Making the Point Financially

Maltastar



Point 1 ` Public Finances in September

This is last set of monthly public finance figures issued by the NSO before publication of the budget for 2003.` It shows that the small improvement registered in the month of September (when compared to September of last year) is little consolation to the widely off mark budget for the current financial year.

The figure quoted officially speaks of a deficit of Lm86 million but reality is that the Lm21 million extraordinary revenue from the privatisation of MIA should be added to this bringing the real deficit to Lm106 million.

`The overall projected deficit for 2002 was Lm78 million. By government`s own figures by September we were already 10% over that figure. In reality we were 36% over that figure. This is the highest deficit ever for the first 9 months. As can be seen from the accompany table it is also much higher than the deficit position left off by Labour in Sept 98 which by government`s own figures was Lm86 million (the figures for September 1998 were issued by a Nationalist administration.` It was in the last quarter of 1998 that Min Dalli cooked the books to invent a deficit of Lm150 million for the whole year to produce a deceptively inflated negative starting position).

The overall projected deficit for 2002 was Lm78 million. By government`s own figures by September we were already 10% over that figure.` In reality we were 36% over that figure.

We will not know the real December (full year) 2002 figure until well into 2003 and by then we could be living after the election.` Min Dalli in presenting his budget, with his eyes on the election, can continue what he started in 1998 and paint the figures away from reality closer to his wishes.





























January - September















Lm millions















































1998 1999 2000 2001 2002

























Ordinary Revenue



362 409 447 467 506



less MIA extraordinary item









-21



Net ordinary Revenue



362 409 447 467 485 A













































Recurrent Expenditure

366 382 403 434 471



Public Debt Servicing



41 46 50 52 55



Capital expenditure



44 64 58 69 71



Total Expenditure



451 492 511 555 597 B























less Contribution to Sinking Funds

















and loan repayments

















included in Public Debt Servicing 7 7 6 6 6 C























Structural Deficit A-B+C

-82 -76 -58 -82 -106

























Central Government Debt

726 858 900 1,003 1,043





























Point 2 ` And that`s not all!

By no means that is the whole picture.` To that deficit one must add the expenditure being financed by the Foundation for Tomorrow`s Schools (FTS) from loan given by commercial banks against government guarantee. APS bank has approved facilities of Lm15 million for this purpose. I don`t know how much will be drawn during this year but whatever it is it forms part of the structural deficit. Schools will never produce revenue streams to repay this debt.` It was hived off to a Foundation and borrowed from the banks against government guarantee simply to enable the government to hide this expenditure so that Min Dalli can paint the figures to his heart`s content.

Incidentally the Ministry of Finance gave its approval for this loan and for a total expenditure programme of Lm60 million to be similarly funded over several years saying that ` The budgetary allocation earmarked by this Ministry for the Foundation over the coming three years is Lm3.1 million per annum`.

After deducting the operational expenditure of FTS this would not be enough to pay interest at 5.125% on Lm60 million.` The message is clear. We spend and fund ourselves from hidden borrowing, just provide for the interest payment leaving it to our successors to face the problem of repaying the capital.

FTS joins similar disaster stories of similar dead borrowing for Water Services Corporation, Freeport, Gozo ferries/Gozo Channel and God only knows how many others.



`APS bank has approved facilities of Lm15 million for this purpose. I don`t know how much will be drawn during this year but whatever it is it forms part of the structural deficit ` Point 3 ` Preaching is not enough

The Governor of the Central Bank has every right to preach that this country needs consensus in tackling its structural deficit problems. The Opposition has shown itself more than willing to do its part provided government does not continue to spend money uselessly on the EU project.` The Leader of the Opposition suggested putting aside our EU differences by postponing such decision for a few years and work together on a national approach to our structural domestic problems.

But preaching, Mr Governor is not enough. When such falsification of the Public Accounts and misrepresentation of the structural deficit is going on under your very eyes you need to do more than preaching. You need to roundly condemn such practices. You should even warn that unless the deficit is addressed and not simply camouflaged you will not hesitate to tighten monetary policy to defend against inflation generated by unsustainable and fictitious borrowings.

Point 4 ` Another Bond

Another private corporate bond is on the market as of today. For those who read the prospectus they will find out that the borrower and its group have a pretty shabby profit record and that the financial position is highly leveraged.

`When such falsification of the Public Accounts and misrepresentation of the structural deficit is going on under your very eyes you need to do more than preaching` Few people do however read and understand the prospectus. They hear the publicity and are attracted by the coupon rate in this case 6.5% which is just about 1% above what similar government bonds go at.

The risk differential from government bonds merits a much wider margin than 1% but nobody is explaining this to the retail investor. The practice to allow the issue of such bonds before introducing a serious and respectable credit rating system to guide unsophisticated investor is dangerous. After destroying the equity market mainly because aggressive issues of 2001 have gutted investors` confidence, we may be producing a similar disaster for the bond market.



Point 5 ` Buy back

Bank of Valletta will announce next Friday its full year profits for financial year to September 2002.` At current equity price level it is likely that the shares will trade at a discount to Net Asset Value and the gross dividend payout will exceed 4% of the equity price.` If BoV do not announce a share buy-back programme to protect their faithful investors they would be failing their corporate responsibility to their shareholders.



Point 6 ` Turnaround

Last week was the third consecutive week that equity markets registered an improvement from the unthinkable lows hit in the first 9 days of October.` If next week the markets register progress again it would be fair to assume that the worst is definitely over and that international equities would be headed for a substantial recovery aided by better corporate profits and low interest scenario. `Add to this the proceeds from privatisation of Mid-Med Bank Lm85 million, and MIA`s Lm40 million and the financing gap of the last 4 years increases by a further Lm125 million to Lm442 million.`



Point 7 ` National debt

To finish off please look again at the Table under Point 1. `Central Government Debt which in September 1998, where Labour government left off, was Lm726 million has now climbed to Lm1,043 million. A growth of Lm317 million in four years.

But this is only part of the story. Add to this the proceeds from privatisation of Mid-Med Bank Lm85 million, and MIA`s Lm40 million and the financing gap of the last 4 years increases by a further Lm125 million to Lm442 million.

And yet there is more. The financing gap was financed by running down the sinking funds on local loans generating one-off extraordinary revenues which have financed Lm37 million of the borrowing requirement during the years 1999 -2001 and 2002 to date. This Lm37 million should also be added to the financing bill bringing the total to Lm479 million in 4 years. Yes, the deficit which Minister Dalli generated and has procured these last 4 years and which was financed by increase in central government debt, sale of assets and extraordinary revenue from abolition of the sinking fund amounts to Lm479 million over 4years equivalent to Lm120 million average per annum.

If` to this one adds the hidden debt through bank borrowing guaranteed by central government and other funding from the Treasury Clearance Fund it is clear we are not far off from the inflated Lm150 million which John Dalli fabricated for 1998.

Increased taxes which have jammed the economy and lowered overyone`s standard of living, have just been washed away in uncontrolled expenditure.` The deficit and national debt problem are still there staring us in the eye six years after they were discovered by the incoming Labour government of 1996.