NET Freefall in Credibility

A Net News correspondent recently wrote a report referring to claims by unnamed financial analysts that the situation of the public finances was unsustainable, adding that the experts described it as a “freefall”. She also mentioned unnamed economists in excoriating the Government for the sharp rise in the public debt.

Now, in my book, unnamed people are mostly dastards who are afraid of standing behind what they say and are afraid of being contradicted publicly on their claims. I do not normally pay any attention to them, but in this case I suspect that the so-called experts are stand-ins for those paragons of healthy public finances ─ a.k.a. the Nationalist Party.

As a background, you might be interested to learn that the “expert” PN governments prior to 2013 managed to amass public debt amounting to an average 66.6% of the GDP during a ten-year period, with two years in which the ratio exceeded 70%.

Unnamed people are mostly dastards who are afraid of standing behind what they say and are afraid of being contradicted publicly on their claims.

In comparison, the PL’s governments averaged a ratio of 53.4% during the seven years prior to the onset of the COVID pandemic in 2020. The ratio had fallen from 70% in the last year of PN governments to 40.7% in 2019. Now that, I would call the real freefall.

Malta entered the pandemic from a position of strength, with a debt-to-GDP ratio which was far superior to the debt metrics of many other countries. The 27 member states of the EU averaged a ratio of 77.2%, whereas those in the eurozone averaged 83.6% in 2019 ─ more than twice as large as Malta’s ratio.

As a result, “Malta’s high economic growth rates and money saved during the boom years allowed the country to weather the pandemic’s shocks and maintain its credit rating,” in the words of the German rating agency DBRS a few weeks ago.  

The agency added that while COVID-19 fiscal support had eaten significantly into Malta’s coffers, generating a large deficit and higher level of public debt, and expected that a robust economic recovery, underpinned by a high vaccination rate, should ensure the country returns to a healthier fiscal position.

The rating agency made the assessment in a rating report which confirmed Malta’s long-term rating at ‘A’ with a stable trend. But, of course, DBRS is nothing but a bunch of incompetent analysts next to the PN’s unnamed experts. The latter are probably the same unmentionables who have been predicting red bulbs flashing all over the economy since 2013, always to be revealed as Prophets of Doom to whom nobody pays any attention nowadays.

The extraordinary challenges presented by the pandemic severely tested the finances of governments all over the world. The EU’s debt-to-GDP ratio rose by almost 13 p.p. to just over 90% in 2020.

Malta’s high economic growth rates and money saved during the boom years allowed the country to weather the pandemic’s shocks – DBRS

Malta’s increase of 12.7 p.p. in the debt ratio in to 53.4% in 2020 was rather modest compared to, say, Spain’s 24.5 p.p. rise or Cyprus’s 24.2 p.p. increase.  

On the other hand, one might consider it overly high compared with Ireland’s 1.2 p.p. increase, but then Ireland had an unemployment rate of 5.3% compared to Malta’s 4.1%.

Though Spain’s debt ratio was double Malta’s, its unemployment rate was 14.2% of the labour force, while Cyprus registered a jobless rate of 7.6%.

We will have to wait a few months before we get full 2021 figures, but the NSO reports that Malta’s debt increased by a further 7.2 p.p. to around 60.6% in the first two quarters of 2021. 

It appears that in 2021 Malta was diverging significantly from the EU trend, where the EU27’s gross debt rose by only 3.7 p.p. whereas that of the eurozone grew by 3.9 p.p., but the ratios themselves were significantly higher than Malta’s. In fact, the debt-to-GDP ratios were 90.0& in the EU and 98.3% in the eurozone.

In other words, whereas Malta boosted its government debt by more or less the same percentage as the EU in 2020, it incurred considerably higher increases in 2021. This looser fiscal stance was necessary because Malta’s GDP dropped by 6.7% whereas that of the EU fell by 4.5%. Had our government adopted a harder stance, this would have impacted employment more adversely.

Does this mean that the public debt has become unsustainable, as the PN claims? Certainly, the likely outcome for 2021 will still be some 7 p.p. lower than the peak figures registered by the PN governments, while the average over the last nine years will be some 10 p.p. lower than the PN’s average between 2003-2012.

Where does that leave the PN’s credibility?

It is worth highlighting that the debt incurred by the PL governments has been financed at lower interest rates than that amassed by the PN governments, so the interest burden is relatively lower.

Of course, the increase in the debt-to-GDP ratio in the last two years and its continuance in at least the next three years, while the finances remain in deficit, is not good news. It could even become worse if interest rates start rising in response to higher inflation rates.

It does not appear at this stage that the debt is unsustainable, though the eventual outcome will depend on how strongly the economy recovers. Most international experts expect it to grow robustly, resuming its higher-than-EU-average trajectory. But this forecast must have some words of caution attached to it, because the recovery hinges on a host of factors, such as the pandemic’s evolution, the return of the tourist sector to better days, higher energy prices, as well as the positive and early resolution of the FATF grey listing.  

It is dispiriting that so many external factors have combined to chisel away at some of the great economic achievements between 2013 and 2019. 

Of course, the PL governments’ own auto-goals in some other spheres have not helped.

It is therefore imperative that the new government which will be ushered in after the impending general election attaches as high a priority to the non-economic issues as to the economic ones.

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