Moody’s blues in white satin

The downgrading of government bond ratings by Moody’s is a sad event for Malta. It makes us all losers; in the immediate future our economy gains nothing while risking losing a lot. Over a longer period it can serve us well if we are humble enough and prepared to accept that there is more to life than sticking to political power.

Our village-nation is part of one of the world’s most powerful economic zones. Malta’s role may be peripheral but in these turbulent times we will be watched as Moody’s revised the outlook to negative. What we do, or fail to do, matters for it transmits a message about how the eurozone is managing its affairs.

Moody’s decision hurts our reputation and eats into the credibility and confidence earned through EU membership. Equally worrying is the timing of Moody’s decision. We now join the “club of the Med” whose economies are increasingly under scrutiny for their lax fiscal discipline and mismanagement.

Moody’s decision comes as no big surprise. Earlier this year, another credit rating agency, Standard and Poor’s, downgraded Enemalta’ s credit profile from B to B-. This, despite the fact that Enemalta’s borrowings are guaranteed by the government itself. The writing was indeed on the wall.

Moody’s say that they based their decisions on both economic and fiscal considerations. They express concern that the Malta government is now projecting a lower medium-term economic growth rate (2.3 per cent) while the IMF is projecting an even lower rate (two per cent). Moody’s are uneasy with the resilience of our economy, should there be a “double dip” in the international economy.

Moody’s may be right but for the wrong reason. After all, they confirm that our economy weathered the 2008 global recession reasonably well.

The truth is that the key challenges for our economy arise from domestic and not external forces. An economy’s performance and competitiveness is judged by its productivity. Generating jobs without increasing productivity is worrying. It is the result of having invested too much in opening shops and building apartments.

The figures look good due to the extraordinary performance of internet gaming and financial services. Do Moody’s believe that our economy is overdependent on these relatively “footloose” activities? A foreign direct investment inflow of €792 million in 2010 is impressive but, unfortunately, very little of this money is being channelled into the productive capacity of our economy. The government can continue to hide behind the numbers but, ultimately, it will only be fooling itself because the wealth being created is not reaching the people.

Or are they anxious that Malta lacks clear economic direction? Vision 2015 is fast becoming a tragedy of Mater Dei Hospital proportions. When will the plan be finalised? Does it have the support of all the social partners? Will it bring our education system closer to our economic needs? Importing foreign manpower mesmerising it with a 15 per cent income tax rate is not the ultimate solution. We need to care for all Maltese, whatever their political, religious or social backgrounds.

Moody’s express concern also on Malta’s capacity to withstand a possible fallout from a prolonged crisis of the euro. This fear is real enough but, at this stage, it is a big unknown. The best the government can do is to prepare the country for the worse while hoping for the best.

Moody’s point out that “the country has exhibited weak debt metrics for some time and the anticipated improvement in the government’s balance sheet at the time of EMU accession has not materialised” (The Times, September 7). Well, not all had such illusions. Moody’s now find “structural rigidities” and a dependence on “one-off measures” in the government’s finance.

Given that there is a “hidden” national debt of about €1 billion, Moody’s decided to also downgrade the Freeport. This will hurt our pockets because much of this debt (unlike the “national” debt) is with foreign investors that will now expect higher interest rates.

Moody’s assert that, should there be another economic downturn, it will be practically impossible for the government to reach its fiscal targets. Government finances are a far cry from being “finanzi fis-sod” (sound finance). It has to cut its expenditure and limit its revenue so as to leave more financial resources in the hands of the private sector (this will alleviate the present acute liquidity problem). It should also implement as early as possible the often promised changeover from cash-based to an accruals accounts system. This will enhance the transparency of the government’s accounts and ensure that the Maltese people will not get any surprises in the future.

We did not need Moody’s to tell us about the state of our economy and fiscal position but now they have told the world and it would be tragic to dismiss their decision as being misjudged. The government should not remain in denial out of political expediency. The people deserve better. Malta’s economy needs to grow the right way. We are all proud of Malta becoming a “financial hub”. However, it is not enough.

An economy’s resilience is dependent on the strength of its home base. Otherwise we are bound to suffer from Moody’s blues.

fms18@onvol.net