BoV signals to the Finance Minister

The Minister of Finance will be looking at the 2008/09 results of the Bank of Valletta and probably rubbing his hands with understandable glee. After a dismal performance the year before, due to the cruel buffeting inflicted on its foreign investments portfolio by the global financial crisis, the bank has recovered with gusto in the 12 months to the end of September.

Operating profit (for the bank alone, not the group) went up to €92.472 million, against €39.725 million the year before. As the financial markets staged a very sharp recovery since the middle of March 2009, BoV clawed back part of its investments' loss of 2008 and up to March itself. There is more to be recovered, and that bodes well for the year ahead, should the financial markets stabilise at a platform from their recovery to build up fresh heads of steam over the next 12 months.

But that's in the future. For the present what interests the minister is the outturn announced by the BoV chairman over the weekend. The enhanced results mean that the Inland Revenue Department will be collecting €32.293 million from the bank this year, against €13.442 million last year. The big jump in the tax take will go some way to compensate for the sharp drop in receipts from the customs and excise and Vat votes.

The jump does not mean that it will be repeated next year and the minister will, I am sure, be cautious how much similar revenue he will include in the forecast for 2010. Yet what counts is the here and now, which is why the minister will express satisfaction.

While allowing him that with pleasure, I do suggest that the minister, apart from looking at the revenue side of BoV's profit and loss account, should also examine very closely the expenditure side. There he will note a rather remarkable factor which in its own way contributed to the bank's overall very good performance in the year under review.

The bank's operating expenses in the 12 months to September 2008 totalled €75.771 million. A year later, up to the end of September, BoV spent €74.969 million on outgoings. That is, it not only managed to keep its expenditure in check, it even managed to reduce it by €0.8million.

Containing expenses is something that the other major local bank, HSBC (Malta) has also been doing. The banks' ability to keep expenditure under tight control should cause the Finance Minister to set about examining how they do it. I have no doubt that he issued instructions long ago for all the government's spending departments to trim their outlays. And the Treasury must surely have been keeping a tight fist on all spending.

That notwithstanding, public expenditure keeps going up and up. The return of public revenue and expenditure for the nine months to September shows that the increase has not been due to any sharply higher outlays on the capital side, which is where any measures to try to stimulate the economy should normally come from. Higher expenditure was recorded under recurrent spending.

There are one-off items to explain part of the increase, like the balance paid to entice dockyard workers away from their job and turn the shipyard into a graveyard not even able to nurse the Fairmount losses, among other blows. And the Prime Minister and his Finance Minister say they have spent about €8 million to help several manufacturing firms retain and even plan to increase their level of employment.

Yet the increase in the deficit is more than that. The minister will explain it all, pointing among other things to the rise in social security benefits notwithstanding the tightening of controls against abuse. Wage and salaries creep will also have added to spending. Everything can be explained, but that is not enough. The structural deficit is roaring away in absolute terms, though its persistent inflation will keep it in some check in relative terms.

It cannot be allowed to continue to get out of hand the way it has been doing. Nor does the deterioration translate into some planned stimulation package to combat the lagged effect of the global recession. The job of the Finance Minister is never easy; perhaps it has never been more difficult than now, as the government has to control spending and try to increase revenue, but to do so without adding further burdens upon an economy which is staggering along rather than walking briskly.

Meanwhile, other aspects in the results announced by Bank of Valletta should be of some consolation to the government. Though inflation and lower overtime work have been eroding disposable income, and despite the millions that flowed into multiple bond issues during the year, the bank's deposit base still expanded considerably. Though the bank, like the rest of the banking sector, must be keeping eagle eyes on its loan portfolio, loans and advances expanded as the bank, in the chairman's words, continued to do its best to assist economic activity.

The chairman also warned of the lagged effects of the recession and implied possible difficulties for the business community. It will be interesting to see what will influence the Finance Minister most from the BoV chairman's statement as he puts the final touches to his 2010 budget speech.