Standard & Poor’s, one of the top three global credit rating agencies, have earlier this month come out with their verdict as to how the Maltese economy is performing.
“Malta’s government has made progress on energy sector reform, a key part of the ruling party’s election promises. If progress can be maintained, it will support already-improving economic growth, which appears to have exceeded our previous expectations for 2013.”
A breath of fresh air is undoubtedly creeping in but this does not mean that Malta’s economy is out of the woods. A lot more needs to be done.
According to S&P, the biggest constraints facing our country remain a high national debt (estimated at 73 per cent of GDP), continued fiscal imbalances and what they term “external data inconsistencies”.
In view of this, S&P decided not to change its previous credit rating for Malta at BBB+/A-2, with a stable outlook.
The BBB+ rating relates to the country’s long-term credit evaluation and implies that despite adverse economic conditions Malta has an adequate capability to meet its financial commitments.
The A-2 refers to the country’s short-term credit rating and more or less indicates the same thing.
A stable outlook is given when existing economic and fundamental business conditions are not expected to vary in a significant way over the intermediate term (six to 12 months).
That Enemalta has been the Achilles’ heel of Malta’s economy is now pretty obvious to all. Two years ago, S&P downgraded the corporation’s rating to B+. At the time, they deemed Enemalta to be “vulnerable” due to its poor profitability, high costs and its fuel oil-dependent generation capacity. S&P had remarked that Malta’s electricity tariffs were among the highest in the EU and that further increases posed an unduly high risk to local enterprises.
Enemalta was in a catch-22 situation and the only solution that the previous administration could come up with was to subsidise (against its declared policy) Enemalta’s fuel costs. Also, to help restructure the corporation’s €800 million debt, a financial special purpose vehicle was set up, which ensured the sustainability of long-term debts by essentially passing the burden onto future generations. Of course, we now know that strong vested interests were at play to preserve the status quo.
Our society continues to pay an unduly hefty price for Enemalta’s failure to invest (despite its huge debt) in modern, clean technology. In their latest report, S&P welcome the decision to go for natural gas by 2015 and point out that this investment, together with the interconnector to Sicily, should help to reduce the cost of electricity production by up to 50 per cent.
This fundamental shift was made possible by some outside-the-box thinking and the disposition of the Labour government to enter into a private-public partnership to finance the necessary investment. The agreement reached with China Power Investment Corporation, one of the world’s largest corporations in this field, is the cherry on the cake. This corporation will be injecting a substantial amount of cash to acquire minority shareholding in Enemalta, which will lead to reduced debts and an improvement in its credit rating.
It is sad that the Opposition’s reaction has been to just raise doubts and questions and to lament that the deal with CPIC was tantamount to “selling energy sovereignty”.
With regard to economic growth, S&P estimate that, in 2013, real GDP growth will reach 1.7 per cent and this will keep increasing up to 2.7 per cent by 2016.
Unfortunately, most of this growth is forecast to come from an increase in the gainfully occupied rather than from higher productivity.
Another positive note is that, during 2013, government revenue was higher than the previous year even though the fiscal deficit is expected to be marginally higher than what the government is projecting due to increases in government expenditure.
A breath of fresh air is undoubtedly creeping in
S&P add that it will be difficult for the government to meet its deficit targets for 2014-2016. Moreover, they believe that, given the “excessive deficit procedure” opened by the European Commission against Malta in 2013, the country will be asked to make an increased effort to reduce its debt burden to 60 per cent of GDP.
S&P refer to Malta’s “external data inconsistencies” arising from the fact that in a small economy like ours it is easy for data to be skewed by one-offs or significant changes in an important specific activity.
In particular, they note the presence of foreign-owned financial institutions which do little or no business in Malta and which lead to the country’s net external asset position being overstated.
Also, repatriation of profits by foreign companies (in particular i-gaming and portfolio equity) represents about 25 per cent of current account payments.
S&P note that, while Malta benefits from the stability of the euro, European Central Bank policy may not necessarily be suited to its particular needs.
Overall, S&P express confidence that, given the progress achieved, the government will continue to address other long-standing structural issues such as pensions, low female participation in the labour force and supply gaps in more highly-skilled positions.
This positive outlook contrasts with vibrations transmitted by the Opposition. It is a pity that we still have politicians keen to see their prediction come true: that of a Labour government knocking on Europe’s door for a bailout within two years.
It is a pity that these politicians seem prepared to discredit their country for their own political agenda.
fms18@onvol.net