News | Wednesday, 19 August 2009

The latest CBM Quarterly Review analysed

In the latest Quarterly Review published by the Central Bank last Friday, the bank is now forecasting that Malta’s GDP will contract by 0.6 per cent this year, followed by a slight growth of 0.6 per cent next year, while HICP inflation will fall down to 2.2 per cent in 2009. Charlot Zahra spoke to two prominent economists – Karm Farrugia and John Cassar-White – on the implications of these forecasts on the Maltese economy, especially in view of the forecasts made by the IMF and the EC’s Spring Forecasts, which are harsher with respect to the GDP contraction, the budget deficit and the deficit-to-GDP ratio

Karm Farrugia: “I think this year’s contraction will exceed 0.6 per cent, more likely 1 per cent”

What is your reaction to the publication of the latest Quarterly Review published by the Central Bank of Malta last Friday?
Exactly as anticipated.

According the CBM quarterly review just published, during the first three months of 2009, general government deficit dropped by €56.3 million when compared with the same period in 2008, while the cumulative deficit-to-GDP ratio dropped to 3.7 per cent in the year to March 2009 from 4.6 per cent in the corresponding period a year earlier. What is your comment on this assessment, especially in view of the forecasts made by the IMF and the EC on budget deficit?
I think this year’s contraction will exceed 0.6 per cent, more likely 1 per cent. Our economy appears always to lag a quarter or two behind the others in the EU/euro zone, both for the onset of recession and for recovery therefrom.
Depending on how much will next year’s capital budget be trimmed in the quest for restraining the fiscal deficit – on which I hold strong reservations - the economy’s performance during 2010 can be forecasted between a flat and a 1 per cent growth. Consequently, the Central Bank’s prediction is acceptable.

What is your assessment of the difference between the CBM Governor’s forecast for Malta as published in the latest CBM Quarterly Report and those made in the IMF mission to Malta in June and the European Commission’s Spring Economic Forecast in May? To what do you attribute this difference?
Two reasons: firstly, CBM is better updated than IMF and probably also the EC, and, secondly, it must also contain or mitigate their inevitable alarmist views, especially since it is not totally independent of the government.

In view of the current economic situation in Malta and in the rest of the euro zone, what would be a more realistic forecast for the deficit-to-GDP ratio in 2009 and 2010?
It is wrong to pass any judgment on the quantum of fiscal deficit for the current year on the basis of its first quarter’s results, especially since accrual accounting remains generally absent.
I prefer to await the second quarter’s result which should really have already been published 6 weeks later.
I repeat what I have already said before: I would be happy if this year’s deficit does not exceed 4 per cent, dropping to 3 per cent next year and neutralising by 2012.

One of the reasons mentioned by the CBM in its second quarterly review for a low contraction in 2009 and a modest recovery the following year is that unlike external demand, “domestic demand is expected to be more buoyant, despite slower growth in consumption, as public investment is expected to accelerate.” Do you agree with this assessment or not? Why?
No, I don’t. In my view current and projected public investment is not adequate enough for a recessionary climate. And how can the CBM bank so heavily on domestic consumption when now we are about to face a debacle on COLA?

What would be the consequences on the Maltese economy if the public investment projects starting from 2009 are delayed?
The worst thing that could happen to our economy.

Finally, the CBM Quarterly Review is projecting inflation to “ease”, with the HICP inflation rate slowing down to 2.2 per cent this year, “mainly as last year’s steep rise in energy prices is not expected to be repeated, and to fall further in 2010.” Do you agree with this assessment, especially in view of the latest increases in gas and fuel prices?
I tend to agree with CBM on this point – “easing” is not eliminating.
Besides energy and utility charges, there are other elements in the economy which are behaving as if the country is not facing a hard time – “pockets” which do not operate in a real competitive environment and which should be investigated.

John Cassar White: “There seems to be general agreement that the economy will this year contract up to 1 per cent”

What is your reaction to the publication of the latest Quarterly Review published by the Central Bank of Malta last Friday?
I have always found the CBM quarterly review very professionally prepared, free from political rhetoric and very useful to get an indication of how the economy is progressing. The last review is no exception to this general approach.

Do you agree with the Central Bank of Malta’s assessment in the latest Quarterly Review that the Maltese economy will contract by 0.6 per cent this year, followed with a growth of 0.6 per cent in 2010?
Forecasts will remain forecasts. There seems to be a general agreement in different professional forecasts that the Maltese economy will this year contract up to a maximum of 1 per cent.
Of course, even this figure can change if new developments of which we are not aware at present materialise.

What would be a more realistic forecast for GDP growth in 2009 and 2010 in view of the current economic situation in Malta and the rest of the euro zone?
A contraction of between 0.5 and 1 per cent is the most realistic forecast that one can make at present.

What is your assessment of the difference between the CBM Governor’s forecast for Malta as published in the latest CBM Quarterly Report and those made in the IMF mission to Malta in June and the European Commission’s Spring Economic Forecast in May? To what do you attribute this difference?
Differences in forecasts are to be expected. Some will be more conservative than others. Economic forecasting is not an exact science and what matters is that when all possible variables are taken into account, one can get an idea in which way the economy will be heading.

According the CBM quarterly review just published, during the first three months of 2009, the deficit in the general government balance dropped by €56.3 million when compared with the same period in 2008, to register a deficit of €49.8 million. What is your assessment of the figure, especially when considering the forecasts for Malta’s budgetary deficit made by the IMF and the European Commission in its Spring Forecasts?
In the first quarter of 2008 substantial public expenditure was recorded in the run-up to the general election.
The IMF made a very relevant comment that showed some doubt as to how early the budget deficit could be brought down to below 3 per cent as required by membership of the euro zone area.
This concern is based on the fact that the IMF would like to see more major reforms taking place to reduce public expenditure.

In view of the current economic situation in Malta and in the rest of the euro zone, what would be a more realistic forecast for the budget deficit in 2009 and 2010?
Once again, very much depends on how successful the government will be in lowering expenditure and increasing income. If taxes are not raised, then expenditure needs to be cut.
Unfortunately, the first economies are often made on the capital productive expenditure account. What is really needed is a restructuring of our social services – pensions, health, education, and other social benefits – system to make it more financially viable.

In the quarterly review, the CBM also states that in the first quarter of the year, the cumulative deficit-to-GDP ratio, computed on the basis of four-quarter sums, dropped to 3.7 per cent in the year to March 2009 from 4.6 per cent in the corresponding period a year earlier. What is your comment on this assessment, especially in view of the forecasts made by the IMF and the EC on budget deficit?
I would not read too much into a single quarter’s figures. Government cash flow changes from quarter to quarter and there is not much point in just comparing one quarter to another.
It is more meaningful to interpret trends in income and expenditure. I believe the IMF is expressing a concern that unless public finances are restructured we will continue to struggle with excessive deficits.

In view of the current economic situation in Malta and in the rest of the euro zone, what would be a more realistic forecast for the deficit-to-GDP ratio in 2009 and 2010?
At this stage I would rely on the forecasts being made by the CBM and the IMF and the EU despite that there may be differences in such forecasts.

One of the reasons mentioned by the CBM in its second quarterly review for a low contraction in 2009 and a modest recovery the following year is that unlike external demand, “domestic demand is expected to be more buoyant, despite slower growth in consumption, as public investment is expected to accelerate.” Do you agree with this assessment or not? Why?
If the Valletta project and other projects start rolling in 2010, it is inevitable that these will have a multiplier effect on our economy.
Such projects boost demand for labour and goods and services that increase economic activity.
So, it is reasonable to expect a boost in economic activity as public demand will enable some workers to earn more money and private businesses increase their turnover to supply these public projects with the goods and services that they need.

What would be the consequences on the Maltese economy if the public investment projects starting from 2009 are delayed?
If these projects are delayed, or if they fail to gain significant momentum in 2010 the economic growth that they generate will be very modest. This can have a negative effect on our chances of promoting economic growth.

Finally, the CBM Quarterly Review is projecting inflation to “ease”, with the HICP inflation rate slowing down to 2.2 per cent this year, “mainly as last year’s steep rise in energy prices is not expected to be repeated, and to fall further in 2010.” Do you agree with this assessment, especially in view of the latest increases in gas and fuel prices?
We have been experiencing very high inflation for far too long. In the last several months this was mainly brought about by the increase in water and electricity rates.
Now that these are in place, one hopes that no further significant increases will be imposed. This is the main reason for hoping that inflation in 2010 will be more subdued than in 2009.

What would be a more realistic forecast for HICP inflation in 2009 and 2010, in view of the current economic situation in Malta and the rest of the euro zone? Why?
There are other factors that are fuelling inflation in Malta at a much higher rate than is being experienced in other Euro zone countries.
Government should continue to identify the causes for such higher inflation and take measures to eliminate market inefficiencies.
The case of food prices should be watched in more detail because it affects everyone in different ways. Only in this way can we hope to register an inflation rate in Malta that is not very different from other Euro zone countries.

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