Edward Scicluna − everyone is going to feel the pain of debt

Corporate debt has risen exponentially over the past decade. According to the OECD’s 2019 Report, the global outstanding debt in the form of corporate bonds reached almost USD13trn at the end of 2018 – twice the amount outstanding in real terms in 2008.

The lockdown in Europe has earned us some protection from the ravages of the Coronavirus but it comes at a cost of mental stress and in certain cases loss of jobs exacerbating family tensions.

This follows other unprecedented emergency measures introduced around the world to rescue economies shattered by the virus, which has claimed more than 360,000 lives globally as infections top 5.8 million. The only consolation is that most governments have retained civil servants on full pay − working from homes since the outbreak of the pandemic in early March. This means that government has honoured its pledge not to cut salaries of its employees while seeing its own tax revenue and licenses dwindling as each factory and private enterprise lays off workers or makes them work on a four-day week.

As can be expected, the worst hit are the hotels and leisure industries which employ almost half of their workforce on a part-time basis (mostly on low wages). The Malta government has started paying a monthly wage supplement (equivalent to €800 less 10% for FSS dues) to a host of workers enlisted in Annex A. In such a list, one finds the hotels and catering categories and a number of self-employed. The latter were ordered to close shop. In the hotels sector, there are about 16,000 workers (roughly half of these are part-timers) apart from a number of restaurant owners (about 2,300 in all) who were ordered to shut down. It means that, in normal circumstances, such a cohort of about 32,000 workers (excluding those claiming quarantine leave) would otherwise become eligible to claim unemployment insurance. Silvio Schembri, minister for the economy announced that approximately €55m have already been disbursed to idle workers while a further €25m are set to be handed out shortly. Over three months, this translates to some 93,580 jobs being subsidized (approx. 31,200 monthly).

Paradoxically, this means, that Jobsplus (unless wage subsidies by Malta Enterprise were available) would otherwise have had to pay an equal amount in unemployment benefits for dole claimants. In short, government had to borrow extra to fund such benefits while corporate and VAT tax revenue is down. It is sad to recall that prior to December 2019, the country was managing a small annual surplus for the past three years but the situation is now pointing to deficit territory. This means extra borrowing had to take place. Government is expecting a drop in revenue this year of €300m and an additional expenditure of €700m, which accounts to around 7% of GDP. To bridge the gap, plans are afoot to borrow an extra €2bn loan by way of government bonds to finance the higher expenditure to make up for the loss of revenue and tax deferrals.

Naturally, members at MCESD are urging government to initiate substantial measures aimed at stimulating the economy and borrow extra funds to support innovation, ideally funds to upgrade infrastructure and boldly diversify away from “bucket and spade” tourism. The latter is fanning noise and air pollution. Can we forget the travails of the beleaguered financial services sector, now reeling under the negative MoneyVal report? Again, rational thinking leads us to conclude that it is madness for the private sector to borrow new money, simply to keep the status quo. That is retaining idle workers on its books: waiting at least 12 months for the vaccine to evolve and made available globally. Unless the private sector has ample reserves put aside out of past profits, it is unlikely to have enough resources to keep idle workers in anticipation of the upturn in global business.

In Malta, government has not been keen to discount corporate taxes, water and electricity rates and fuel. On the contrary, licensing costs by MFSA are expected to increase. So, in a nutshell, to safeguard the livelihood of low income workers, the options for them are either to claim unemployment insurance or as in case of AirMalta’s cabin crew accept a lower wage. It is opportune to note that there are mounting pressures in Brussels to come up with a recovery scheme to revitalise the ailing EU economies. Not a moment too soon, the EU unveiled a historic €750bn recovery plan to get the continent back on its feet. This scheme will complement the loan support scheme of €750m, which the local government has pledged to support the cost of borrowing by SMEs and larger units to finance recurrent expenditure including the cost of retaining workers. Such debt will have to be repaid out of future profits in the coming years (SMEs benefitting from a one year moratorium on interest and capital). The logic of borrowing now to finance the retention of workers and other idle productive resources has to be weighed carefully against the probability of recouping such heavy costs in the future if and when trading resumes.

In this context, one notes the cautious reaction of the finance minister towards the recent EU attractive scheme of €750bn offered to prime the pump. Malta qualifies for a cool €1bn tranche. He warned against getting burdened with unsustainable debts which could lead to a situation whereby fresh loans would have to be sought to pay older ones. In the case of Malta, such debt burdens would force the exchequer to levy new taxes on the e-commerce sector and possibly lower welfare benefits − a move, which in itself, is regressive. It is widely expected that the ratio of debt to GDP may exceed 70% by end of the year. As the world grapples with the destructive forces of COVID-19 − fears this will accelerate a global economic recession. The Coronavirus has been shutting down businesses, quarantining workers and halting international travel at a level never before seen. Global policymakers are scrambling to ease the public’s anxiety over the pandemic health crisis, all the while attempting to deal practical fiscal policies and implementing Keynesian policies to expand demand by borrowing at easy terms to help ailing businesses. But of course, as recently pointed out by Finance minister Scicluna, delving into dangerous levels of debt can never be sustainable. Debt bubbles fuelled by artificially low interest rates and cheap money will more than likely burst and the Coronavirus is excellently placed to be the pin which pricks this particular bubble. One wants to avoid the debt tragedy that in the past plagued both Greek and Italian economies.

It is exceedingly clear that many businesses will not be able survive this pandemic. Concerns of businesses being unable to make bond repayments are a prevailing and critical fear for investors, particularly for those in or related to the airline, energy, financial services and hospitality sectors. Prospects of little to no revenue over the coming months (or perhaps longer) for such particularly exposed sectors are especially troublesome. With plummeting levels of creditworthiness, many corporations will no longer be able to merely roll over debt and borrow more money cheaply − a vicious circle.

One hopes that the incidence of debt on a global scale will start to de-escalate once an effective vaccine is found but in the sober words of Prof. Scicluna – everyone is expected to feel the pain of debt.

The writer is a partner in PKF Malta − an audit and business advisory firm