Funding national projects

In the concluding paragraph of last week’s article, I remarked that “the latest ambitious reiteration of the Grand Harbour regeneration plan is another clear case study of how the intermediation function of the capital markets can enable investors mobilise their liquidity to fund sizeable projects for public and private initiatives”.

Given the huge publicity being given to the Grand Harbour regeneration plan, I think it is necessary to provide further details on how the capital markets can be used to diversify the funding sources of long-term national development projects and in turn mobilise private investment.

In recent years, several EU member states have also promoted the use of capital markets to fund a wide range of national projects including renewable energy, transport infrastructure, digitalisation and housing.

One of the strategic goals of the EU is to foster stronger capital markets across member states to reduce reliance on bank lending, improve cross-border investment flows and help to channel private savings into productive investments. This is essentially the main aim of the Savings and Investments Union (SIU) and the recommendation to launch Savings and Investment Accounts (SIA’s) across the eurozone is specifically intended to encourage investments by retail customers in order to grow household wealth and prepare for retirement. In turn, this generates demand for stable and long-term investments producing a sustainable income stream.

As such, suitable investments need to be available via the Malta Stock Exchange for the potential continued growth in the number of investors that are likely to be accessing the local capital markets. Projects of national importance such as the Grand Harbour regeneration plan, a new mass transportation system as well as a permanent link between Malta and Gozo could all be valid ideas to have public-private partnership (PPP) structures in place. These should be encouraged to have debt and equity instruments listed on the MSE with the backing of international investors of repute as anchor players. This will undoubtedly help to deepen the local capital market.

Activity on the Borża is currently dominated by the bond market rather than the equity market. Malta Government Stocks (MGS) and corporate bonds attract the lion’s share of trading on the secondary market due to an investor base skewed towards domestic retail investors whose general preference is for income-generating securities and having a ‘buy-to-hold’ mentality. New issuance on the primary market is also centred around the bond market. Last year, new corporate bond issuance exceeded €700 million while sovereign bonds via the MGS market amounted to €1.26 billion. This pattern is very likely to continue in 2026 with new MGS issuance estimated at up to €1.9 billion and the corporate bond market also continuing on the same busy trend of last year.

One of the advantages and attractions of the Malta’s sovereign bond market (MGS) is the role of the Central Bank of Malta as a ‘market-maker’ in Government securities. While this is not a role played by other national central banks in the eurozone, such a mechanism is necessary in view of the constraints of Malta’s capital market where other institutional players and credit institutions do not play an active role in providing liquidity. However, this is of fundamental importance since it provides a degree of comfort to investors in the sovereign bond market that a buyer of ‘last resort’ is present on a daily basis.

Given the very strong growth of the corporate bond market and the continued popularity also evident this year, a similar set-up needs to be created in corporate bonds with credit institutions or government-backed entities performing the role of a Liquidity Provider. While this may be currently overlooked by the MSE and many market participants, the introduction of a liquidity provider is urgently needed given the strong growth of issuance being experienced. The MSE had announced that it is looking into the introduction of Liquidity Providers for the equity market and the Chairman of the MSE had stated that “discussions are taking place with the tax authorities to consider tax benefits for liquidity providers and issuer market makers”. Such tax benefits are fundamental to make this a viable proposition which is an urgent pre-requisite for a more active secondary market.

As I have documented in recent years, the equity market has failed to recover from the brutal hit of the COVID-19 pandemic as well as other shocks over recent years which have dented credibility in a significant manner. The low level of trading activity in the equity market creates a circular challenge: (i) investors fail to participate due to limited trading activity and seek to exit current exposures; (ii) companies hesitate to list on the MSE due to restricted market depth and weak trading volumes; and (iii) the Borza remains dominated by bonds rather than equity.

In essence, the MSE is clearly struggling to reach the critical mass necessary to achieve the two-way momentum required for a liquid and active secondary market for equities. Apart from the need to have liquidity providers and/or corporate market makers, a more active secondary market also requires a new breed of investors. The privatisation of the MSE which I mentioned in another article recently, should be the starting point of a clearly-defined internationalisation strategy of the capital market to place Malta on the map of the international investor community. After all, the country is registering the highest rate of economic growth in the EU and therefore this alone should be a very positive attribute for any roadshows to international investors.

The funding of national projects via MSE-listed instruments, especially given the historic and strategic role of the Grand Harbour, should encourage public-private partnership structures (with the introduction of international investors given the uniqueness of the Grand Harbour) and strengthen the role of the Malta Stock Exchange as a financing platform. This will also help to create more equity instruments on the Borza.

Unfortunately, the credibility of the equity market suffered another major setback in recent months with the disturbing developments concerning other national projects (Malita Investments plc) and the Government’s intervention with an important land concession (Manoel Island).

While this does not bode well for using the MSE for other national projects in the future, the capital markets need to remain a central financing pillar for Malta to fulfil the EU’s Savings and Investments Union.

The MSE needs to therefore evolve into a more diversified investment ecosystem by encouraging equity ownership and issuance, improving secondary market liquidity and attracting international investors beyond the traditional domestic base. The Government of Malta has a key role to play as the sole shareholder of the MSE and also as the key stakeholder of major national projects that can be an important catalyst to attract international investors and reignite investor enthusiasm locally.

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