Are we Living Beyond Our Means

Maltastar



The study made by a panel of unnamed economic analysts on the credit boom experienced in Malta during the 1990`s asks in the title the question whether we are living beyond our means.

Unfortunately the study itself stops short from answering its own question.` It amasses data which seem to point to sectorial evidence that this could be the case, but does not make the case for or against its own question in a distinct manner.

I propose to attempt an answer.` The country is not yet living beyond its means. But unless it changes course it is heading there and fast. `The national debt has doubled these last 5 years and is still growing alarmingly both in absolute and relative terms`

The test that a country is living beyond its means is structural balance of payments deficit (on current account) and regular recourse to foreign borrowings from banks or in the final analysis from the IMF.

Much as the economy has problems, thankfully foreign borrowing is not amongst them.` Our balance of payments has not developed any structural deficit on its current account and the country has not been forced to seek foreign borrowings.

Certain sectors of the economy are indeed living beyond their means but they are neutralised by other sectors that are still saving and providing internal sources of financing, protecting the country from the need to tap foreign borrowings.

The sectors living beyond their means are very easy to identify.` First and foremost is the public sector.` The government has been running budget deficits since the mid-80`s but the situation has aggravated structurally since 1996 when the public deficit rose to high percentages of the GDP.` The national debt has doubled these last 5 years and is still growing alarmingly both in absolute and relative terms. And this does not include about half a billion liri in other hidden debt - through guaranteed bank loans against which the government annually has to provide for the interest charges or financed out off the budget through the Treasury Clearance Funds.

Anybody who optimistically assumes that the government is addressing the situation need only look to the August public finance figures just published to see how wrong he or she is.

The Table below shows that the government has lost control of its finances and the real deficit has increased from Lm55 million in the first 8 months of 2000 to Lm100 million in the first 8 months of 2002. This after adjusting the Lm21 million MIA extraordinary revenue but without adjusting the Lm7.5 million special one-off revenues from the Investment Registration Scheme. The deficit in reality has doubled over what it was in 2000.























Government Finances























January - August















Lm millions





















1998 1999 2000 2001 2002



Ordinary Revenue

322 357 396 417 448



less MIA extraordinary item









-21



Net ordinary Revenue A 322 357 396 417 427











































Recurrent Expenditure

319 345 361 385 419



Public Debt Servicing

36 42 46 46 49



Capital expenditure

40 59 51 63 65























Total Expenditure B 395 446 458 494 533



less Contribution to Sinking Funds

















and loan repayments

















included in Public Debt Servicing C 7 7 7 6 6























Structural Deficit A-B+C -66 -82 -55 -71 -100























Central Government Debt

740 812 905 1,007 1,031

























Now August, one of the high revenue generating months as it includes one of the three annual provisional tax payments, is captured by the statistics and the seasonality argument, never strong, now disappears. Even taking August alone as a month the deficit for the month increased from Lm4 million last year to Lm7 million this year. Even in a strong revenue-generating month the government still registered a growing deficit.

`Although no statistics are available one could also make the strong case that private consumers under the age of thirty are living beyond their means` And yet the government has no problem in financing its deficit or rolling over its maturing debt. It is doing away with all sinking fund provisions for new or rolled-over local debt on the assumption that the debt need not be repaid but simply extended into infinity. Indeed it is succeeding to do so at lower interest rates as local investors have little other opportunity for investment having been hurt so much by losses on equity based investments these last three years.

Which basically confirms that whilst the government is living beyond its means the country as whole,` thanks to the culture of thrift inherited from our fore-fathers, is handling the situation without any crisis similar to that of Latin American countries who had to finance externally all their debts because of the traditional instability of their financial systems.

Although no statistics are available one could also make the strong case that private consumers under the age of thirty are living beyond their means. With public transport offering no real solutions for the demands of` their life-style, and with the government withdrawing completely from the provision of social housing for first time home-buyers (gone are the days when young couples could build their house on a few hundred liri plot from government or could rent an apartment for less than Lm100 p.a.) young adults have no alternative but to take on debt which is thankfully financed internally from the savings of the older generation through the intermediation of the banking system.

`It calls for banks, when considering credit programmes, to become less reliant on security and more on projected cash flows` So my conclusion is that there is hope.` Provided we turn course before it is too late, before more debt accumulation challenges the ingrained trust in the financial system consequentially leading to flight of capital, before interest rates overseas move up with the economic cycle, this country can be saved from the economic and financial distress that otherwise awaits it.

Finally the said study is critical of banks for over-lending in certain sectors leading to the current high provisioning for non-recoverable debts and high ratios of non-performing loans. It calls for banks, when considering credit programmes, to become less reliant on security and more on projected cash flows.

It is dangerous to make such recommendations without taking into account local reality.` Firstly it is quite normal and obvious that in an economic downturn banks have to increase their provisioning levels and like the rest of the economy see their profits suffer. Still HSBC have registered increased profits and BoV still returned very respectable performance. Secondly the definition of non-performing loans is becoming more rigid to follow Basle standards; so comparisons with past levels when the definition was more relaxed are unreliable.

Finally, in a micro-economy where bank lending remains the main source of business finance, it is dangerous if the banks were to shy their economic responsibility and follow the HSBC example.` If in the past banks had adopted such an approach does anyone think that we would today have projects like Portomaso, the hotels of Corinthia, Island Group, various car parks, entertainment and commercial centres` Obviously some risks had to be taken and in certain instances it is quite normal that risks turn to failures. But in the majority of cases the bank lending delivered in everybody`s interest (1) .

Alfred Mifsud

Note 1: This is not to excuse a particular case like Daewoo where the bank lent way beyond the limits of prudence without any economic justification for the risks involved. This case cannot but give rise to claims of political interference. The call for a special independent enquiry of this case remains justified and sooner or later it will be made.