The writing was on the wall

The budget contained optimistic growth projections, with the Minister assuring us that the decrease in income tax will be amply made up for by the increase in corporate taxes collected due to higher profits made by companies.

I guess it was inevitable. This week, Standard & Poor's downgraded our long-term credit rating to BBB+. This puts Malta's credit just half a step above the very end of the investment grade spectrum (BBB), teetering on the edge of junk bond status. Essentially, the Standard & Poor's assessors have informed the world that they believe that Malta can meet its obligations for the time being but that there is a strong possibility that we will have serious problems managing our debt in the months and years to come.

The timing could not have been worse for the PN, who reacted by clinging to the quote mentioning the budget ("The dissolution of Malta's parliament on Jan. 7, 2013, will prevent a 2013 budget from being adopted until after the elections set for March 9") in the document overview like limpets, announcing to all and sundry (and anyone else willing to listen) that the downgrade was a direct consequence of Labour's vote against the budget. We were also told that if the PN are voted back to power and pass the budget, S&P's will immediately upgrade us once more.

Unfortunately when making these statements, the PN seems to have forgotten that S&P's submitted a two page rationale for their decision, and that several supporting statements were made after the initial nod to the failure of the budget vote. Anyone who bothers to download and read the report will be left with no doubt as to the real reasons for the downgrade.

"The ratings are constrained by our view of Malta's sizable government debt burden, significant contingent liabilities from what we view as permanently loss-making state enterprises, the external vulnerabilities of the narrowly based economy, and structural issues such as high private-sector indebtedness and very low female labour force participation."

Clearly, the shooting down of the budget a few weeks ago has nothing to do with the escalation of gross general government debt to 75% of GDP or the loss-making enterprises the report is referring to, which have been in the red for years now. Similarly, the female participation rate has been low for years - it is absolutely not the case that women resigned in droves after the 10 December.

The report singles out Enemalta as a major cause of concern, with the S&P's assessors making it clear that all things equal, the utility company is expected to continue making losses for years to come. This is obviously a problematic statement for the government, which has been at great pains to convince the public that the end of the financial haemorrhage going by the name of Enemalta is in sight.

In a masterstroke of political spin, we were told that S&P's were concerned about the situation at Enemalta because of the PL energy plan - this, notwithstanding the fact that the energy plan in question was not mentioned in the report at all.

The claim made by the PN is a load of hogwash. Standard & Poor's mentioned Enemalta because the €800 million debt that this entity is burdened with is guaranteed by the government. Seeing as there currently is no indication that Enemalta is going to come by a windfall, then the odds of this loan getting paid off any time soon are scarce.

As S&P's succinctly put it - "The Maltese government guarantees debt worth almost 20% of GDP issued by state-owned enterprises, on top of an estimated gross debt burden of 75% of GDP in 2013." There you go, tot up the debt and we end up with a sum equal to 95% of GDP. Am I the only one who gets a shiver down my spine when I consider that number?

To get a sense of perspective of the implications of this 95% we need to take into consideration that Spain's debt was 85.3% of GDP at the end of 2012. Countries such as Portugal (108.5%) and Italy (120.9%) reported higher debt, but frankly we are not that far off.

This is the real reason for our downgrade, which after all relates directly to our ability to repay our debts. The chances of our not meeting our obligations have grown because our debts have grown, while our economy has slowed down.

"Downside risks to growth, stemming from continued poor external demand in Europe and slow improvements in domestic demand are likely to keep real GDP per capita growth lower than pre-crisis levels. Real GDP per capita growth is also likely to remain below the government's budgeted growth projections, which appear to us to be quite optimistic."

So there you have it, in a nutshell. The budget contained optimistic growth projections, with the Minister assuring us that the decrease in income tax will be amply made up for by the increase in corporate taxes collected due to higher profits made by companies.

Go tell that to Standard & Poor's.

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