With international money markets crashing and hugely unpopular utility tariff proposals overshadowing the upcoming Budget, Finance Minister Tonio Fenech has plenty to worry about.
We're experiencing a crisis in US and international markets. What are the effects on the Maltese economy?
The situation is clearly worrying. We cannot imagine that Malta is immune to whatever is happening internationally, but we're keeping a close eye on the situation.
How are you doing that?
We've analysed our banks' portfolios. The problem (in the US) started with defaulting home loans. In Malta we don't have that issue. Local banks lend very conservatively; they have adequate guarantees in terms of property and other collateral. Whenever they sanction a loan they make sure you can pay it back. Traditionally our default rates are less than one per cent.
Our banks did not go into the securitisation market - they were prudent enough to only go for stocks and bonds which have an established coupon rate and which get back the capital on maturity day.
(Still), the problem is having an impact on local banks which have invested their portfolio with a number of international financial institutions. At this stage what has really affected us is the fall in international market prices...
A bank (Bank of Valletta) had stocks in Lehman Brothers. The fact that Lehman brothers went bankrupt triggered off the problem... but approximately 50 per cent of that would be recovered. If you had to look at Bank of Valletta's portfolio, which is wisely spread out, the risk is minimised.
Bank of Valletta had 0.5 per cent of its portfolio wiped out. That's not insignificant.
It is insignificant in terms of the profit line. It is a hit which the bank can withstand. As long as the other institutions are responding in buyouts then what BoV owns in other institutions is safe - and that is what's happening now.
If the risks are minimal why are the local financial institutions so silent about the international situation? It is causing concern.
A bank has to be cautious about the way it divulges information. The same figures given by two individuals will lead to two different interpretations.
The silence is fuelling speculation.
The bank (BoV) said in initial statements that it had two difficult quarters, a third quarter in which it had recovered and a fourth equally good quarter. When the issue of Lehman Brothers cropped up, it was legally obliged to make a statement to revise the first statement. It doesn't mean that the bank is facing problems but that the projected profits have to be revised.
The bank will still make profits - if fear creeps in, it will be dangerous and it will be no fault of the bank. The bank has a portfolio of assets which has been compiled through proper risk management with established institutions which can withstand the storm.
Let's take the worst case scenario - if banks do go bust, will the government guarantee people's savings? The British government has a scheme which guarantees savings of up to £35,000 per customer.
If the situation arises, the government will act responsibly. We will not let our financial system fail. It's in the interest of the nation. I will continue monitoring the situation with the Central Bank governor and the MFSA chairman and we will take the right decisions at the opportune moment. So people can rest assured that we will protect our financial system because it's the backbone of our economy.
We are keeping in constant contact with our bankers to make sure the situation is not creating irreparable problems in any way. We are very, very far from that position. What's really concerning in the wider sense is what will happen to the world economy. This situation is spilling away from the banks.
What if we do reach that low point?
We are monitoring the situation daily and we have to make sure that whoever is managing our banking system is taking the most transparent and correct decisions. I want to put people's minds at rest.
How much revenue has the government lost from the banks' reduced profits?
The settlement tax would not have been established pending the banks' financial results publication. But our indications show that government's revenue from the bank taxation would be halved compared with last year.
Away from the international situation, with less than a month to go to the Budget there is trepidation. Is it going to be all doom and gloom?
In drawing up the Budget there are some very important decisions which have to be taken along the way. We have a detailed discussion at MCESD level on the new energy tariffs.
Clearly the government cannot keep supporting Enemalta to the tune of €43 million. The bills were not covering the full cost of energy. I'm in favour of lower taxation, but this can only happen if we sustain the momentum of lower subsidies.
If you want to have low taxes then you have to pay for what you consume. Clearly the rates have to be adjusted. But if the call we receive from everyone is to keep subsidising energy then we can't lower taxes. The money has to come from somewhere.
You've known about this since last year.
Yes - that's why we increased the surcharge. Since we are a responsible government and don't want to give a shock to the economy and reduce growth rates, we have decided to subsidise the surcharge for a while.
Eliminating subsidies is another term for the introduction of more taxes, which means it's going to bring about a slowdown.
No, eliminating subsidies means everyone will be paying their due. We should not have an issue about that.
Why don't you phase out the elimination of the energy subsidy over a number of years instead of doing it at once? It's going to hit a lot of people.
The country cannot afford to keep forking out €43 million in subsidies. If Enemalta cannot prove that it has adequate financing for its operations and capital requirements the banks will not support the corporation.
In the present liquidity scenario it is even more difficult. We will take mitigating measures, it doesn't mean that the government will not be subsidising anything - and that will form part of the discussions on the Budget.
Do you fear that the removal of subsidies is going to push some families below the poverty line?
They will have an impact on income but we have to remember the significant tax reductions which kicked in this year. The cost of living mechanism will also come into effect. If there are people who fall within the remit of needing support, then the energy support system will kick in.
But is the timing of such a change right, considering the delicate international situation and the slowdown in growth? This is major blow.
We can't keep postponing decisions. We have to readjust to this reality of prices. We have to strike a balance between taxes and subsidies.
So don't you think these new tariffs are going to result in a huge social cost?
If you take tariff proposal 5, which affects 70 per cent of households, mainly the middle class downwards, it will cost an additional €1.50 to €5 a week. If we can reduce consumption there will be a significant impact through the eco scheme we're offering. We need to conserve energy.
There is a growing voice of dissent about the government's change in tone. During last year's Budget they were fed a lot of goodies and now they're being told they have to bite the bullet. Do you blame people for feeling this way?
People have a legitimate right to these perceptions. We are committed to take the necessary decisions so that at the end of five years they will judge us and say they have had a good government. People do not judge us just in the weeks of the electoral campaign. What we're facing today was not what we were facing in the electoral campaign, not even the months before.
It's just eight months ago. The price of oil was high...
... no it wasn't.
Of course it was.
During the electoral campaign, the price of oil was touching the $100 a barrel mark.
It's gone down to around that figure again ($96)...
In July and August it reached $145 and now it's sliding again. It doesn't mean that we're today in a position to buy cheaper oil than the $85 a barrel we had paid for it. Let's remember that in 10 years' time energy consumption will double and to meet the demand we have to invest.
The PN promised a reduction in the maximum income tax rate in its electoral manifesto. Is it a foregone conclusion that we are to expect nothing this year?
No. We always go to the MCESD with options. We have not excluded any of the promises we made. Part of the proposals we made in the electoral programme were clearly intended to incentivise people to work and invest more.
Everything has to be taken in perspective. Last year and this year we had growth rates averaging 3.5 to four per cent. When we are now talking of average EU growth rates of 1.5 per cent before the American financial crisis - I must ensure that we don't wreak havoc in public finances just for the sake of keeping promises. That would only lead to an increase in taxes next year.
You used to argue that tax cuts actually generate more revenue for the government.
Yes, in a scenario of three to four per cent growth rates. But if in reality world demand slows down - you might want to work more, but there's no demand for your activity.
You must have an idea what you're going to do.
No, at the moment we're still analysing the situation and I still haven't completed my meetings with the other ministers to see what they're asking for. I still have a big chunk missing in my equation. The Budget is really prepared in the final weeks.
Right after the election, the Prime Minister said that the income tax cut promise will be executed this year. Did he jump the gun?
No he didn't. The situation we have today wasn't predicted in the few weeks after the election. When we had discussed the matter (of income tax cuts) we were clear that we still wanted to do it - but the world is changing every day, not every month.
Everybody would love it if there were tax cuts - so would I. But I have to act responsibly.
Would you be arguing the same way if we had a general election this coming March?
I wouldn't be arguing differently. During the election campaign when the Labour Party was saying it would have cut the surcharge by half we stood up and said it was not possible. It would have been a popular move had we done that, but we didn't.
Economist Edward Scicluna said that according to his past projections he estimates an increase of €60 million to €73 million over and above the budgeted deficit figure for this year (€68 million). Do you agree with him and can you see the government eliminating the deficit by 2010?
This year we have specific pressures which will clearly not allow us to reach the deficit target established in the Budget. We have subsidised Enemalta over and above what we would have projected and we have the (shipyards') early retirement schemes.
If we had to eliminate these two factors we would have been very close to achieving our targets, even slightly better than what we achieved last year. We won't be derailed from our targets as long as we address the energy issue and shipyards issue next year.
Yes, 2010 (to eliminate the deficit) is still possible, depending on the world economy. A slowdown would mean problems for everyone.
The Labour Party has accused the government of overspending during the electoral campaign. Can you safely say this wasn't the case?
It was not the case. The average rate of government spending was 10 per cent higher than the first six months last year because children's allowance - a big increase in last year's Budget - was paid in February. It will not be paid again in October. The argument that ministers were hurrying up to complete certain projects before the election - fine - that's what they should have done anyway... there's no scandal in it.
ST Microelectronics is said to be facing losses that could reach €58 million a year. After the initial messages of doom and gloom everything's gone quiet.
We've had a number of meetings with ST Microelectronics - they had said there were no plans to close any plants in Europe, and therefore the Malta plant should not be phased out. During subsequent meetings it clearly emerged that after having conducted a review of operations, ST is still viable - as long as we remain competitive. From the knowledge we have today and the discussion we have had, ST has no intention of closing its plant in Malta.
That's a different tune to the messages ST was sending you some three months ago when they indicated they would phase out within four years.
Yes - it's a different tune. After making an evaluation of the effectiveness of moving their plant from Malta to Asia they were realising that other elements come into play. Malta still has a very competitive advantage particularly in its engineering and development stage of the line which hasn't reached Asia.
Electoral promise 258 in the PN manifesto falls under your remit - it states that board chairmen should be appointed after a public call for applications. Most government boards have now been reappointed, but no public call for applications was ever made. Is that promise defunct?
No. First of all appointments are not for five years. Appointments to limited liability companies are for a year and in other entities they are there for three years at most. It's a promise that the government intends to execute during this legislature and there's a discussion on how this can be implemented.
We're not going out there asking who wants to be a director on Gozo Channel or Air Malta because everybody wants that post...
That's what the electoral manifesto says.
It doesn't specify that there is an application. What we are contemplating is the creation of a system where people would express an interest in being involved in government boards.
So far all chairmen have either been reappointed or the government has chosen people with close connections with the Nationalist Party.
I disagree. Look at the boards I have appointed and you will find that nobody knew the chairmen I have chosen. Of course, the government has to ensure that every chairman it appoints is loyal to the electoral programme that the government is working towards.
Watch highlights of the interview on www.timesofmalta.com.