even only a matter of know your client, but know your client's client. The issue of correspondent banking is very closely related to this. And there is no magic solution to the issue. e banks are quite a captive market locally, with a handful of main deposit