Dark clouds and silver linings

Malta's economic growth prospects for 2009 have slipped from 2.5 per cent to 0.7 per cent in just two months. Kurt Sansone asks whether there is cause for concern.

The European Commission's interim forecast for 2009 puts Malta in a relatively better position than most member states but the figures are way off the government's budget projections. Even so, Finance Minister Tonio Fenech is not alarmed. He insists it is too early to talk of a mini-budget to overhaul the financial programme and the forecasts spelt out in November.

"The case for a mini-budget arises if I decide to either increase expenditure or reduce the deficit in an extraordinary way. It is important that we start implementing the budget measures first, which were intended as an economic stimulus package to enable the economy to grow," Mr Fenech said.

The Commission revised economic growth drastically downwards to 0.7 per cent, almost two percentage points less than the forecast read out by the finance minister in the budget.

The same applies to the deficit and debt figures. While Mr Fenech projected a deficit of -1.6 per cent, the Commission is forecasting a higher shortfall at -2.6 per cent. Mr Fenech had projected debt at 61.9 per cent of Gross Domestic Product with the Commission revising the forecast to 63.3 per cent.

The drastic revisions made by the Commission are cause for concern according to veteran economist Karm Farrugia, who believes the government is being too complacent in the face of dark clouds on the horizon.

"I am angry and worried. I feel there is too much lethargy on the government's part. This is going to be a long and deep recession. It will last for at least a year. This is no joke," he said.

Mr Farrugia is dismayed because the news was announced by the Commission rather than the government. He said statistics took too long to be published in Malta making it difficult to react quickly in the extraordinary circumstances that had developed.

"We still don't have the fourth quarter results for 2008. They will probably be published sometime in February. If the economy is found to have dipped in the fourth quarter we have a bigger chance of going into recession," Mr Farrugia warned.

His foreboding is not shared by the finance minister. According to Mr Fenech, the fourth quarter indicates that the economy will register growth and employment levels will remain good.

"We have to be careful not to make the situation worse. While we see stress, we are not in a critical situation like other countries. The government does not want to cause panic in the economy," Mr Fenech said.

The drastic changes in projections have raised questions over whether the government should hold a mini-budget to revise its financial and economic forecasts.

Mr Farrugia believes the government should present a revised budget in the short term.

"The finance minister should forget the three per cent deficit target. The government should immediately revise the water and electricity rates downwards to give people more purchasing power. The economy needs an urgent stimulus," Mr Farrugia said.

Economist and ex-finance minister Lino Spiteri, however, sees no need for a revised budget.

"The difference in figures between the government's forecast and the Commission's results is because the Commission used more recent data and so it is more up to date," Mr Spiteri said.

However, he stressed the need for the government to come up with fresh forecasts between April and June.

In a scenario that is changing every month, both economists agree on one important measure: the government needs to trim bureaucracy.

"More important than a revised forecast is the need to ensure that bureaucracy does not hinder economic activity. Otherwise, given the recessionary forces galloping all over the EU and the rest of the world, there is no way Malta can remain unscathed," Mr Spiteri warned.

His plea is repeated by Mr Farrugia, who also insisted the government needed to pump more money into the economy.

"Unnecessary red tape is stifling investors... that is something we cannot afford to have. The government needs to go further and provide incentives to industry. There are many ways of doing this, including putting pressure on banks to release more liquidity," Mr Farrugia said.

Mr Farrugia believes the time is ripe for money to be invested in the tourism sector. Public funds should be used to help three star hotels upgrade their rating.

"The government can inject the money, giving the companies a three-year interest-free period after which they would start paying back the money," Mr Farrugia said.

The finance minister is cautious about increasing the deficit beyond the three per cent target, arguing for a balance between increasing the deficit and maintaining stability.

"Increasing the deficit will make the country less attractive to investors. I don't want to see the country downgraded by rating agencies as happened in Ireland because that would be bad for investor confidence," Mr Fenech said.

The finance minister highlights two problematic areas: tourism and manufacturing.

With the tourism sector, the government could have more of a direct hand in helping the sector, he said, pointing out the increased budget allocation for the Malta Tourism Authority.

"We will experience a downturn from the British market but we also have to be wise enough to spend the money when and where it is needed. Decisions need to be taken on a weekly and monthly basis," Mr Fenech said.

He admitted, though, that in manufacturing the situation was tougher since export companies were dependent on consumption patterns in foreign markets.

"Some companies have gone on a four-day week because of reduced orders from abroad. But the fact that they have opted for a reduced working week rather than lay-offs is an indication that at some point they are prospecting a recovery.

"We are performing a week by week assessment of unemployment figures and are not seeing any alarming trend in redundancies," Mr Fenech said.

The minister insisted the government would take the necessary decisions, when, and if the need arose, to introduce corrective measures to those announced in the budget.

As for the government's target to reach a surplus in public finances by 2011, Mr Fenech said this was no longer a priority.

"We want to see the economy grow and that is what matters at the moment."

These words will go down well with Mr Farrugia, who insisted the target was unrealistic and "over optimistic in the first place".

ksansone@timesofmalta.com