The Malta Independent 21 September 2019, Saturday

Beyond the praise

Thursday, 22 August 2019, 09:47 Last update: about 30 days ago

It is always good to be praised. But it is never good to allow praise to cover or mask eventual warnings.

Malta has been praised by many credit rating agencies over the past months. This is all well and good and the government milks every declaration to the utmost in the public sphere.

But while we rejoice in the praise and acknowledge the government's management of the economy that produced these results, we must not close our eyes and ears to the warnings that may be buried in the praise.

Last week, as a case in point, we were the only paper to reproduce in full the rating by DBRS. Maybe we have had so many good and authoritative ratings that we have stopped looking closely at the words in the ratings summaries.

But we must not lose track of the subtle warnings in the DBRS rating.

Such as:

-Additional considerations factoring into the Rating Committee decision included:

(1)     heightened risks to growth and fiscal performance due to the small size of the Maltese economy, and

(2)     potential risks stemming from regulatory or policy harmonisation changes.

- While valuation in the housing market is becoming stretched, strong demand has largely been driven by fundamental factors such as rising disposable income, substantial net migration and low interest rates.

An increasingly responsive housing supply, households' high levels of financial wealth and liquid assets and banks' conservative lending practices mitigate the risks to the banks´ mortgage loan book.

-         DBRS views the main sources of risks as arising from a sharp deterioration in Malta´s growth outlook, a weakening primary balance or the materialisation of a contingent liability.

In addition to its large and concentrated financial system, another source of contingent liabilities could come from vulnerabilities in its SOEs, with liabilities of 18% of GDP in 2017 and accounting for most of 8.5% of GDP of outstanding guarantees in Q1 2019.

-         Malta's corporate taxation proceeds represented 16.6% of total revenues in 2017, with around 50% from foreign-owned companies according to IMF. Therefore, Malta´s tax base could be eroded if international tax changes were to reduce significantly the attractiveness to multinationals to locate in Malta relative to other jurisdictions.

-         Malta's open economy is the smallest in the euro area and is vulnerable to weak external demand and lower foreign direct investment. In the short-term, major risks stem from an escalation of protectionist trade measures hurting global trade and growth as well as the impact on tourism from Brexit.

-         Also, addressing emerging infrastructure bottlenecks and labour shortages in certain sectors, which could weigh increasingly on growth, will remain a challenge. In the medium-term, changes in international corporate taxation, changes to the EU regulatory framework or slow progress in enhancing its governance framework could reduce Malta's attractiveness as a financial and business location.

There may be other points to reflect upon. We are now, even if in mid-Summer, in the middle of the preparations for Budget 2020. We expect to hear from the government how it intends to tackle these and similar points and how it plans the future of our economy. 
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