Be­yond the praise

The Malta Business Weekly - - FRONT PAGE -

We pub­lish in one is­sue, ex­cep­tion­ally, three as­sess­ments of the Mal­tese econ­omy which were all pub­lished in the space of a week. All from re­li­able in­sti­tu­tions like Fitch, the IMF and the Euro­pean Com­mis­sion.

All sang high praise for the Mal­tese econ­omy. Fitch ex­pects the Mal­tese econ­omy will con­tinue to out­per­form eu­ro­zone peers. Malta is one of fastest-growing economies in Europe, said the IMF, while the Com­mis­sion said: Real GDP growth was among the high­est in the EU in 2014-15, reach­ing 7.9%, driven by strong net ser­vice ex­ports, ro­bust pri­vate con­sump­tion and a surge in in­vest­ment, partly due to one-off fac­tors.

This is then echoed by the rat­ings in the case of Fitch: Fitch Rat­ings has af­firmed Malta's Long-term for­eign and lo­cal cur­rency Is­suer De­fault Rat­ing at ' A' with Sta­ble Out­looks.

Com­mon to these three re­ports there is praise for the re­silience of the Mal­tese econ­omy and its sec­tors and also praise for the way the gov­ern­ment has been man­ag­ing the econ­omy.

But there are also some un­der­stated warn­ings and the gov­ern­ment, and the coun­try, would be very much mis­taken if they were to dis­re­gard them.

Let us take the last re­port, that by the Euro­pean Com­mis­sion, which states in clear terms: “Over­all, lim­ited progress has been made in ad­dress­ing the 2016 coun­tryspe­cific rec­om­men­da­tions. Measures have been taken to im­prove the sus­tain­abil­ity of pub­lic fi­nances, par­tic­u­larly re­gard­ing age-re­lated bud­getary costs. The full im­pact of these measures on pub­lic ex­pen­di­ture, how­ever, is not yet cer­tain.

“Some progress has also been made in strength­en­ing labour sup­ply by im­prov­ing ac­cess to and par­tic­i­pa­tion in life­long learn­ing, with a fo­cus on the low-skilled. Re­gard­ing the progress in reach­ing the na­tional tar­gets un­der the Europe 2020 strat­egy, Malta has made progress to­wards its tar­get on em­ploy­ment.

“How­ever, there ap­pears to re­main a gap with re­spect to the tar­gets for re­duc­ing green­house gases, rais­ing R&D ex­pen­di­ture, in­creas­ing re­new­able en­ergy pro­vi­sion, im­prov­ing en­ergy ef­fi­ciency, re­duc­ing early school leav­ing, in­creas­ing the ter­tiary ed­u­ca­tion at­tain­ment, and re­duc­ing poverty. “

IMF said: “Di­rec­tors noted that the bank­ing sys­tem is well cap­i­tal­ized and liq­uid, with prof­itabil­ity well above lev­els seen in peers. How­ever, they ob­served that pro­tracted low in­ter­est rates, weak credit growth, legacy cor­po­rate non­per­form­ing loans, and an uncer­tain ex­ter­nal en­vi­ron­ment pose chal­lenges.

“In ad­di­tion, banks’ high and in­creas­ing ex­po­sure to the prop­erty market along­side per­sis­tent house price ap­pre­ci­a­tion could also lead to im­bal­ances. They en­cour­aged the au­thor­i­ties to de­ploy tar­geted macro-pru­den­tial tools to en­hance the re­silience of banks and house­holds to prop­erty market swings, close data gaps, and re­view the fis­cal in­cen­tives re­lated to the prop­erty market.

“While there has been progress in re­duc­ing non­fi­nan­cial cor­po­rate sec­tor’s legacy NPLs, Di­rec­tors noted that a faster res­o­lu­tion of re­main­ing dis­tressed loans would help un­lock re­sources for growth. They wel­comed the au­thor­i­ties’ plans in this area, in­clud­ing their in­tent to stream­line the in­sol­vency and bank­ruptcy frame­works. Di­rec­tors un­der­scored that main­tain­ing a ro­bust im­ple­men­ta­tion of the AML/CFT frame­work in line with in­ter­na­tional stan­dards would also help con­tinue safe­guard­ing the in­tegrity of the fi­nan­cial sys­tem.”

And fi­nally, Fitch said: “Fu­ture de­vel­op­ments that could in­di­vid­u­ally or col­lec­tively, re­sult in neg­a­tive rat­ing ac­tion in­clude:

“-Sig­nif­i­cant slip­page from fis­cal tar­gets lead­ing to de­te­ri­o­rat­ing pub­lic debt dy­nam­ics.

“-Crys­talli­sa­tion of ma­te­rial con­tin­gent li­a­bil­i­ties or a shock to the bank­ing sec­tor that re­quires fis­cal sup­port.”

We the peo­ple and the gov­ern­ment would do well to heed such ad­vice and act ac­cord­ingly. Malta, it is of­ten re­marked, is a small and open market and the slight­est change of de­te­ri­o­ra­tion in our trad­ing part­ners must not find us un­pre­pared.

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