Updated 4.45 p.m.

The Finance Ministry has clarified comments by Finance Minister Tonio Fenech about Malta's end-of-year deficit following a report in The Times where he hinted that the Government may not reach the deficit target of 2.2 per cent of GDP it has set itself for the end of the year. (See full statement below)

In his comments to The Times, the minister said: “The Government intends to reach the Budget target although it may not be 2.2 per cent,", adding it would “definitely be below the three per cent threshold set by the EU”.

It was the first time a senior government figure has suggested the 2.2 per cent target set last year may be unreachable. Malta closed 2011 with a 2.7 per cent deficit.

Mr Fenech also suggested further cash injections for the ailing energy company Enemalta may be in the offing.

The corporation is experiencing liquidity problems because of high oil prices and has withheld excise taxes due to the government.

The admission came a day after ratings agency Moody’s said it expected Malta’s deficit to rise to 2.9 per cent by the end of the year before falling slightly to 2.6 per cent by the end of 2013.

While affirming Malta’s A3 rating and negative outlook, Moody’s lauded the Government for having successfully reined in the national deficit over the past years.

Malta’s deficit stood at 4.5 per cent at the end of 2008. But with the EU threatening to take action unless this was curbed, the Government succeeded in cutting it to 2.7 per cent by last December.

Moody’s approval of the Maltese deficit reduction was tempered by its warning that the country’s national debt needed to start coming down by the end of 2013.

Government debt stood at 72 per cent of GDP at the end of 2011.

Official statistics show it has risen to 75 per cent since then, although Mr Fenech urged caution in reading quarterly debt figures.

Debt a high priority

Such numbers, the minister said, had to be seen at the year’s end.

He also noted that Malta’s debt levels, although not optimal, were below those of many other eurozone states. In its report, Moody’s had noted Malta had more debt than most other A-rated countries.

The Labour Party said the Moody’s report confirmed its suspicions: that the Government was inflating its projections to mask economic problems.

Reducing the deficit by inflating debt was no solution, the PL said.

In its reply, the Government said the Labour statement betrayed its ignorance of the basic function of national debt, which included any deficit a country had accumulated over a given year.

Tackling Malta’s debt was also high among economic analyst John Cassar White’s concerns.

“It’s about time we started including the debt of parastatal companies such as Enemalta in government debt figures,” Mr Cassar White said.

The government acts as a guarantor for the €1.17 billion such companies owe, with the lion’s share of that figure – €660 million – belonging to energy company Enemalta.

Adding parastatal company debt to the national total would leave Malta with a “high” debt-to-GDP ratio of over 80 per cent, Mr Cassar White said.

The Government has repeatedly helped prop up the ailing energy corporation within EU state aid parameters, and that is likely to continue. Enemalta has so far withheld excise payments it owes the Government to ensure liquidity, explaining much of the €15.8 million shortfall in the government’s excise duty revenue in the first seven months.

At the beginning of the year the Government injected €25 million into Enemalta to keep utility bills static as the firm’s oil costs rose.

Economist Gordon Cordina also spoke about national debt. “Moody’s has cut the Government some slack, given the rough economic ride the eurozone is going through, but one would expect debt to come down in the medium-term,” he said. A failure to do so would leave the Government in a quandary, with the cost of servicing existing debt making it prohibitive to keep on borrowing.

“One advantage is that the Government tends to raise its money locally. But that also means its borrowing potential is directly linked to the economy’s performance.”

Dr Cordina felt there was scope for the government to pursue sectoral growth niches more aggressively.

“We’ve done very well out of financial services, gaming and pharmaceuticals. But every industry reaches saturation point. We need to start finding the niches which can project us through the next five years,” he said.

MINISTER'S CLARIFICATION

In its statement this afternoon in reaction to the newspaper report, the Ministry of Finance said:

"It is important to clarify that notwithstanding the constant lack of trust by the Opposition of achieving such targets, the Minister highlighted the impressive deficit reduction programme achieved during the past years, reducing the deficit from 3.6% in 2010 to 2.7% in 2011 (0.1% better than targeted in the budget for 2011), and this notwithstanding the difficult economic climate that prevails within the European Economy.  The deficit projected for 2012, set in the estimates as 2.3% continues to be an important target that this country needs to achieve notwithstanding the pressures on public finances being caused by higher oil prices and other expenditure pressures.

"It is to be pointed out that during the short comments expressed by the Minister to questions made, the Minister expressed his commitment that Government will remain on track with its deficit reduction programme notwithstanding the risk of a slippage as expressed by Moody’s.   The Minister expressed his concern that the lower growth rates achievable due to a worsening economic climate at an EU level, pose additional challenges to achieve these financial targets. However the Minister clearly stated that Government is committed to ensure that we achieve a deficit level which is significantly lower than 3% and closer to the 2.3% budgeted.

"The Minister pointed out that government expenditure increased in 2012 due to a number of reasons, namely:

a) assistance to Enemalta, through which government assumed responsibility for Enemalta’s social and environmental commitments, which ensured Enemalta was in a position to maintain stable tariffs despite increases in the international price of oil;

b) assistance to Air Malta, approved by the European Commission following the restructuring plan;

c) substantial increase in the budget for medicines and

d) increase related to different sectoral agreements, including pay rises to the Police Corps.

Despite these increases in expenditure, Government took a number of measures and continues to identify further savings to compensate for any increases in the above expenditure items – as is usual practice throughout the financial year.

Government considers the achievement of these financial targets as crucial to maintain stability which is essential in its efforts to attract investment and jobs, and therefore is continuing to constantly monitoring trends in expenditure to ensure that Malta achieve its targets of a further reduction in the deficit for 2012."