Recovery – taking the rhino by its horns

The latest medical reports show how we reached the highest rate of head-to-head vaccinations among European Union countries, more than double the European average

It prays an early deliverance from the fangs of the pandemic and come autumn, the health authorities anticipate that at the present rate of inoculations, the country will gain “herd immunity”. Perhaps this was another aspect that caused Moody’s financial report to express its confidence in Malta’s economy.

In its latest country report, it adds that given the success of these reforms by government it will lead to a supportive upgrade of the country rating. Moody’s affirmed Malta’s credit rating at A2 with a “stable” outlook which reflects its expectation that although the outbreak of the coronavirus caused a significant economic and fiscal shock in 2020, yet it predicts that the outbreak only lands a short-lived negative impact on Malta’s economy or public finances.

According to the rating agency, Malta’s GDP contracted by 3.8% in 2020 and is estimated to grow by 3.2% in 2021. Certainly, comparisons are odious but a GDP growth of 3.2% is only half what we reached in the peak year of 2019. As a general comment, Moody’s explained that although tourism remains a key sector, the remote gaming sector and professional services sector have grown in importance and these are not expected to be significantly affected (one prays the dreaded tax harmonization policy by the Commission is resisted). These growth sectors are partly compensating for the harder-hit sectors.

Not so sanguine was the quarterly review issued by the Central Bank. It starts by commenting that the general government current account balance (measured on a four-quarter basis) registered a deficit of 8% of GDP in the third quarter of 2020, against a deficit of 5.1% in the previous quarter while debt increased mainly due to extra funds needed to fund various Covid-19 recovery schemes.

Employment was stable. It is debatable whether furlough workers ought to be classified as gainfully employed since economists argue that such workers do not contribute fully to the economy – mostly as a result of their precarious employment. Malta’s own statistics register such furlough jobs as gainfully employed. Naturally, a lot depends on how early we will regain the tourist traffic enjoyed in 2019. To kickstart visitor mobility, the president of the EU Council, Ms von der Leyen said a digital Green pass “should facilitate Europeans’ lives”. The noble aim is to gradually enable travellers to move safely in the European Union or abroad.

Some EU member states are worried that the legal path to create the pass, which would include approval by European Parliament, will take too long, in time to be ready for the summer holidays. But, quoting Internal Market Commissioner Thierry Breton he is bullish in stating that this scheme will be working by June.

In parenthesis, one quotes Spain’s tourism minister; Spain wishes that other countries positively consider a “green corridor” for vaccinated tourists in case there is no universal EU agreement on issuing “vaccination passports”. In the UK, a spokesman said that they are keen to plan for the issue of vaccine passports. It is interesting to note China’s Covid passport is already set in progress.

This will include an encrypted QR code that allows immigration officials to obtain travellers’ health information. The added advantage is that “QR health codes” within WeChat and other Chinese smartphone apps are already equipped to gain entry to domestic transport and to many public spaces in China. Simply put – the apps track a user’s location and produce a “green” code – synonymous with good health – if a user has not been in close contact with a confirmed case or has not travelled to a virus hotspot. Back to Europe and pressure is mounting on various governments that face redundancies and thousands of furlough workers particularly those connected with the aviation and hotel sectors.

Why is the aviation sector in such a precarious position despite many airlines that have parked their planes, yet are still struggling to fill seats – enough to make money? The writing on the wall is – unless business picks up, more airlines will fail and others (like AirMalta) will need state aid to survive. Planes were only 62.9% full on domestic flights around the world, well below levels at which airlines make money and an abysmal 38.9% for international travel. As an interim measure, Heathrow airport is introducing a levy styled Airport Cost Recovery Charge, to recoup the cost of operating and maintaining the Covid-19 safety infrastructure.

The reality of losses from tourism suffered by countries such as Cyprus, Malta, Spain and Greece is worrying since these countries had to resort to massive debt mountains to cope with the drop in revenue. Be that as it may, the latest Central Bank review reads some solemn facts.

Exports fell by 12.4%, reflecting lower foreign demand for goods and services. The contraction of domestic demand can be measured by a decrease of 6.9% in imports – a year earlier. As exports fell more strongly than imports, thus net exports declined, shedding 9.2 percentage points from real GDP growth. It goes without saying that such a contraction in Real GDP is a bitter pill for the new minister of finance who took over two months ago. Moving on, the balance on the current account shifted into a deficit compared to a small surplus registered in the third quarter of 2019. Such a dip in performance has killed the wind from the sails of party apologists who were so vocal hailing the Joseph Muscat

“L-Aqwa Zmien” with surplus balances in the past. One may ask, what contributed to this sudden U-turn?

Again, the Central Bank review provides the answer – a sharp decline in net services receipts, coupled with an increase in net income outflows. All this comes with a cost to public finances with the general government balance deteriorating significantly.

A debt legacy of about €6bn is a sharp reminder that in the next decade there has to be repayment of such debt from new taxes or else from a brisk acceleration in GDP’s growth. Certainly, to speed up the recovery, we need to take the rhino by its horns.