There was no need for the recent downgrade of Malta’s credit rating to be traumatic provided the government addressed public debt, three leading economic analysts have suggested.
We are saying the right things but not doing the right things- John Cassar White
Moody’s downgraded Malta’s government bond rating from A1 to A2 and revised its outlook of the country to negative.
In especially critical comments, financial analyst John Cassar White said that while “there are plenty of ideas and lots of chatter” there is a distinct lack of “clear targets and milestones to address the weaknesses in our public finances”.
“We are saying the right things but not doing the right things,” he said.
While Moody’s downgrade was not a cause for alarm, he said, it flashed a number of red lights that the government would do well to take heed of. The most pressing need was a comprehensive review of Malta’s social services expenditure. Mr Cassar White’s concerns were reflected in comments by economist Gordon Cordina. Domestic revenue, Dr Cordina said, was not high enough to meet future requirements. Although growth levels were healthy and employment rates were improving, he felt the government had to review certain aspects of its fiscal management.
Economist Lawrence Zammit said that although there had been a significant push towards lowering the fiscal debt, the total amount of public debt remained relatively high. However, he noted, most of Malta’s debt was local rather than foreign.
An economic report published by the European Commission last Monday insisted Malta’s key economic challenges were fiscal consolidation – in other words, bringing deficit and public debt levels down – and pension reform, linked with an increase in the retirement age.
Dr Cordina sounded a word of warning. “The things we are doing may not be sufficient to meet the challenges on the horizon. It is perfectly feasible to have an economy in which education and health remain entirely free. But we have to be able to afford it.”
Mr Zammit also spoke along similar lines. “So far, the economy is doing fairly well. However, there are parts of our social welfare system that are unsustainable. It may well be the case that we need to introduce an element of means testing.”
The EU report vindicated some of their concerns. The non-binding nature of many of Malta’s targets for fiscal consolidation suggested a “relatively short fiscal horizon”, it said, and the long-term budgetary impact of ageing was “significantly higher than the EU average”.
Mr Zammit, however, cautioned against too broad a reading into the downgrade. The Moody’s report, he said, was not a downgrade of the Maltese economy. It was a downgrade of “our local and foreign debt”.
“Malta’s economy is very exposed to events overseas. Moody’s could hardly ignore economic instability abroad when analysing Malta’s government bond rating,” he said.
Dr Cordina’s primary concern was in removing inefficiencies while simultaneously generating more jobs. Doing so, he admitted, could entail short-term readjustments, as was happening with Air Malta. Nevertheless, given adequate lifelong learning structures, there was no reason why workers in inefficient industries could not be retrained to become productive contributors to the economy. “We need restructuring permeating the entire public sector.”
Malta still had a long way to go in terms of lifelong learning, Dr Cordina said. “There’s little point in speaking of raising the retirement age if workers aren’t given adequate training to keep on working.” This was especially important due to Malta’s ballooning pension expenditure.
This concern was also reflected in the European Commission report. Malta, it said, suffered a “mismatch between demand and supply of skills on the labour market” and suggested the country “strengthen the effectiveness of its vocational training system”.
Growth rates were good when compared to other countries, Dr Cordina acknowledged, but they could still not be high enough to meet future expenses. “There’s little point in comparing ourselves with those that are drowning,” Dr Cordina quipped.
The government, Mr Cassar White said, had to take the lead and shoulder responsibility for its high levels of debt and bloated public sector. The Opposition also had a role to play. “Both,” he said, “must be clear with the public and explain where they intend to take the country, and how they intend to take it there.”
There’s little point in comparing ourselves with those that are drowning- Gordon Cordina
His words ominously reflected events in eurozone crisis countries. “Fiscal policy is becoming increasingly centralised. If we don’t tackle these issues we’ll find ourselves at some point in the not-too-distant future being forced to do so by others.”
A country, Mr Cassar White said, went on existing beyond the next election. “Politicians might think in terms of election cycles but citizens see things differently. Citizens think in terms of their lifetimes and those of their children,” he cautioned.