Finance Minister Tonio Fenech is interviewed by Anthony Manduca about the state of the economy and the prospects for 2010.

In the Budget you projected a deficit of 3.8 per cent for 2009 and 3.9 per cent for 2010. You also projected a GDP contraction of -2 per cent for 2009 and growth of 1.1 per cent for 2010. Are you sticking to these forecasts?

As I have had the opportunity to state on other occasions, growth and financial projections are made on the basis of a number of other projections that are strongly affected by external factors over which we have no control. I believe that as the European economies start to recover and grow in 2010, together with the economic stimulus provided through our Budget for 2010, with several initiatives such as those aimed at SMEs or the massive investment in infrastructural projects, we can indeed see a level of growth over 2010. Clearly, if the recession in our major trading and tourist markets does not subside, that may adversely impact our projections.

The latest GDP figures show that Malta is still in a recession unlike most other developed countries. Why do you think Malta is taking so long to emerge from recession?

Malta is a very open economy which is highly dependent on events happening elsewhere. We can stimulate a level of local demand by taking certain initiatives - which we did, as indeed the Budget for 2009 has provided for a stimulus package equivalent to 1.6 per cent of GDP, and which was hailed by the European Commission as one of the most effective implemented among all EU countries.

However, I do not think that the situation elsewhere is very positive. The economy of the European Union as a whole is struggling in the current circumstances. This is clearly manifested in the loss of jobs, which is expected to reach around nine million by the end of the current recessionary phase. A number of countries, especially those in Eastern Europe but also Spain and Ireland, are experiencing double digit unemployment rates. Unemployment has reached record levels, as 24 million EU citizens are looking for a job.

Our domestic economy, small and open as it is, could not avoid being affected by these developments. On the other hand, the cost it paid in terms of GDP reduction and unemployment growth was contained to around one half that of the EU average. The only difference is that while others were already experiencing a downturn in the first quarters of 2009, our economy was still experiencing growth. This lagging effect is now occurring inversely.

Also, finance wise, I believe we are standing, thanks to our efforts over the past years to put our finances on a sound basis, on a much stronger footing than many of our partners in the EU. These are experiencing enormous deficits and consequently had no other option but to adopt austerity measures, increasing taxes and cutting or freezing wages and government investment in essential areas such as health and education. It is true that we had to take politically sensitive decisions such as adapting the energy prices, but at the same time Malta, with already the lowest tax rate on employment, was one of the few countries to keep increasing spending in its social commitments without introducing or increasing any tax.

The Prime Minister has forecast that Malta will exit the recession by the third quarter of 2010. Are you confident about this?

I am confident that 2010 will signify the return of growth. We have provided the tools for this to happen, but once again we are very much dependent on other factors. Having said that, there is no reason not to be optimistic. The government has provided a number of tools to make this happen. We have substantially increased the budget for tourism marketing, we will be further promoting Malta as an investment location and millions in EU and local grants will be available for companies to refurbish their premises, employ new people, innovate and invest in IT. All these support measures are intended to achieve that goal.

The GRTU is saying that the new utility tariffs mean a 48.7 per cent increase in electricity bills for small businesses and a 16 to 25 per cent increase in water bills. Are you concerned these new tariffs, coupled with higher tariffs for consumers, could threaten Malta's economic recovery?

I do appreciate that these tariffs will have an impact on our businesses, but in terms of competitiveness, energy prices have gone up elsewhere and thus our businesses will not be placed at a competitive disadvantage in respect of their competitors. Clearly it will have an impact on the spending powers of consumers although allow me to remind you that the government will be supporting families with a €30 per household and €25 per person voucher to counter these increases.

Those families that have been careful with their energy use during the past year will see minimal or no increases over their previous bills. Moreover, I have been discussing with representatives of major economic sectors to see how we can mitigate the effects of tariffs on businesses.

Are you satisfied with the way the government tackled the economic crisis in 2009? What did this crisis teach you and would you do anything differently if another similar crisis emerges?

It is not easy to say what would have been had we not taken the necessary decisions. Once again, it is not of any satisfaction to look at the difficulties other countries are facing, but, I must say, considering the downturn has had on tourism, manufacturing, on trade and other areas of the economy, effects that will continue to be borne out over the coming months, we are encouraged that local business confidence has recently started to show some signs of turning less pessimistic.

Unemployment levels have grown and for us this is of concern, but we have not seen the levels of massive unemployment that have brought certain countries almost to civil strife. We have managed to achieve a degree of success in maintaining levels of employment without dismantling our finances while maintaining sustainable increases in social expenditure.

Many economists expect only a slow recovery in the major industrialised countries, as entrepreneurs will be cautious and prudent in their business and in their investments, which will also imply that growth in employment will be gradual. This for us is a matter of concern, and a reminder that employment needs to remain at the centre of our policy-making in 2010.

What particular areas of the Maltese economy are you hoping will lead Malta out of recession in the third quarter of 2010?

Interestingly, when one looks at the different economic sectors and their performance throughout 2009, although the average marks in the negative, it is indeed only the manufacturing industries that have felt the brunt so negatively to impact the economy as a whole, as most of the other sectors remained stable or even experienced growth, such as financial services, ICT and gaming. These will be on the forefront of growth, but we also aim to generate growth in tourism, with a substantially increased marketing budget as well as domestic demand, through large-scale infrastructural projects that will be initiated next year. SMEs, which are the backbone of our economy, will also need to play an important role, and we believe that this can be achieved with the significant incentives that have been offered for them to modernise, upgrade and hire new people.

Has there been a positive response to the various measures introduced in the Budget to help SMEs such as the microfinance schemes?

Definitely. I was impressed by the overwhelming response by local entrepreneurs with regards to SME initiatives. Indeed, the interest in the tax credit and micro-credit schemes has been substantial with hundreds of calls reaching the offices of the Micro Business Support Unit and the Budget Helpline during the past month, along with a number of e-mails or enquires in person at the ministry.

Although most of the interested businesses were at this stage only seeking clarifications on the methodology of the schemes, on their applicability to their businesses and the timeframes involved, there seems to be a genuine interest by Maltese and Gozitan SMEs to renovate their businesses, to invest in new machinery or technology or to employ new personnel through these unique incentives being offered.

This is ultimately the rationale behind the announcement of such schemes, through which the government aims to tap in the considerable potential of SMEs to generate economic growth and job creation.

It has not been a very easy year for you. Besides having to deal with a very difficult economic climate there were also a number of allegations made against you. How did these allegations affect you and what impact did they have on the way you carry out your ministerial duties?

Indeed, 2009 came along with a number of challenges. To me, no challenge could have been bigger than a financial and economic crisis of unprecedented proportions that have seen banks, companies and even countries collapse. These required the government's total attention and resources, and today, I am pleased to note that despite a non unremarkable level of impact, we have managed to outperform many of our more economically advanced European counterparts.

Clearly, the allegations have provided an additional burden on my agenda, but, consciously in the know that I had nothing to hide, and being always ready to provide any evidence required, they were ultimately not in a position to hinder my complete dedication to support the Maltese economy in surviving these difficult times, which as I said, I believe we have done with relative success.