This week I have had two journalists asking me for my reaction following Moody’s decision to downgrade Malta’s government debt.

In last week’s contribution I had already made reference to Moody’s assessment of our real economy and this week I would like to draw further conclusions from Moody’s report.

The local mood after Moody’s report has not been positive. I believe that the most important point that needs to be made at the outset is that, contrary to the perceptions of many, Moody’s did not downgrade the Maltese economy but it downgraded the government’s debt rating.

In fact, Moody’s statements on our economy are indeed very positive. I shall be quoting verbatim some of the things they said. Among other things Moody’s claims that: “It’s (Malta’s) small, open economy, displays moderately favourable economic prospects, while a relatively-high GDP per capita denotes a high level of economic development.”

It also claimed that: “Income convergence to EU levels over the past decade advanced at a vigorous pace, benefitting from sizeable foreign direct investment inflows linked to EU accession which help fiancé Malta’s external deficit, common to island economies”.

My final quote refers to: “The high institutional strength based on the country’s favourable marks on the World Bank’s governance indicators”.

Thus Moody’s worsening credit assessment of government bonds has nothing to do with the performance of the economy. This is further strengthened by the fact that during the second quarter of this year the Maltese economy grew by around 2.5 per cent and the latest data on employment shows a positive upward trend.

Hence, there is certainly no need to resort to pessimistic statements, that do not seem to be founded at present, in any of the fundamentals of our economy. Moody’s report believes that the real economy is performing well in the circumstances.

Thus, it becomes legitimate to ask why the bad mood on the part of Moody’s, especially since Moody’s itself describes our domestic capital markets as deep and our debt structure as favourable, given that the foreign currency component is negligible and the low level of non resident holdings of debt.

There are essentially two aspects. The possible impact on our economic growth as a result of the 2008-2009 recession and the possible lack of sustainability of our national debt.

In a nutshell Moody’s downgraded the rating of government’s debt on the basis that our economy is not expected to grow as fast as it has done prior to the international recession. Slower growth could mean less government revenue and therefore the current level of government debt may become unsustainable.

Moody’s also makes a slight reference to the exposure of local banks to the real estate sector. The credit rating agency also made reference to other economies that are rated as A1 countries.

None of this seems to presage an economic disaster.

I believe that to extend the opinion of Moody’s to the whole economy is erroneous for various reasons. It would demonstrate a lack of basic understanding of economics. This should not however detract our attention from the debt issue.

Admittedly the debt issue would have been less of a problem, if it were not for the vicissitudes of countries such Greece, Ireland, Spain, Portugal and Italy. So I believe we should see it as an opportunity and introduce in our legislation the concept of the balanced budget.