The rating downgrade by Moody’s came as no surprise to those who analyse our economic performance clinically rather than rely on the political rhetoric that often replaces the honest soul searching that we need so badly. The audacity of hype has its limitations, however skilful the spin doctors may be in selling us sweet dreams.

We need to promote a culture of honest economic self-appraisals rather than indulge in spin- John Cassar White

So, according to Moody’s, our public finances are not that solid. The medium and long-term issues of the financing of our educational, health, pensions and social services remain unresolved. Electoral expediency for too long obfuscated our plans to do what it takes to put our public finances on solid foundations.

The administration’s overoptimistic statements that Malta has not been affected by the global economic downturn, thanks to its prudent economic management, have also proved to be too exuberant. Certain economic indicators clearly show that there are still very dark clouds threatening our economy. Our political leaders should be more credible than, for instance, Berlusconi who indulged in excessive schadenfreude – the malicious enjoyment of another’s misfortunes – when he gloated about how worse off other countries were as a result of the global economic crisis.

With our open and small economy we can never be prudent enough in taking measures that strengthen our competitiveness and promote sound fiscal management. The fall in direct foreign investment in those sectors of the economy that not only add value in economic growth but also create significant employment, is a worrying indicator that our competitiveness is no longer attractive enough to foreign investors. We need to look at the factors that are affecting our competitiveness, including the quality of our educational output, the bureaucracy that hinders business operations, and the excessive cost of services provided by the state.

Another worrying feature that characterises Moody’s comments on the downgrading of Malta’s rating is that the forecasts being made by the government for economic growth in the medium-term are too optimistic when compared to those made by reputable organisations like the IMF. The government, for instance, is forecasting a GDP growth rate of 2.3 per cent for the next few years while the IMF is forecasting a significantly lower rate of two per cent. This may not appear much to people who do not understand the dynamics of economic growth, but it really is a significant difference that can affect the realisation of our economic ambitions. What is more worrying is that the economic targets set when we joined the euro are proving to be unrealistic and have to be reviewed in the light of current global economic developments.

The comments made by Moody’s on the risks faced by our financial institutions are also very sobering. While our banking system remains relatively strong, our banks remain vulnerable as the result of the concentration risk in their loans portfolio as well as their significant exposure to the property market which at present is underperforming. Should our financial institutions experience a sudden downturn because of either local or external economic factors, the government will find it increasingly difficult to secure financing as reasonable rates thereby further complicating the fragile prospect so strong economic growth.

Moreover, the current crisis in the eurozone has taught us that banks with significant exposure to sovereign debt of countries that have less than sound public finances may not be able to withstand the onslaught of the capital markets. It is therefore important that, irrespective of any encouraging stress test results, our banks should beef up their capital.

Moody’s’ prescribes the medicine for this difficult situation that we are in. Firstly, we need to really reform our public finances to make our health, educational, pensions and social welfare system sustainable in the long-term. Waiting for the economy to recover to undertake reform will probably make the situation even more difficult.

We also need to address our falling competitiveness as an equally important priority. The plan-as-we-go management of this issue is getting us nowhere. We have to look at the factors that are making us less attractive in the eyes of foreign investors and I would start with a thorough review of the performance of our educational system in the last twenty five years.

Finally, we need to promote a culture of honest economic self-appraisals rather than indulge in spin. Almost everything in our public life in Malta is shrouded in partisan politics that dulls our minds and prevents us from being honest with ourselves. We owe it to ourselves to treat each other more maturely.

jcassarwhite@yahoo.com