Editorial

When credit rating agencies have been under such strong attack for failing to predict the financial crisis, and for other reasons as well, it is not unreasonable to take their reports with a pinch of salt. Even so, it may not be advisable to ignore them altogether either as they could still be relevant and, in any case, their views are unlikely to be considered in isolation by investors.

The latest report on Malta by Moody’s is positive in that it has confirmed the island’s A1 rating, saying it reflects high levels of economic and institutional strength, high government financial strength and very low susceptibility to event risk. Its report comes less than a month after the government published its pre-Budget document in which it confirmed its commitment to work for further fiscal consolidation.

This is the correct policy to take in the wake of the financial turbulence that has seen so many governments take austerity measures to rein in expanding deficits and national debts. Greece is far from being out of the woods yet but recovery in other European countries appears to be picking up, with the main motor, the German economy, growing by 2.2 per cent in the second quarter, its fastest quarterly growth in more than 20 years.

Even though Germany may not keep up this strong performance, the improvement, as well as other encouraging economic indicators, could further help in Malta’s efforts to keep to the growth path and make it easier for the government to cut the deficit as revenues rise in the wake of improved economic activity. Although Malta’s deficit is lower than that registered in a string of other European Union member countries, it is still above what EU rules allow. The government is now planning to bring it down to below the three per cent threshold next year through a programme meant to improve efficiency in public spending, reduce waste and ensure value for money. These are all very laudable aims but it remains to be seen to what extent it would be able to do this. In its pre-Budget document, the government says it specifically plans to critically scrutinise all public sector expenditure programmes.

All departments and other public sector entities will be required to assess their operations and to present an action plan on how they intend to improve their operational efficiency and reduce their recurrent expenditure to reach pre-defined targets. Furthermore, according to the pre-Budget document, the government is considering placing further emphasis on increased value for money in public procurement procedures.

In its latest report on Malta, Moody’s remarked that the islands’ susceptibility to event risk was very low, mainly because adoption of the euro has effectively eliminated the risk of a balance of payments crisis. Malta’s banks also weathered the global financial crisis relatively unscathed. However, it pointed out that concentration risk was considerable and banks were highly exposed to the local real estate sector. Still, the rating outlook was stable.

All this, and the gradual improvement in the eurozone economy between April and June, would tend to confirm the optimism expressed by the Finance Minister, Tonio Fenech, in his foreword to the pre-Budget document when he said that, with the financial and real activity rebounding, the challenge for individual countries was now how to benefit from this upswing and to re-establish the long-term growth trajectory. Hopefully, though, there would be no unforeseen hiccups that could so easily disrupt the new trend.