The regular economic analysis and forecasts of rating agencies and the European Commission are essential reality checks because they are prepared by independent analysts. The clinical language used contrasts with the happy talk of local politicians who see themselves as cheerleaders for increasingly COVID-weary people.

Moody’s latest credit opinion on Malta coincided with the publication of the European Commission’s winter report, spelling out how it sees the EU economies performing in the coming few years.

There is significant good news for Malta. Moody’s and the commission  forecast economic growth of 5.1 and 4.5 per cent respectively for 2021 after a substantial economic contraction of -7.8 per cent in 2020 because of the pandemic.

These short-term forecasts need to be treated with cautious optimism.

Moody’s qualifies its upbeat forecast for Malta by reminding readers of their analysis that external shocks due to the small size and degree of openness of the Maltese economy may affect us quite negatively.

One of our most important economic drivers is tourism, where we have little influence on the demand-side dynamics. This limitation is even more critical at a time when the evolution of the pandemic remains uncertain.

Another caveat highlighted by Moody’s is the vulnerability of contingent liability risks from the broader public sector. The substantial weakness of Air Malta must surely be the most severe threat to public finances in the short term.

The national airline is incurring losses of about €1 million weekly. It would be naïve to believe that this is just the result of the pandemic. Air Malta has been struggling with insolvency issues for at least two decades. It is unreasonable to expect taxpayers to keep bailing out the national carrier indefinitely even if the EU competition authorities were to sanction more state aid beyond what is needed to repair the COVID collateral damage.

Institutional challenges related to the rule of law and the fight against corruption remain outstanding. In the last year, some progress has been made but Malta’s reputation is still badly tarnished by the abuse of power in the government’s top echelons.

Economic forecasts are as good as the reliability of the information fed into the models used by rating agencies and other institutions. The fly in the ointment of the latest relatively optimistic forecasts is the uncertainty that still exists on how the pandemic will evolve. While the vaccines are providing enormous hope, a significant concern is presented by the new coronavirus variants, which tend to spread faster and may yet evade the full effects of vaccination.

It seems that the government is still determined to stick to the economic model that has delivered impressive growth in the last few years but which is considered by some analysts as being built on high-risk strategies.

The medium and long-term economic forecasts are more uncertain. The outcome will depend on developments that are more difficult to identify today. Malta’s long-term challenges, for instance, include any external shock coming from the EU agreeing on taxation policy changes, which seem to be moving towards more fiscal harmonisation.

Malta’s underperforming educational system is another weakness that has partly been behind the disproportionate reliance on imported skilled labour to sustain economic growth.

The unwinding of government support to struggling businesses during the pandemic may also give rise to pressures on government finances when some of these businesses might not be able to repay their loans.

Moody’s and the European Commission’s economic analysis should give rise to optimism with a hefty dose of caution.