09 APRIL 2003

Search all issues

powered by FreeFind

Send Your Feedback!

Bleak investment future with Labour victory

The Labour Party was in an upbeat mood yesterday as it looked ahead with optimism, in the belief that next Sunday will turn out to be a sure victory for them.
If the soundings turn out to be true then one should expect Malta to face a bleak future, with three respectable credit rating agencies stating in no uncertain terms that Malta’s credit rating would be lowered as a result – a sign that would lead to less investment across the board.
The credit ratings are linked to Malta’s accession to the European Union, but they also look at the government strategy in fighting the deficit.
The reports and analysis were carried out before the final decision by the Labour Party to do away with Lm81 funding from the EU, and an additional Lm9 million. Added to this is the fact that Lm25 million would have to be removed from the revenue flow in the first two months,
The latter being the MLP’s electoral commitment to pardon two month’s income tax for practically the entire working population,
Labour leader Alfred Sant has shot down concern about the importance of credit ratings, describing them as reports rolling out like cheesecakes.
Nonetheless, the conclusions in many of the reports have been used by many of his faithful lieutenants to illustrate the deficiencies in the government’s fiscal deadline implementation.
A report by Standard & Poor's Ratings Services had reaffirmed its A/A-1 foreign currency and AA-/A-1+ local currency ratings on Malta, saying the outcome of the referendum in favour of EU membership "reflects expectations that fiscal consolidation and progress with structural reforms will continue". The outlook is stable.
"The first true test of popular support for EU membership, the referendum result, not only gives increased legitimacy to the government's structural reform agenda but also creates an opportunity to quicken the pace of reform," one Standard & Poor's credit analyst said.
"Further measures to deregulate, liberalise and privatise key sectors of the Maltese economy are central to safeguarding external competitiveness and strengthening the economy's capacity to adjust to economic shocks."
The agency observed that the government and the opposition, however, remained polarised over the issue of EU membership.
"Although the referendum result has lent additional political weight to the government's pro-EU stance, the next general election will give the MLP and the rest of the no lobby an opportunity to reverse the result, which is non-binding: the vote in favour of membership was only achieved with a 54 per cent majority on a 91 per cent turnout.
"EU aspirations have provided an important anchor to the government's increasingly prudent macroeconomic policy approach, which has allowed for continued progress with structural and institutional reforms. Should an MLP government be elected and withdraw Malta from the EU accession process, the pace of reform could slow."
Another credit rating agency, Fitch, said that staying out of the EU could lead to Malta's international credit rating being downgraded.
A no vote was likely to initially lead to a negative rating watch, and a "very possible" downgrade within months or a year, according to Fitch's sovereign ratings managing director and Malta analyst.
He did point out, however, that giving the thumbs down to EU membership would not automatically lead to a downgrade. Likewise, membership would not mean an automatic upgrade.
"But it's obvious that the EU membership process has led to the modernisation of the economy. And the reintroduction of protectionism would be very bad news," he told the press.
Other rating agencies, like Moody's, have also in the past closely linked Malta's credit rating and investor outlook to the island's EU accession bid.

Credit ratings show the government's willingness and ability to meet its financial obligations.
A spokesman said the London-based said the rating agency was treating each candidate country on its own merits.
"Should you turn down membership, then we would need to know what the alternative policies are. Is the island capable of luring investment outside the EU?" he asked.
He doubted whether the EU would have much appetite to mould a special agreement with Malta.
"The EU doesn't seem to be interested in going into new negotiations with Malta. Let's be honest. Malta is a very small country and I doubt what negotiating clout it will have," he said.
The spokesman said Fitch would not look favourably at Malta if it retained its trade barriers, even if it claimed to want the best possible relationship with the EU.
He said the reintroduction of levies would be a bad move, especially considering neighbouring countries like Tunisia were eliminating them.
"Malta would be going in reverse - and that would certainly bring a downgrade."
Protectionism, he insisted, led to inefficiency and less productivity.
On the other hand, as an EU member Malta would have an excellent opportunity to lure foreign investment and give the economy the necessary thrust, he said.
It was after all evident that the adoption of the EU's acquis had enhanced the Maltese economy's efficiency and competitiveness.
However, he said, it was ultimately up to Malta to exploit its position as an EU member. Countries like Ire-land got their house in order in impressive manner with entry into the EU.
The better known rating agency Moody hasn’t changed on membership benefits
According to a Moody’s senior analyst speaking to The Malta Financial and Business Times, Malta’s EU membership application has significantly enhanced Malta’s credit rating and if the application were to be withdrawn, such a move would be "very damaging" to the country’s status.
According to Kristin Lindow, Moody’s sovereign analyst responsible for Malta, "The prospect of EU accession is pulling up Malta’s ratings, as membership is seen as providing a motive for fundamental economic reform.
"If it were thought that Malta were to retract its application, it would be thought that a reduction in incentive within the country would take place, as the idea of reform seems to be so unpopular. It is thought that such a move would result in large structural and economic problems.
"The fact that there is a total lack of consensus between Malta’s political parties on the issue [of EU membership] coupled with the fact that the General Workers’ Union is so opposed to membership, if there had to be a marginal shift in the political sphere, it is unclear what Dr Sant would do.
"It would be very damaging for Malta if its application were to be withdrawn.
"Malta stands to make or break its future by failing to reach agreement on an issue of such importance to the future of the nation."
While affirming that economic growth at the end of last year and at the beginning of this year has appeared to be stronger, Mrs Lindow expressed concern over the compilation of economic data and points to discrepancies from varying sources.
Moody’s is the world-leading provider of independent credit ratings, research and financial information to the capital markets. Moody’s reports are closely followed by the world-wide investing community.
Despite the fact the Moody’s, in its annual report, had praised Malta for the government’s economic reform programme, which has narrowed the country’s fiscal deficit and aims to further reduce it through the sale of state-owned enterprises, it also gave dire warnings of a possible disruption to the process.
Moody’s states in its report on Malta, "Domestic political opposition will likely mobilise against both structural reform and the government’s EU accession plans, throwing the smooth implementation of these initiatives into doubt.
"Should the progress of reform be interrupted and macroeconomic imbalances persist in the long term, the negative outlook on Malta’s ratings could progress to a review for downgrade in Malta’s debt and bank deposit ceilings, as well as BoV’s and HSBC’s deposit ratings."

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Business Times, Newsworks Ltd, 2 Cali House, Vjal ir-Rihan, San Gwann SGN 02, Malta
Tel: (356) 21382741-3, 21382745-6 | Fax: (356) 21385075 | E-mail