Some weeks back, Prime Minsiter Gonzi was elated with ratings that Malta received from Mood’s International.
Admittedly, a first reading of the report appears surprisingly positive. However, when one looks more carefully, it soon transpires that Moody’s give the Gonzi government several subtle warnings. In fact, this report highlights not only the many shortcomings in the Government’s future plans, but also Gonzi’s Government lacklustre political vision.
Let us first take a look at what is positive about Moody’s report of 3 February 2010: (i) “Malta’s A1 government rating reflect the country’s high economic resiliency and its very high financial robustness…”; and (ii) the argument made by Hornung (the author of the report) that “now, the risk of economic disruption from the political cycle is far less than it has been historically, not least because of the heavy constraints on economic policy that are imposed by Malta’s membership of the EU and its adoption of the euro.”
The A1 rating, although a positive one, is definitely not a certificate of excellence. So much so that the ratings A1 to A3 are indicative of “low-credit risk”; they also “suggest a susceptibility to impairment over the long term”. In fact, Malta has been compared with countries whose economy is in transition; that is, an economy that is being transformed from a restricted one to one that is entirely open, as is the case with countries such as the Czech Republic, Estonia, and China.
In addition Moody’s insists that the state of Malta’s general economy is a ‘stable’ and not a ‘positive’ one. In order words: there is very little else to add. Under a government with Prime Minister Gonzi at the helm, Malta’s economy has registered no growth whatsoever.
Apart from this, one has to understand that in assigning this rating Moody’s give credit to Gonzi’s Government for one thing only – for taking Malta into the Eurozone. This lack of magnanimity on Moody’s part is quite understandable given that the process of convergence with the rest of the Eurozone is an on-going challenge. At the same time, at no stage does Moody’s register any genuine attempts by the Gonzi government so that this convergence is realised. So much so that the Maltese government is chastised about what still needs to be done.
It is an interesting fact that Moody insists that Malta will have to seriously address the problem of its economic structuring. Malta has manifested serious shortcomings in regard to the size and inefficiency of the public sector, its widespread dependence on subsidies, the lack of investment in innovation and research, and the low rate of participation by women in the workplace. All this shows that the Gonzi government has still a lot of spadework to do in order to come close to the targets set in the Lisbon Strategy.
Gonzi is blowing his trumpet very prematurely when he asserts that Malta has managed to overcome the first wave of the international financial crises. Malta has many more serious problems to deal with, none of which have anything to do with the international financial crisis – a crisis which Gonzi likes to pull out of the hat in his attempts to disguise his incompetence and that of his ministers.
Moody’s report is clear and unequivocal: Malta cannot expect any substantial improvements. The increase in the economy will be a small one. The Maltese market is too small and very little diversified to expect otherwise. Hence, as confirmed by Moody’s, there will be rumblings in the different sectors of Malta’s economy. This apart, Malta’s total dependence on the importation of crude oil will bring with it serious problems, not least because the price of crude oil has a tendency to reach high levels over time. It is also evident, as indicated in Moody’s, that the abolition of water and electricity subsidies have brought about additional expenses for families as well as on industry in general. To make matters worse, the fact that water and electricity are supplied by a monopoly, in a country where deregulation is difficult because of the very small size of Malta’s market, does very little to ensure that water and electricity tariffs truly reflect the international price of crude oil.
In this regard London’s Economic Intelligence Unit in its 1 December 2009 report is very clear about this and forecasts serious outcomes for Malta: “Real GDP is estimated to have contracted by 3.2% in 2009, slightly less than the euro area average. Domestic demand will be subdued over 2010-11, as unemployment remains at relatively high levels, peaking in 2010 before easing slightly in 2011. Disposable income will continue to be squeezed by higher energy costs and lower wage growth. Consumer sentiment will be constrained by weak demand in the important tourism and manufacturing sectors… Tourism activity will also remain subdued, with the result that any positive contribution from the foreign balance will be modest. Overall, GDP is forecast to expand by 0.4% in 2010 and by 1.3% in 2011, well below the average growth recorded in the pre-crisis period”.
The Moody’s report draws attention to a serious problem for Malta which ironically was first instituted when Gonzi was at the helm of the Maltese Government. In June 2009 the European Commission instituted formal procedures against Malta on account of its inability to control the national deficit. Our fiscal challenges are imposing especially when one bears in mind that the deficit is on the increase, in 2009 being higher than the three percent GDP budget deficit threshold.
Moody’s makes it perfectly clear that it will not be easy for the Maltese Government to consolidate its fiscal policy especially since subsidies, state aid, salaries in the civil service and entitlement spending are far too high. Moody’s warns Gonzi’s Government about the very little space it has to manoeuvre. Moody’s also reports that 70% of Government espenditure are fixed commitment (e.g. recurrent expenditure such as salaries and pensions).
In actual fact Gonzi and his Government have a very difficult uphill journey ahead of them – the problem of Malta’s competitiveness on the European and international markets. Moody’s confirms that at a time when inflation is at a high level, the mandatory wage stabilisation process that is COLA renders competitiveness more elusive and difficult to attain. It is very unlikely that Gonzi’s Government will be capable of solving the problem of Malta’s lack of competitiveness. As the Economic Intelligence Unit points out:
“…A gradual recovery in world trade is expected to lift exports at a slow pace, but Malta may lose market share on account of falling price competitiveness. This partly reflects the adverse impact of a strong euro on Maltese exports owing to their large exposure to countries outside the euro area. In particular, the performance of the semiconductors industry is likely to be weak and a decision to relocate such activity elsewhere by the end of 2010-11 cannot be ruled out.”
In fact, Moody’s makes the point that although ST Microelectronics remains the firm with the largest workforce in the manufacturing sector, it nevertheless cut its workforce by 25% and warns that “... the textile sector has left the Island and the electronic sector is also turning into a sunset industry…”.
Moody’s report asserts that Malta’s banking sector has manifested robustness by successfully resisting the first wave of the global recession, while at the same time confirming that the sector did not receive any Government aid. However, while Moody’s is suggesting that Malta’s economy owes its survival to the banking sector, at the same time Moody’s expressed concern since the banking sector is heavily dependent on the property market.
In an austere tone the Economic Intelligence Unit draws the following bleak picture: “Fixed investment and exports have contracted sharply with consumer confidence weakening, driven by lower disposable income and negative wealth effects, weighing on household spending, concerns about the underlying strength of the banking system as defaults and loan losses rise, and the negative wealth effect from falls in house prices and other asset classes. Investment is expected to remain weak in 2010, with the residential property market experiencing further declines, albeit less sharp ones than in the previous two years…”
One would be justified to conclude that the Prime Minister Gonzi’s puerile behaviour – his bragging about the ‘certificate’ he alleges Moody’s have bestowed on him and his Government and his self-compliments – is merely symptomatic of the demotivation and lethargy that have taken hold of him and his Government in the face of Malta’s long list of financial and economic problems, many of which are self-induced by his and his Governments incompetence, lack of foresight, and mismanagement.
Gonzi is quickly and irrevocably running out of steam and increasingly appears incapable of rallying his ministers and MPs to push forward those reforms that are essential if Malta is to seriously address its structural problems.
Dr Farrugia is Deputy Leader of the Partit Laburista
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