Political instability is a bigger threat to the economy than the credit downgrade imposed by a leading rating agency, according to the employers’ association.
The downgrade is more a reflection of what is happening in the eurozone rather than of the domestic situation
On Friday, Standard & Poor’s downgraded Malta to AA2 from AA1 in an exercise that saw similar downgrades for several eurozone countries.
But for Malta Employers Association’s director general, Joe Farrugia, the more immediate concern is the political crisis.
Although the economy was downgraded, Mr Farrugia said it was a result of the problems in other eurozone countries with which Malta traded.
“The issues that led to the downgrade were external ones but unless the domestic political problems are solved our rating risks going down because of internal matters,” Mr Farrugia said.
He noted that political instability caused uncertainty that led to an economic slowdown. He urged politicians to find a solution. Economist Joseph Vella Bonnici believes the political crisis is not helping matters at a time when the country has to dedicate its energy to face up to the challenges ahead.
Although the Standard & Poor’s downgrade was linked to the performance of other eurozone countries, he said, it was another loop in a chain of events that saw Malta being downgraded by Moody’s last year.
“Malta did not fare as bad as Italy, Spain and Cyprus but it is not with the top countries either, which means we have to be very vigilant,” he said.
Mr Vella Bonnici felt that much depended on the government’s commitment to be transparent about the real situation and the challenges ahead.
“There are some areas of our economy that are doing well but others that are more domestically oriented, such as the construction industry, are suffering,” he said.
Mr Vella Bonnici said a more transparent attitude could provide the right impetus for a more coherent approach between the government, unions and the social partners.
Economist Lawrence Zammit believes the negative economic outlook in the eurozone is a more pressing concern than the downgrade itself.
“The downgrade is more a reflection of what is happening in the eurozone rather than a reflection of the domestic situation,” he said.
Mr Zammit said Malta’s advantage was that its sovereign debt was domestically sourced and this minimised the dangers of fluctuating interest rates.
He reiterated his call for rating agencies to be controlled given the impact their decisions had on the world economy.
ksansone@timesofmalta.com