Off Balance Sheet

The Malta Independent

International equity markets are still shaken by the Enron affair.    They just can’t fathom how in a sophisticated financial market as that of the US, such things could in fact happen.

“Air Malta are changing their financial year end in order to balance the operating losses with the profits from disposal of  aircraft which are  being disposed after the traditional year-end of March 31st.”

Even encouraging figures at the macro-economic level are not impressing the market that is more focussed on the dull results being turned out at the corporate level.   If circumstances were normal the investors would be pouring money into international equities discounting their eventual rise as it is obvious that with a time lag macro-economic recovery will boost corporate profitability.

But investors, still dazed by the Enron scandal  and by the laxity and flexibility of American corporate accounting standards, are unenthused by the good news doubting them even where there is no realistic basis to do so.  The market has coined the word Enronitis to give a single word description of the sour feeling of being cheated by corporate irresponsibility of  executives who instead of focussing energies to drive the company’s core business forward, waste resources  to engineer the share price growth boosting personal remuneration packages involving share option deals.

Is Malta suffering from Enronitis?    At the corporate level, at least for companies whose equities are traded on the Exchange, there is nothing to suggest so.   On the contrary one notes more rigid bad debt provisioning by the banks making up for some past laxity especially on the part of  Bank of Valletta.   A whiff of minor Enronitis reached me this week as it was confirmed that Air Malta are changing their financial year end in order to balance the operating losses with the profits from disposal of  aircraft which are  being disposed after the traditional year-end of March 31^st.

A more serious case of Enronitis is structured into public finance reporting.   While government consolidated fund figures pretend that the deficit is being reduced this is unreal.   Removal of salutary practices such as making contribution to sinking funds for public debt, and treating grants as ordinary revenue are technical adjustments which produce a lower public deficit without in any way changing the hard reality.

“But the most offending case of Enronitis is off-balance sheet financing.   Government has off balance sheet commitments that as at the end of March amounted to Lm415 million.  These are mostly bank loans guaranteed by government”

But the most offending case of Enronitis is off-balance sheet financing.   Government has off balance sheet commitments that as at the end of March amounted to Lm415 million.  These are mostly bank loans guaranteed by government.   The figure has dropped from Lm483 million in 1999 and superficially one could shout that progress is being registered.   I suspect that is not so.  

The reductions are related to cases where government guarantee was always expected to be and remain contingent.   Guarantees to such healthy organisations making it to privatisation like Maltacom, MIA, HSBC Home Loans can easily be ignored or reduced.  

What’s worrying is that there are clear indications that no progress whatsoever is being registered regarding recovery of dead loans  in cases like Water Services Corporation, Gozo Ferries, METCO, MDC, and Freeport amongst several others.   It is clear that government commitment in these cases is much more than contingent.    It is real, very real and these loans can only be serviced by direct contributions from the consolidated fund.

Add to these at least Lm100 million of similar dead funding in the Treasury Clearing Fund and you would have to top up the national debt by some Lm500 million.    What’s worse with government finance in dire straights and an approaching election forcing the government to be seen to be delivering,  government is resorting to old bad habits.    The Foundation for Tomorrow Schools is proposing to borrow Lm70 million from banks against government guarantees to finance expenditure off balance sheet to keep the consolidated fund respectable.   

Much as the purpose is noble form a social point of view, its method of financing is a case of Enronitis.