‘Defend open borders and globalisation’, Vella says in warning against trade protectionism

The Central Bank’s new governor Mario Vella gave his first speech to the annual dinner organised by the Institute of Financial Services (IFS), where the former Labour Party president told his audience the benefits of globalisation had not been unevenly distributed and that wage earners in developed countries had not seen a real increase in wages for decades or were unemployed.

“This is what populism feeds on whilst certainly not offering solutions intended to ensure social justice. Economic growth is only a means to the ultimate end of providing a higher standard of living and confidence about the future for all citizens. But it is an absolutely necessary means,” the 63-year-old central banker – a former member of the Maltese communist party – said.

Vella warned that while Malta could expect stable economic growth in years to come, the sluggishness of its trade partners’ growth, geopolitical tensions in the neighbourhood and a resurgence of protectionism “threaten this prosperity”.

This is what populism feeds on whilst certainly not offering solutions intended to ensure social justice. Economic growth is only a means to the ultimate end of providing a higher standard of living and confidence about the future for all citizens

He said Malta, an extremely open economy that depends on external trade, had to “take a resolute stand” against protectionist countries who want to close borders to trade. “We need to defend open borders and globalisation,” he said.

Closer to home, Vella outlied his primary challenge of keeping a watchful eye for a property bubble as Malta’s economy continued to expand, and to prevent it from overheating.

“At the Central Bank we are keeping a very watchful eye on the price developments in the property market. Earlier this year we published work by our Economic Research Department exploring property price misalignment… at the end of 2015 house prices were still below their equilibrium fundamental value, but nevertheless price trends in this regard will continue to be closely monitored.”

Vella warned that with low interests rates, investors were more likely to take up more risky ventures and said that better education was needed to ensure people understand the risks of unrated corporate debt.

He said Malta should focus on building up sufficient fiscal buffers that can allow the island to counter eventual adverse economic shocks with fiscal policy if needed. “In this regard, judicious control of government expenditure is essential, bearing in mind that some important government revenue streams may be past their peak and need to be replaced through new initiatives.”

He said the Maltese labour force required better investment if it was to become more productive, and said that competitive labour costs but also lower energy, transport and finance costs would make the country a more attractive location foreign direct investment.

Economic progress

Economic activity in Malta remains robust with an exceptional increase of 6.2% real GDP growth last year, and an average 4% during the first half of 2016. The growth is being driven by private market services, encompassing a mix of traditional and new sectors, including tourism and distribution, aviation and professional services.

This growth in output has also fed Malta’s growing labour market, where annual employment growth exceeded 4% up until April and registered unemployment falling to record low levels over the summer. Inflation remains under control at around 1% since the beginning of the year, while government finances enjoy a positive external trade balance and reduced budget deficit and debt ratios.

Vella said key to this growth included low interest rates on credit, EU fund absorption and the value added of their investment, but also reforms that have improved production and labour productivity, namely increased female participation in the workforce, an increased retirement age, and also the influx of foreign workers.

Even banks, he said, had seen non-performing loans (NPLs) decline by 12% thanks to improved creditworthiness, with the Central Bank now proposing that banks with NPLs higher than 6% reduce them to below that level within five years, or else increase their capital reserves.

He said that together with a common deposit insurance fund across the EU’s banks to protect depositors, cross-border banking will be strengthened.