Counting our chickens

In parliament last Tuesday, the Prime Minister made repeated references to Malta's successful weathering of the international economic storm: arguing that only his own 'firm hand on the tiller' can guarantee this continued stability in future.

Dr Lawrence Gonzi may perhaps be forgiven for his overtly triumphal tone, seeing as he was effectively asking the House for a vote of confidence in his government. But while a superficial assessment of the country's finances appears at a glance to bear out his claim, there have of late been a number of indicators that things may not be quite as rosy as all that on the economic front.

Within days of the Prime Minister's assertions, two separate developments unfurled that appeared to suggest another, less encouraging interpretation of the current economic scenario. The first concerned a statement by European Commissioner Olli Rehn, who argued that Malta's deficit was expected to widen to 3.5% of gross domestic product in 2012, and 3.6% in 2013: effectively pouring cold water on Fenech's own projection that deficit reduction of up to 2.8% of GDP was attainable by the end of the fiscal year.

The second, more serious indication concerns the worrying financial chaos that continues to reign at Enemalta and Water Services Corporations, which appear to be locked on a collision course with insolvency.

Last Wednesday, this newspaper reported how top officials of Malta's government-owned utility service providers had asked for an increase in tariffs during an MCESD meeting the previous weekend: a suggestion shot down by Fenech, allegedly citing 'political reasons'.

Fenech himself has since denied making this statement, but - while this newspaper stands by that story as 100% factual - the important thing at this stage does not concern the precise details of if, when and exactly how this request was made (in the presence of numerous witnesses, incidentally). The important thing is that the financial situation at both Enemalta and WSC (which Fenech did not, and indeed cannot, deny) has clearly not been calculated as part of Malta's balance of payments - even though it is arguably enough to upset the entire economic apple cart completely, and derail both the government's and the Commission's economic projections in the process.

Even here, the extent of the financial shortfall remains uncertain. Enemalta has not published its audited accounts in over three years. The last time it did so, we discovered that the corporation stood to lose €123 million by the end of 2009. Meanwhile, unpublished financial estimates now suggest that by end 2011, Enemalta alone would have lost a further €30 million. In an interview in today's edition, independent economist Karm Farrugia quantifies the shortfall associated with government corporations (including Enemalta and WSC) at around €1 billion in total. This is admittedly only an estimate, but one that comes from a reliable source who is not generally known to exaggerate.

Naturally, Fenech will argue that this apparent black hole in the nation's economy does not qualify as government debt at all, because the money was not directly loaned to these corporations by government, but rather by private banks. However, he cannot deny that these loans are guaranteed by government: and as such, in case of an arguably inevitable default, this money will one day have to be come out of government's coffers.

The implications are, to say the least, worrying. After all, it was precisely this sort of 'creative accounting' that partly contributed to the crisis currently gripping eurozone countries like Greece and Italy: where government debts were also 'disguised' using similar, if not identical, strategies.

Besides, even without taking into consideration an additional unbudgeted €1 billion shortfall, there is already disagreement between Malta and the Commission regarding the actual size of deficit, as well as between local and international forecasts for the coming years.

Admittedly, Fenech and Rehn may be using different (but equally legitimate) yardsticks to measure the local economy and make their predictions accordingly. And it must also be noted that Fenech is not only within his rights to challenge the Commission if he feels its calculations are incorrect; but he also deserves the nation's support.

But the question remains: why should the rest of the country take either assessment at face value, when it is demonstrable that important and potentially game-changing considerations have been left out of the equation altogether?

Factor in the bad debts accrued by Malta's government corporations, and you can rest assured that the entire financial scenario will change beyond recognition. From this perspective it is suddenly debatable whether the 'firm hand on the tiller' metaphor, as coined by Lawrence Gonzi last Tuesday, is applicable to Malta's actual financial reality. And far from weathering the 'perfect storm', it looks likely that the worst of the international crisis has yet to even materialise.