Malta’s booming economy has ground to a sudden halt due to the coronavirus crisis. Finance Minister Edward Scicluna tells Jacob Borg that the government cannot compensate for all the economic pain that is to come.
We’ve had economists likening the situation to Malta’s very own version of the Great Depression. Do you think it will be that bad?
No, I wouldn’t call it the Great Depression from now. We can still react, governments are reacting. We have never had uncertainty on so many fronts, in the public sector, with the decision makers, private sector companies, individuals and families.
There’s great uncertainty and that is what drives people towards fear, this fear of the unknown. But I wouldn’t say that we know from now, how bad it will be. It depends on us, and many other circumstances that are still unfolding.
What really features now is this uncertainty.
Businesses hate uncertainty. What is the economic impact going to be?
If the government doesn’t even know what the impact will be when it comes to its own finances, then the private sector doesn’t know either.
Every country is trying to limit the virus spread. The price of this is economic. The more we lean towards health, as it should be, the more it costs us, not only psychologically and socially, but economically.
Look at school closures for example. The repercussions on the labour force and on the economy were enormous. You have this tradeoff, either you lean towards health or the economy.
As expected, the population is leaning towards health and expect then, obviously, the government to pay the bills for the rest.
A lot of the aid has been channeled towards the tourism industry. When you look at some of these big hotel chains, they have very healthy balance sheets. Why isn’t the government being more targeted in its aid?
The first priority has been increasing supplementary expenditure on health. In our case, we started with a guesstimate of €35 million, but we’re seeing that you need to spend more, three to four times more.
The focus is on workers, trying to maintain their income. No government in the world can compensate workers their full wage in all sectors.
First of all, government cannot make up for lost sales. In Malta, the private sector has a turnover of €25 billion. Its wage bill is around €4 billion. That’s close to our annual budget. So how can you spend all that money without knowing for how long it will go on?
Strictly speaking, if it’s a short six-month period, companies should, as you imply, be able to maintain those costs if you give them liquidity, at the cost of less profits and divdends in the future.
That’s why most of the money will be going into loan guarantees, loans from the bank or moratoriums and low interest.
Hotels used to suffer throughout the winter by not having any tourists and then make up for it in summer. So, they do have the stamina. But when they are uncertain, they will tell you ‘look, why do I keep these people on the payroll when I am not sure if the summer is coming?’ And no one can guarantee summer for them!
The top priority sectors were those shut down by the health authorities, directly or indirectly. The government felt they should be the priority, not to be compensated, but for the workers to at least be paid a basic salary which will then be topped up by the employer.
Is this aid package open ended? How long is it being guaranteed for?
Every measure, whether here or in neighbouring countries, is looked at one phase at a time. No one can look long-term. It will be reviewed, say, every three months. Nobody knows if it will be increased, remain the same or decreased.
This is why there is more than one package in every country. It takes time to grasp the phenomenon and its implications.
You don’t just dump your staff like that. You need them. This is not permanent
This is where the bank loans become useful. No country has promised to start dishing out cheques from day one. I mean, we are trying, but the administration [of such schemes] is enormous. I’m not talking about Malta. Wherever it may be, it is going to take time.
We are going by sector. Rather than looking at company A,B or C, if they are in the same sector, they are facing the same external environment, so we treat them the same.
I look at the macro, what we can afford, what are the implications on debt and the deficit. Then it’s the Economy Ministry and Malta Enterprise who are allocating this.
Next are those who are already being hit indirectly.
Is there any preliminary data on redundancies and unemployment?
No, because everyone is holding back, waiting for information. You don’t just dump your staff like that. You need them. This is not permanent. Everybody wants to survive this dark tunnel, trying to keep as many people with you as much as possible.
Now, the first thing is to give them cash flow to survive because without cash flow they will die, that’s their oxygen, and then you work out how you can help them survive.
It is a very complicated thing to do, we are talking about around 240,000 people in the labour force and 60,000 companies. It’s a big job. The best thing to do is tackle it sector by sector, then decide how to lessen the cost burdens. No country can do it for all sectors with the €800 given.
If you take that figure and multiply it by workers in the other sectors, it amounts to €1.6 billion. It’s not feasible. We cannot replace the economic activity in all the sectors.
Does this mean some companies and even entire sectors will inevitably have to go bust?
No. A company is a living organism. It will try to survive. Even simple restaurants, they had to close down, but they kept their kitchens open and are now doing home deliveries. In some countries, sectors in need of people like agriculture are taking on the unemployed.
They will, of course, try to economise and it’s in their interest to do that. But the main aim is to survive.
What we need as a government now is to give clear information. We need to set up as quickly as we can a website with information, with frequently asked questions, so everyone will know what is going on sector by sector, from education to quarantine questions.
All these questions need to be answered very clearly, and they will at least help in the confusion which naturally arises in such a situation, which has been likened to a war time period, which, in a sense, it is.
And for any war, you need ammunition. How is this aid package going to be financed?
Luckily, we are in a situation where, if we’re careful, we will get out of it without getting into so much indebtedness that we would need a bailout.
People have been commenting about the tax deferrals. The tax deferrals are a big deal. For the government to defer €500, €600, €700 million, we have to scratch our heads and see where we are going to borrow this money from.
There is help from the European Central Bank, which is ready to buy government bonds from banks on the secondary market.
Then there’s the European Investment Bank, which we are in discussions with to see how we can tap certain guarantees to offer them to the banks. We have already offered €300 - €450 million in guarantees through the development bank. These in turn will be offered to the banks, which will be able to continue offering these loans, moratoria, low interest and so on.
We need around €2 billion worth of borrowing to feel comfortable in dealing with the current package. This is our estimate. It will come from various sources.
Cash flow is vital for both companies and government. Government has a 2020 budget of over €5 billion. It has to find money for the current budget, the supplementary budget which is around €650 million and then the cash flow package. It is a big headache for all European countries.
Because we are in a strong position, we don’t need to resort to the European Stability Mechanism.
The ESM will by its nature put so many conditions on the country which borrows, it will be like a bailout. We don’t want that. We don’t need it.
There have been calls for a cut in electricity tariffs. Is this even possible with the fixed-term contract signed with Electrogas?
It is not just the government’s company [Enemalta]. You also have the Chinese now. It is not ours to say, OK, let’s lower this or increase that.
That is where criticism of government decisions to sell such vital assets such as power stations and hospitals comes in. When a crisis like this comes about, that is when you really need these State assets…
Well, with government [fuel] hedging agreements, it is neither good nor bad. It depends on your luck. If the price goes down, you have to pay. If the price goes up, someone else has to pay and you get the agreed price.
It doesn’t mean that just because the price goes down, the price of fuel goes down with it.
But again, we would be looking at every possibility, and we’ll be looking into this as well. There is no yes or no. I’m just saying what the new environment is like.
Will we start feeling the pain of certain decisions when it comes to the sale of these assets and government corruption, once Robert Abela’s ‘war chest’ starts to run out?
The pain is the crisis. When the country’s turnover gets switched off abruptly, there is going to be pain. No government can make up completely for that pain.
To create social discord at this point in time is not on the top of the list
The prime minister has been very explicit [when it comes to corruption]. He will be making sure all the procedures were followed.
The auditor general is investigating. We have the courts looking into it. We have the government looking into it.
We know corruption costs money. It is a separate issue. It is a question of principle. Even if it is costless. Good governance is good governance.
So, let’s keep that separate in the sense that the outcomes are there, nobody’s trying to hide, we’ll get to the bottom of it and see what, if anything went wrong, and who and so on.
This [coronavirus crisis] is something very, very painful. Everybody is going to feel that pain. The government will try its utmost to try to diminish the pain. But it will be partial. The remedy will not take away all the pain.
It is a reality. If we are still in denial, so be it, but it’s very factual. For something happening like this, it is too big to try to compensate.
NSO statistics show that between 2014 and 2018, the government wage bill increased by 30 per cent to €1.3 billion. Given the downward pressure on private sector wages, is it time for discussion on a public sector salary cut?
Looking at it from a macroeconomic perspective, the public sector did grow, but it didn’t grow as much as the country’s national product. The private sector grew more than the public sector. At the moment, we are still assessing higher priorities than that.
To create social discord at this point in time is not on the top of the list. We will see as we go along. This is something where the government is not embarrassed to say it will change as the story unfolds. What’s conspicuous here is the uncertainty. Because of that, government cannot commit and say yes or no on anything.
This is not me hedging. This is the prudent approach. You can’t promise anything. You just have to steer by the seat of your pants in the best way possible to survive this storm.
Note: The conversation has been edited for clarity and length.