IMF contagion fears for Malta – one year later

Time flies and circumstances change, sometimes for the better, at others for the worse. In the case of the eurozone financial and economic situation they are rapidly moving into more negative positions day after day. The sovereign debt burden and fears, based on hard signals, of a fresh recession are threats that will not go away but grow with each passing day.

So far Malta has survived its worst fears. That has led the government to remain quite bullish about our prospects and talk of the future are only lightly laced with adequate doses of realism. The Prime Minister said recently that he was keeping a close watch on nearby and further afield developments and would take action if necessary.

That attitude is far too laid back. One has to anticipate, not be reactive. To underscore my assertion I will quote from the IMF consultation report based on an analytical visit by an IMF team last November. In a section on contagion and other risks the team wrote the following (I will quote verbatim, but I will split up the comment to make it clearer

“Uncertainty remains and risks are tilted to the downside. Malta is facing high risk of contagion if the fragile economic and financial situation in parts of the euro area worsens. Some banks, involved mainly in international business, are exposed to euro area debt securities that have recently faced significant pressure.

“Malta’s sovereign spreads have remained relatively contained but international market sentiment has proven volatile over the past year.

“Real estate market weakness could turn out deeper and more protracted than expected as an excess supply in segments of the real estate market and some debt overhang need to be worked off. In this case negative feedback loops between the real economy and the financial sector could materialise.

“Moreover, Malta’s attractiveness as a business location and some of its new high-growth activities (e.g. some business and financial services, pharmaceuticals,) could be adversely affected should the EU or member state regulations or taxation change.

“On the upside, low interest rates and stronger demand could sustain momentum longer than expected.”

The Maltese authorities did not quite share the IMF team’s reservations.

“The authorities,” said the IMF report, “especially the Ministry of Finance, were more upbeat on the near-term outlook and medium term prospects. The authorities agreed that there likely is excess supply in segments of the housing market and commercial real estate, but referred to sustained demand in upscale housing, including from abroad, and the relative scarcity of land in Malta.”

As it turned out the relative bullishness of the Maltese authorities was justified on a net basis. They understated the real estate problem, where Malta has an overhang that compares to Ireland’s and Spain’s and translates into a mother of stock problems. They were also wrong on “sustained” demand for housing, “including from abroad”.

Top end property developers report withdrawal of interest in the wake of the government’s failure to set out clear new conditions for purchases of property by non-EU expats. That was a sign of the government’s devilish indecision. Unconfirmed reports have it that new regulations will be out next week. If that does happen it will be a full nine months after the Ministry of Finance massaged the IMF’s consultation report.

Reread the warnings inherent in that report. Low interest rates and a reasonable export performance have sustained momentum. But what of the pitfalls that existed in November? They have all grown deeper, meaning that the danger of contagion is closer than ever.

The euro and US economic and financial situation has deteriorated. US politics have gone mad and President Barack Obama has edged closer to impotence. In the eurozone, Greece went further adrift, Portugal staggers along, and Ireland does better but still has a mountain to climb. Worse still, Spain and Italy deteriorated. (Italy will be taxing gaming activities, which could hit Malta.) As if that was not enough, France is stuttering and even Germany’s brisk economic pace is faltering.

Translating all that, in economic terms our export markets, what with austerity measures, including in the UK, and stubborn budget deficits and king-sized public debts, are weakening. Sovereign debt instruments are weaker than ever, leaving various Maltese institutions unnervingly exposed, though the majors among them work manfully to improve their balance sheets and solvency ratios.

To refer to the real estate market again, it is in a desperate situation. The overhang of unsold property grows. (Spain has just slashed its property sales tax to try to boost sales. No hint of similar measures in Malta.) The forced-sale value of property security giving to the lending institutions weakens further. If the IMF felt it should warn Malta of contagion nine months ago, a visit now would surely result in a bleaker assessment.

Among various other things the IMF 2010 consultation report had this to say: “Long-term sustainable growth requires policies to focus on raising productivity, skills and employment rates.”

Have enough of such measures been implemented over the past nine months? A related point: has government bureaucracy lubricated growth prospects, or has it threatened to jam them up?