Beyond the Pandemic
Address by Dr Mario Vella
Governor, Central Bank of Malta
during the IFS webinar
Continuity Post Pandemic: An Economic Perspective
Thursday, 10 December 2020
Undoubtedly, 2020 will be remembered as the year of the COVID-19 pandemic, which has tragically
led to loss of lives and economic hardship for very large numbers world-wide. The outbreak of COVID-
19 and the measures to contain the spread of the virus brought about a global economic shock without
precedent after the Second World War. The world economy entered a recession, which has been far
deeper than that experienced during the Great Financial Crisis of 2008-2009.
Containment measures were highly effective in controlling the first virus outbreaks, though this came
at a very significant economic cost. With the initial lifting of measures, economic activity began to
recover and sentiment did improve. However, active cases rose sharply again and the health situation
deteriorated by the end of the summer, forcing many countries in Europe to re-introduce containment
measures by October. Although the level of stringency of the latest containment measures were less
than those implemented during the first wave, activity is still more restricted compared with the third
quarter, undermining global recovery prospects.
Similar developments could be observed in Malta. Activity was significantly restricted during the
second quarter of this year, in an effort to contain the spread of the virus. Travel was practically
banned - barring for repatriations - with severe consequences for the tourism industry. Other services
were deeply impacted by the shutdown of non-essential services, and other sectors - such as
manufacturing - were adversely affected by disruptions to the global supply chain. Although GDP still
posted positive growth in the first quarter, the contraction in the second was broadly at par with that
registered in the euro area. Incoming data suggest that economic activity began to recover and
sentiment improved in the third quarter as the most disruptive containment measures were lifted,
but rising positive cases and newly introduced restrictions will likely weigh on activity in the fourth
quarter, so that confidence among consumers and business is likely to take longer to recover than
previously anticipated.
During these uncertain times, projections have become increasingly difficult, as economic activity is
intrinsically linked to the evolution of the pandemic, its impact on confidence of consumers and
businesses, and very importantly to policy support and prospects of a medical solution.
Unlike the great financial crisis of 2008-2009, the fiscal response has been prompt and significant,
aided by the fiscal space accumulated in recent years. Liquidity measures such as tax deferrals,
moratoria on loan repayments and the Malta Development Bank COVID-19 Guarantee Scheme, have
all been fundamental in limiting bankruptcies by providing liquidity support. In addition, the Wage
Supplement Scheme has been very successful in avoiding higher unemployment. Additionally, the
voucher scheme has been a welcome boost to support domestic consumption, and provided some
relief to the retail and hospitality sector during summer. Meanwhile, both the ECB and the European
Commission introduced new pandemic instruments, which benefitted the domestic economy, though
the benefits of some of these, like the Next Generation EU funds, will accrue during 2021.
Given this context, the Bank expects economic activity to contract sharply this year, with a gradual
recovery starting next year, though this outlook is conditional upon a containment of the spread of
the virus and the rollout of a vaccine during 2021.
Compared with our August projections, we are revising GDP growth downwards in 2020 and 2021 due
to the deterioration of the international economic environment; the renewed containment measures
introduced in October; and a more subdued recovery in tourism than previously anticipated.
Exports are expected to be the largest contributor to the decline in GDP in 2020. Both domestic and
external factors have been severely negative for exports during this year. In particular, foreign demand
has declined dramatically while travel disruptions negatively affected services exports. In addition,
supply disruptions during the first part of the year have adversely impacted the productive capacity
of Maltese exporters. Exports should bounce back next year, but will likely remain constrained by
uncertainties related to travel and Brexit. Furthermore, in 2021, foreign demand is expected to
recover only partially from the decline experienced in 2020.
As restrictions were lifted in May and June, private consumption is expected to have recovered
somewhat, partly assisted by the Government's voucher scheme, though uncertainties about the
length of the pandemic are likely to have kept household saving higher than usual. We expect this
positive momentum in consumption to persist in the final quarter of the year, amid relatively resilient
labour market conditions, though the containment measures introduced in October are likely to limit
expenditure on certain services and may keep household saving still abnormally higher. Overall,
consumption is expected to decline in 2020, but is expected to be the main driver of the recovery in
the coming year.
The decline in demand and the elevated level of uncertainty have also led to deferrals in private
investment plans. Therefore, overall investment is projected to fall significantly in 2020. However, as
the level of uncertainty recedes, private investment is expected to bounce back. Furthermore, the EU
Budget as well as NGEU funds will provide a substantial boost to government investment during the
next year.
One of the surprising aspects of this recession has been the extraordinary resilience of the labour
market in Malta. Despite the unprecedented decline in economic activity in 2020, overall employment
levels have held up very well. Following an increase in unemployment levels in April and May,
thereafter unemployment embarked on a gradual downward path. The unemployment rate, though
above pre-pandemic levels, remains very low historically and the lowest in the euro area.
Nonetheless, the outlook remains surrounded by an elevated degree of uncertainty and risks remain
firmly tilted to the downside. These relate mainly to the response of consumers and firms when a
number of support measures came to an end. Furthermore, the recovery in exports may be slower
than expected if international tourism - and foreign demand generally - take longer than expected to
recover, or if sectors worst hit by the pandemic fail to restructure to remain competitive.
Turning to the banking sector, the local banks entered the COVID-19 crisis from a solid financial
position since they were operating with ample liquidity and high capital ratios, good profitability and
declining NPLs. However, the banking sector, just like virtually all other businesses, was certainly not
immune to the effects of the spread of COVID-19. It presented banks with unprecedented challenges,
both from an operational perspective and financially. Firstly, banks have focused on keeping their
employees and customers physically safe and followed the guidelines and recommendations issued
by the authorities. The banks ensured that all their business functions continued to operate as
seamlessly as possible with the least possible impact on customer services. In particular, their digital
banking platforms allowed their customers to continue to undertake banking transactions from the
safety of their own homes. Overall, domestic banks responded positively to this challenge and they
are proving to be instrumental in supporting both businesses and households, and in providing credit
to facilitate the economic recovery.
Banks were pro-active and had voluntarily already began providing moratoria before the coming into
effect of Directive No. 18. This was necessary to support both businesses and households that had
experienced a sudden stop or reduction in income flows as a result of the pandemic. By the end of
August, outstanding resident loans subject to moratoria had peaked at €1.9 billion, equivalent to
almost 17% of resident lending, with households accounting for the lion's share, though these
represented 10.1% of lending to households. By September, the amount of loans subject to moratoria
started to decline, falling to 15.6% of resident lending, as some of these borrowers were in a position
to resume their loan repayments, signalling a recovery in economic activity. At the same time, around
€165.6 million loans were disbursed under the Malta Development Bank's COVID-19 Guarantee
Scheme, accounting for almost 4% of the resident corporate loan book to support working capital
requirements of businesses. A further €178 million have been sanctioned but not yet disbursed. Such
loans were mainly granted to the wholesale and retail trade, accommodation and food service
activities, and the transport and storage facilities, which were the sectors that were worst hit by the
pandemic. Banks worked hard to activate such schemes within a relatively short period of time.
The support provided by domestic banks was made possible because of their prudent business models
coupled with the implementation of a stronger post-global financial crisis regulatory framework,
which over the past years strengthened the overall resilience of the financial system. Although, as with
other banks around the globe, domestic banks posted significantly lower profits - with a few
registering losses in the first half of 2020 - their financial standing remains sound. This has been
consistently confirmed by the Central Bank's latest stress tests aimed at assessing the resilience of
domestic banks to the adverse effects of the pandemic. Such tests featured extensively in our Financial
Stability Report and in the Interim Report. The resilience of our banks, as the current spread of the
pandemic continues to unfold, is truly a testimony that prudence is the best response to the high level
of uncertainty created by this shock.
As a result of the pandemic, the ECB, national central banks, and the regulatory authorities have all
launched a number of measures aimed not only at supporting the economy, but also in part directed
at encouraging banks to utilise the capital and liquidity buffers built up in recent years to deal with
crisis situations that arise. Such measures included:
• In order to ensure that banks can continue to fulfil their role of funding the real economy, the
ECB allowed banks to temporarily operate below the level of capital defined by the Pillar 2
Guidance and the capital conservation buffer, to operate below the liquidity coverage ratio
and to partially use capital instruments that do not qualify as Common Equity Tier 1 capital to
meet the Pillar 2 Requirements;
• Easing of collateral requirements in obtaining funding from central banks;
• Introduction of TLTRO III to provide banks with very cheap funding at an interest cost of up to
minus 1% if such funds are lent to businesses;
• Provide liquidity through a €750 billion Pandemic Emergency Purchase Programme;
• Further flexibility in prudential treatment of loans backed by public support measures, thus
allowing banks to avoid procyclical effects when applying IFRS 9.
• The lowering of the countercyclical buffer requirement to zero in a number of countries.
• Requesting banks to suspend shareholder distribution of dividends for the 2019 financial year
as well as for fiscal year 2020, at least until October, to enable banks rebuild capital buffers.
All such regulatory measures have been implemented not only to encourage banks in their ongoing
support to the economy but also to ensure the stability of the banking sector going forward. With
these measures, one needs to take into consideration the fiscal support through a broad range of
government measures aimed at helping households and businesses, which also indirectly sustain the
banks by mitigating the effects of the crisis on bank balance sheets.
The negative implications from the pandemic will continue to be felt in the near term and this is why
the Central Bank encourages all financial institutions to preserve capital, while at the same time
continue to lend prudently and avoid unnecessary forbearance measures. I will repeat: the banks are
sufficiently liquid, with strong capital ratios and financial resources, and these, coupled with their
technological infrastructure and human resources, is enabling them to meet the challenges that the
pandemic presents.
To conclude, although the pandemic has been around with us for some nine months, the uncertainties
surrounding it are still high, although recent news of the rollout of a vaccine in the very near future
have surely given hope that we are closer to the end of the pandemic. Nevertheless, its effects will
not go away any time soon, and 2021 will be a challenging year, both from an economic perspective
and for the banking sector. Therefore, both fiscal and monetary authorities will need to remain vigilant
and monitor closely the situation to avoid untimely withdrawal of support measures.
Finally allow me a footnote. I would have welcomed this opportunity to say something about Brexit.
However, in view of the coincidence between this event and the ongoing saga, I will not do so today.