Post Covid-19 – Taking the bull by its horns

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George M. Mangion is a partner in PKFMALTA, an audit and business advisory firm

Castille went on a cheerful mood as it reflected on the latest Moody’s report. This says that irrespective of the slowdown caused by the lockdown and the decimation of the tourist industry, Malta’s economy will be able to recover without significant lasting scars. It augurs that our public finances will be brought under control after the pandemic. The latest report notes how Malta has among the highest rate of head-to-head vaccinations among European Union countries, more than double the European average.

It hopes that our release from the fangs of the pandemic is at hand and come autumn, the health authorities are claiming that at the present rate of inoculations, the country may regain “herd immunity”. Perhaps this was another aspect that caused Moody’s to express its confidence in Malta’s economy.  In its latest country report, it adds that given the success of these reforms by government, this will lead to a supportive upgrade of the country’s 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, it predicts that the outbreak will have a short-lived negative impact on Malta’s economy or public finances. 

According to the rating agency, it expects Malta’s GDP to contract by 3.8% in 2020 and to grow by 3.2% in 2021. Certainly, a GDP growth of 3.2% is only half what we reached in the peak years prior to 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 (unless the tax harmonization policy by the Commission is resisted). These growth sectors partly compensate for the harder-hit sectors.

Not so sanguine was the latest quarterly review issued by the Central Bank. It starts by commenting that the general government 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 Covid-19 recovery schemes. This debt-to-GDP ratio rose to 53.7% from 51% at the end of June 2020. The latest unemployment rate stood at 4.6%, slightly higher than the 4.4% registered in the second quarter, and 3.7% recorded a year earlier. This rate works out on the assumption that the thousands of furlough workers are counted in the JobsPlus statistics as fully employed. Readers may question that this is a debatable subject as some countries consider furlough workers do not count as gainfully employed due to their precarious employment income. This interpretation may be a draconian measure which if adopted in the case of Malta, will reduce the gainfully employed in Malta by around 47%. All the same, the EU unemployment rate peaked in July at 8.7%; this being the highest rate in almost three years and considerably higher than the low of 7.2% reached in April 2020, so as to compare that Malta had fared better. Be that as it may, the Central Bank review reveals that 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 the third quarter of 2020 of 9.9% in Real GDP is an improvement on the previous quarter when GDP had contracted by 16.1%.

Moving on, the balance on the current account shifted into a deficit compared to a surplus 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 in hailing the surplus balances achieved in the past. One may ask what contributed to this sudden U-turn. The Central Bank review comes with the answer – a sharp decline in net services receipts, coupled with an increase in net income outflows. When measured as a four-quarter moving sum, the current account registered a deficit for the first time in almost four years and stood at 2.2% of GDP. 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 a repayment of such debt from new taxes or accelerated GDP’s growth. Certainly, the genie needs to go back in the bottle.

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