How did Maltese households and firms fare during the pandemic?

The fact that Maltese households and firms were well protected by Government financial assistance is already quite known. The number of those registering for unemployment has remained low, while the proportion of the population in severe material deprivation has fallen. The number of firms has continued to rise, while employment is higher than it was a year earlier.

We also know that the banking system is very liquid. So much so that when Government issues Malta Government Stocks they are heavily oversubscribed. There have also been reports that deposits with the major banks have reached record levels. In terms of real wealth, mostly housing wealth, we know that property sales have boomed, and house prices have maintained a slightly upward path.

However, a more comprehensive assessment of the overall financial position of households and firms is missing in the national debate. Various surveys, particularly those issued by the European Commission, have indicated that households and firms are confident about their financial situation, with Maltese households claiming that at present they are able to make major purchases.       

But to fully grasp the effective financial situation of households and businesses, the best approach is to analyse the financial accounts compiled for both sectors. These are published on a quarterly basis by the Central Bank of Malta on its website and approved by the European Central Bank.

At the end of 2020, Maltese households had net financial assets of €22.7 billion. This was €1.1 billion higher, or 5% more, than the situation at the start of the pandemic. Families are now holding €114 million more in notes and coins, €876 million more in deposits, €259 million more in equity and investments and €218 million more in insurance and pension accounts. The amount of loans and accounts payable rose, while holding of bonds fell somewhat.

The financial accounts allow one to compare what happened in the first nine months of the pandemic with what had happened in the first nine months if the 2008 economic crisis. The difference is astounding. The pandemic, which is an economic shock far larger than the 2008 crisis, has seen households improve their financial position. The 2008 crisis had seen them face a loss of a third of a billion euro, or a decline of 3%. This reflected a large drop in the value of equity, a rise in debt and other accounts payable, and lower insurance and pension accounts.

Therefore, while in the pandemic the net financial assets of households rose by 5%, in the economic crisis of 2008 they had fallen by 3%.

Turning to firms, their net financial assets have fallen by €363 million, or by 3%. This reflects a drop in the value of equity, together with a rise in loans. Against that, other accounts payable decreased while firms increased their holdings of cash and bank deposits. The latter, for instance rose by €461 million during the first nine months of the pandemic, despite that activity was severely hit.

Looking at the first nine months of the 2008 economic crisis, the net financial assets of non-financial corporations had fallen by €460 million or by 6%. In that crisis, the drop was not in the value of equity, but rather a decline in bank deposits and a large rise in indebtedness. This was a sharp reduction in liquidity in a situation when firms were highly leveraged. Compared to 2008, firms now have deposits that are four times larger, while their loans have increased by just 60%.  

Financial accounts confirm that households and firms have fared much better than in the crisis of 2008, even though the latter’s economic shock was much less substantial. Besides the fact that this reflects the resilience of the Maltese economy, which has diversified greatly in recent years and has ascended more the global value chain, one must acknowledge the great financial assistance of Government. That said, even while in 2008 Government adopted austerity politics and did not assist firms and households, while now Malta’s assistance package is one of the most generous in the world, the burden of the national debt will be the same, or 65% of GDP. This is a real testament of good economic management.

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