Benchmarking with Peers

The Malta Independent on Sunday 

  

There is no doubt about it. We have some problems which need to be addressed without further delay.

The Prime Minister admitted as much during his independence speech though he shied away from stating the obvious that his government carries primary responsibility for the creation of these problems.

We should be happy for the small mercy of having achieved convergence of opinion at least on the fact that problems do exist. Gone are the pre-election days of liberal assurances that everything was fine and under control and that government finances were on a sound footing, that the very accession to the EU will generate an impulse of investment to re-generate the economy and deliver sustainable growth at a rate that would permit a fast catch-up with the EU average.

Acknowledging of problems is a necessary first step. On its own, however, it does nothing to provide any solution although it helps to raise awareness of the need to come up with solutions. The next thing we should do is ask ourselves, just about how big is the problem? And there can be no absolute answers to this, only relative ones in comparison with the situation prevailing at our competitors which in this case are the other nine countries acceding to EU membership next year and who will be playing with the same rules and regulations to try to push their fortunes closer to the EU average.

	Fiscal Def	Fiscal Dbt	Bank Assets	Stock Market Capitalisation	Inflation
	/gdp %	,/gdp %	/GDP %	/gdp%	CPI 2002
Country	2002	2002	2002	Aug-03
Cyprus	2.9%	56.6%	290.0%	47.0%	3.6%
Czech	7.3%	20.0%	91.0%	18.0%	2.4%
Estonia	surp1.2%	5.8%	101.0%	38.0%	3.6%
Hungary	9.9%	53.3%	106.0%	17.0%	5.3%
Latvia	2.5%	15.2%	79.0%	11.0%	1.9%
Lithuania	1.2%	23.6%	37.0%	17.0%	0.3%
Malta	5.2%	62.5%	298.0%	35.0%	2.2%
Poland	5.7%	48.8%	72.0%	16.0%	1.9%
Slovakia	5.5%	38.5%	106.0%	13.0%	3.3%
Slovenia	2.9%	28.0%	92.0%	14.0%	7.5%

Source : own research

I have prepared a table of comparison for the 10 acceding countries of five key macro-economic performance indicators. They are all in percentage terms of GDP (except inflation which is a percentage of increase of consumer prices within the economy) in order to make them more easily comparable overriding the size difference from Poland, the largest, to Malta, the smallest.

Take our fiscal deficit which last year came in at 5.2% of GDP. Bad as this may be there were four other countries performing worse than us with the extreme being Hungary with nearly 10% of GDP deficit. At the opposite virtuous extreme there is Estonia with a budget surplus of 1.2%. Rather than be concerned about the absolute level of the 2002 deficit we should be more worried by the fact the 2003 deficit is shooting up to 7% as one-offs that cushioned the 2002 outturn will not be repeated. Even more worrying is the prospect that in the absence of structural adjustment this deficit will continue to increase as we are made to finance our share of the contribution for carrying out the obligations of EU membership.

The annual deficit will take a more meaningful significance if viewed against the situation of accumulated fiscal debt. So for example Czech Republic’s 7.3% 2002 deficit is much less worrying if considered against a 20% accumulated debt position than if considered on its own. Basically the Czechs have a great capacity to incur deficit so their current high level of deficit is much more tolerable than it would be if the accumulated debt level was anywhere near the Maastricht indicator of 60%.

So the seriousness of Malta’s deficit gains added significance in the context of our chalking up the highest rate of Debt/GDP of all candidate countries. At 62.5% we are already above the EMU limit and our capacity to incur debt is getting uncomfortably narrow just as the size of the annual deficit has started growing again.

To take a wider view of things I have included a view of the ratio of Bank Assets to GDP. This is meant to assess the level of facility with which the broad economy can finance the deficit incurred. The bigger the ratio of Bank Assets to GDP the bigger is the capacity to finance the deficit within the economy without crowding out private investment finance demands and without hiking up domestic interest rates. This ratio indicates the accumulated savings of the whole population within the economy. And here we can sigh some relief. The savings culture inherited from our ancestors and the size of accumulated past savings are strong enough to give the government undeserved freedom to finance deficit on comfortably structured terms at low interest rates. Compare Lithuania who although boasting very low debt/GDP ratio has very limited capacity to finance deficits internally as they have the lowest Bank Assets/GDP ratio. It could be the result of insufficient past savings or inherent culture to keep savings outside the economy.

So whilst our fiscal problems are not to be under-estimated we should take heart that these problems are generally domestic rather than external and that we still have a large capacity to finance debt, provided we do nothing foolish to force people to use the freedom of capital to take their savings elsewhere.

The final statistics calculates the Stock Market capitalisation as a percentage of the GDP which is a good indicator of the sophistication of the financial markets and finally the level of domestic inflation. In both cases we are among the best of the breed among EU candidate countries.

The conclusion I can best draw from this analysis is that provided we do what we have to do without further delay the position should be recoverable in the medium term. If we do what needs to be done without further false compromises with reality this country could not only solve its deficit problem but restore its competitiveness with the rest of the world and embark on a growth path which will help us catch up with the EU average sooner than many presently consider possible. For this we have the thrift culture inherited from our forefathers to thank.

If we continue to delay and fool ourselves by treating the symptoms and not the root of the problem then we continue just wasting resources making an unavoidable future meeting with reality more painful and much more complicated.