Credit rating agency Moody’s has given a number of reasons for its view that ‘there remains a risk of fiscal slippage’ in the government’s finances this year.
Holding that the Government’s consolidation strategy is mostly underpinned by additional revenue-raising measures, it provides - as reasons for its opinion that the programme ‘appears to be optimistic’ - the weaker economic environment at home and abroad, additional expenditure for the restructuring of Air Malta and for the utility subsidies, and the current stage of the political cycle, with the deficit traditionally widening in pre-election periods.
They are all valid and, taken together, would seem to confirm fears expressed by others that it is going to be very difficult for the Government this year to meet its deficit-reduction programme. One of Moody’s reasons, in fact, confirms the concern expressed by The Times only a few days ago when it said that, with the general election now approaching fast, the temptation on the Government’s part to spend more than it has budgeted for may become strong.
The Government has to resist this at all costs for, given the difficulties already existing today, it would make the situation worse not just for the new Administration, Nationalist or Labour, but for taxpayers who would, ultimately, have to foot the bill.
The past is littered with examples of irresponsible behaviour by incumbent administrations. Some state organisations are still suffering the after-effects of such abuse committed on the eve of elections, particularly when they loaded state organisations with additional manpower that was not needed.
The Government is obviously well aware of the difficulties in reaching its deficit-reduction target. However, it keeps striking a positive note, saying it is committed to achieving a deficit level that is significantly lower than the three per cent threshold allowed under EU rules and closer to the 2.3 per cent targeted in the Budget for this year.
Moody’s has, in fact, praised the Government for managing to bring the deficit down but there is really not much to gloat about, given that the agency has retained Malta’s A3 government bond rating. In Moody’s view, the outlook remains negative.
Of course, the situation could have been worse and, in affirming the bond rating at A3, it, at least, recognised the efforts the Government made in its deficit-reduction programme.
Moody’s took three points into consideration when it affirmed the rating: the Government’s successful consolidation strategy, which brought the 2011 fiscal imbalance below the three per cent of GDP ceiling under the excessive deficit procedure; the expectation that debt ratios will stabilise in 2013, curbing further deterioration of key credit metrics that are already weaker than A category medians; and the continued presence of significant macro-economic and fiscal downside risks.
Quite interestingly, Moody’s forecasts continued real output growth for this year but at well below potential. It also forecasts a gradual recovery in 2013 growth, with real GDP expanding 1.1 per cent.
Moody’s credit rating report comes in the wake of the two important economic indicators: a rise in exports, and, worryingly, a slowdown in foreign investment. The fact that foreign investment was the lowest in seven years is a matter for concern. However, there has been a most positive development since the publication of Moody’s latest report: Malta is out of the recession.
The way ahead is not expected to be plain sailing. It never seems to be but the economy is still showing remarkable resilience.