Finance Minister objects to Moody’s downgrade

Finance Minister Tonio Fenech has reacted to a downgrade by Moody's Investors Ratings that this is the result of the ongoing problematic economic situation in Greece and detoriating financial circumstances in the eurozone that are pilingt downward pressure on the classification of the different countries.

"I must admit that I'm disappointed with Moody's rating, also because during the communication we had, the agency did not refer to anything specific in Malta but continually referred to the international climate scenario," Fenech said.

He added that his disappointment also arose from the fact that Malta undertook the necessary measures to send a strong message of stability to the international arena. "This also goes to show that we cannot run away from the reality out there and that the international perception on the eurozone affects Malta. It is crucial that all member states take on all necessary measures to mitigate their debt problems, as their problems are affecting the rest."

Reacting to comments made by Opposition leader Joseph Muscat, Fenech said Muscat was riding on Moody's report in an attempt to hit out at government. "Joseph Muscat ignores the reality out there and insists on blaming the Maltese government, even though government is recognized by several institutions of implementing the necessary steps to mitigate its debt," he said.

Fenech also referred to comments made by Muscat, who said that the largest reduction in national debt was down to an increase in revenue from the issue of government stocks. "His comments only go to show that Muscat doesn't understand the basic principle of public sector financing. Stocks are a method by which government finances its debt. Issuing stocks doesn't reduce debt: stock are debts themselves."

The finance minister went on to add that during 2012 the country will still register economic growth, despite statements by financial institutions including the International Monetary Fund that the growth might not be as big as forecasted by government.

Fenech went on to defend government's forecast for growth, by referring to the local manufacturing sector which was dependent on countries such as Germany. "Our own sectors are so far safe; for example the manufacturing sector in Malta depends on Germany. Indicators for the tourism sector, the financial sectors and the IT sectors show that they will go strong during this year.

"Our message is one: if the Opposition is keen on discouraging the public we tell the Maltese you shouldn't give up. The Opposition is simply interpreting the reports wrongly, to the detriment of investment in Malta. At the end of the day it is not the Nationalist Party in government which suffers, but jobs and employment," he said.

Fenech added that if it's not the crisis which was generating economic slowdown in the country, it was the Opposition's attitude.

Asked what could government do to "convince" credit rating agencies that Malta was doing its best to counteract for the eurozone crisis, Fenech said that government will invite Moody's to come to Malta and analyse for itself how the country is faring and what measures have been undertaken by government to mitigate the problem.

“Moody’s has taken a blanket approach. The reason we object to the downgrade is because Moody’s itself is saying that nothing has changed since their last analysis. They have taken a position to downgrade us because of our neighbouring countries,” Fenech said.

He said that it was important for Malta to keep decreasing its deficit to look different: “It is better to look different then to throw Malta with all the rest.”

The finance minister went on to urge the credit rating agencies to carry out a more detailed analysis of the individual countries. “We must insist on the message that our finances are on a strong footing. Government has thus taken the decision to cut its expenses by €40 million,” he said, referring to the January budgetary cuts.

“We are serious about our targets. We are seeing the deterioration out there and Malta’s not waiting for somebody to tell it what needs to be done. We are doing it,” he said. “Secondly, we need to continue sustaining economic growth by giving the necessary incentives.”

Fenech insisted that government will keep going strong with its economic growth targets, despite the less enthusiastic forecasts by not only Moody’s but also by the European Commission last year and by the International Monetary Fund this year.

The IMF said Malta’s real GDP growth in 2012 would be relatively modest at 1%.

Moody's is saying that the real output growth is likely to be significantly lower than government's 2% forecast.

"At this stage I admit that it could be difficult for Malta to reach its 2% target, however it is certain that we will still register economic growth," he said, adding that the generation of government revenue so far has been as predicted.

"We are not having an impact on revenues as some are possible fearing. Ultimately, it's through economic growth that we meet our revenue targets."

Asked whether the 2% economic growth figure has been revised, Fenech said government never revises its forecasts for economic growth: "Unlike other countries, reality is that we do not have an independent body which carries out growth projections. But what counts is the final result.

"Looking at the final results of the past four years it's easily noted how our forecasts had been lower than the final results."

The finance minister said that if his indicators were showing that government was realistically on the path to reach its targets, there is no need to increase taxes.

Moody's Investors Services also justified its downgrading because of Malta's relatively week debt metrics compared with other 'A' category peers.  Fenech said that if Malta's economic growth is not as forecasted, then government's potential to reduce its debt is reduced because of the decrease in growth.

Since debt and deficit are calculated at a percentage of the economy, and not at nominal value, the only way to address them is through a balanced budget. "This should always be at a percentage of the GDP, achieved through the decrease in government's expenditure and increase in economic growth."

When percentage growth is higher than the deficit, than you are at proportion to reduce the debt at a percentage of GDP even though the debt is increasing because of deficit, he added.

"Growth is important in terms of public financing as economic growth will help you sustain the debt levels," Fenech said.

The finance minister went on to add that the downgrade should not have an impact on investor's confidence, especially when one compares the statistics for the government's stocks issued during 2011.

"Although downgrades could be associated to an increase in the cost of borrowing, Malta's domestic stability has ensured that there is not a decrease in investor confidence or a marked increase in the cost of borrowing," Fenech said.

The majority of the government's debt is local.

According to the finance ministry, the average amount of interest paid during 2011 on outstanding debt has slightly decreased. The weighted average rate in 2011 dropped to 5.19% from the 5.41% in 2010.

In the first stock issue for 2012, applications with a total nominal value exceeding €247 million were received for the authorised sum on issue of €150 million.