Malta’s struggle with debt is major cause for concern – economists

Prof.  Edward Scicluna believes that in spite of Malta’s short term satisfactory economic growth, the future is not as bright, not just because of projected sluggish external demand, but because our low investment ratios will put a cap on our potential growth for the future.

Prof. Scicluna’s opinion was quoted by maltatoday journalist Matthew Vella, who together with journalist Karl Stagno-Navarra co-authored the article titled Malta’s struggle with debt is major cause for concern – economists, published by maltatoday on Wednesday, 14 September 2011.

Journalists Vella and Stagno-Navarra, tackling the recent downgrading by Moody’s of Malta’s bond ratings from A1 to A2 and the change of its economic outlook to ‘negative’, sought the opinion on Moody’s report of economists Prof. Edward Scicluna, Lawrence Zammit, Gordon Cordina and Karm Farrugia.

Article published by maltatoday follows:

Malta’s future “is not looking bright” according to Labour MEP Edward Scicluna, who is cautioning that the island’s debt exposure is much higher than it is being made out to be.

The recent downgrading by Moody’s of Malta’s bond ratings from A1 to A2 and the change of its economic outlook to ‘negative’ has been in part attributed to Malta’s exposure to the Eurozone’s instability.

But Moody’s has also cited Malta’s “weak debt metrics” as a factor contributing to its negative assessment. Malta’s national debt is 68% of its GDP – less than the EU average of 85%. So why should we be worried?

“We also need to add €1 billion of guarantees on public corporations’ debt – the second highest in relative terms in the Eurozone; and €400 million of guarantees on external debt tied to the European Financial Stability Facility (EFSF). Together with the €74 million bilateral loan to Greece they bring the ratio up to just under 90%,” Edward Scicluna told MaltaToday.

The MEP is saying that although short-term economic growth in Malta has been satisfactory, Malta is not suffering because of low demand for its good and services, but because of its low investment ratios.

“The best indicator for total investment – whether public, private, foreign and local – is its ratio to GDP. This is a primary determinant of our maximum capacity to grow. In 1995 it stood at 30%. The decline saw this ratio falling to 26% in 2000 and 16% in 2009. The Commission estimates this will go up to 18% by next year. Is that not disappointing?” Scicluna asks.

Scicluna finds agreement from former Air Malta chairman Lawrence Zammit, who says that Moody’s downgrading of Malta’s creditworthiness was not related to the economy, but to the servicing of local and foreign public debt.

“It is the debt element that has forced the downgrading,” Zammit argued, adding that Moody’s interprets the scenarios of a possibility of a double-dip recession.

Zammit says that government must ensure fiscal consolidation. “If only we could address that in a serious manner, then we need not be worried about downgrades,” he said.

Terrors of the West

Edward Scicluna has argued that Moody’s analysts meet members of both the government and Opposition, as well as the Central Bank and other economists, before giving its ratings.

“Remember: there is a downgrade and a negative outlook, each one in turn has its causes,” Scicluna says.

“The downgrade is the easier to explain.  When we were accepted in the Eurozone, Moody’s felt that our debt profile did not really deserve an upgrade, but they did go ahead with this, on the premise that since we have been accepted into a distinguished club of advanced European countries, and have promised to abide by the then strict rules of economic behaviour, we would converge to their standards.”

Today however the Eurogroup is splitting itself into two: the top performers’ and the laggards’ group. “Since Moody’s noted that nothing from our economic profile had changed for us to deserve staying with the top performers, we were relegated to where we were before.

“And unless government improves its public finance performance, Moody’s intends to downgrade us again,” Scicluna ominously warns.

According to economist Karm Farrugia, credit rating agencies have become the “terror” of western, and perhaps even the global economy. “Sadly their influence far exceeds the expected from a collective opinion of a bunch of anonymous economists, chiefly secretive,” he said.

Farrugia says that the worst part of credit rating agencies is that “no one agency confronts another, as schools of economic thinkers are known to do…”

But with regards to Malta’s downgrading, Karm Farrugia says that “downgrading our credit worthiness is only ‘one’ view, and possibly not entirely shared by other agencies, if only they bothered to grade us similarly.”

Differing opinions

But it is a truth universally acknowledged that for every economic development there will be as many interpretations as there are economists.

This certainly holds true for the Moody’s downgrade. According to economist and university lecturer Gordon Cordina, the Moody’s downgrade is of a fiscal and not economic nature, and can be addressed by increasing government revenue.

“We were upgraded when we joined the eurozone, and downgraded because of fiscal problems in the eurozone,” he explains, adding that the downgrade reflects the outlook for a worsening economic scenario within the eurozone and worldwide.

Cordina says Moody’s are signalling the importance of the country taking stock of its social models and their efficient distribution over the next five years. “I am not saying slash social benefits, but we must be more efficient in the delivery of such benefits,” he said, adding that government must also ensure more sources of revenue to be able to afford such benefits.

“By increasing revenue I don’t mean through taxes, but surely there are many other ways for government to increase its revenue, such as confronting evasion,” Cordina says.

But veteran economist Karm Farrugia argues that increasing revenue is not the best way forward to combat negativity.

In his assessment of the significance of Moody’s downgrading, Farrugia says that reducing expenditure is important, providing that it does not come from capital projects given that they employ more people and keep most of the resultant added value.

“It is wastages we must combat, and they are rampant in most areas of the public sector,” Farrugia argues, saying that government’s reaction to the downgrading is “correct” even though it shows “complacency.”

“The Opposition is equally correct in laying emphasis on the negative outlook which Moody’s forecasted, and which probably tipped the balance in favour of a downgrade,” he said.

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