Curmi & Partners

Counter Cyclical Thoughts

by David Curmi

One of the benefits of a strengthening economy has been an improvement in the general financing position of the government.  We have seen this through a number of rating upgrades over recent months.

Firstly what does a rating aim to achieve?  Essentially a rating attempts to give an indication of the quality of the issuer of a bond and simultaneously indicate the ability, or level of confidence, of this issuer to repay its obligations – both its interest payments and ultimately the money it borrowed.

The most recent upgrade was that of Moody’s who indicated that they are more positive about the outlook for Malta. In other words they are saying that they have a higher level of confidence today than they did prior to issuing their upgrade, that the Malta Government would be able to meet its obligations.  The ability of a government to pay its debts is largely a function of the way it manages its finances.  Just like the income and expenditure of any household, government has its own income and expenditure, and like many of us, it has its debt.  Debt that it would have accumulated over the years for various reasons.  As the economy grows, GDP grows and tax receipts grow.  This can be seen in the chart where the darker column reflects the growth of the economy.    Over recent years the rate of growth of the economy has been impressive by any measure.  Growth rates of 5-7% are normally associated with emerging economies rather than a more developed economy like ours. 

This growth rate has enabled the government to turn a budget deficit into a budget surplus.  Not a easy feat either. What is also notable though is the continued rise in total government debt over the same period, now at €5.7bn.  This can be seen by the lighter bars in the chart. 

In order to try and get some sense of affordability of this debt level, the Debt to GDP ratio is commonly used.  There is no magic number that reflects sustainability.  Smaller and more vulnerable economies are commonly advised to have a ratio of around 40%.  The EU Maastricht criteria indicate a level of 60%. A number above this would only indicate a higher degree of risk and in credit rating speak, a lower level of confidence that the debt is sustainable.  From a high of 70% Malta’s Debt to GDP is expected to have reached 54% as at end 2017.


As can be seen, since 1995, debt financing has been a common feature of government finances. Running with a budget deficit i.e. spending more than we earn, has been an acceptable form of finance.  The large pool of savings and the appetite of such investors to participate in the issue of government bonds has been steadfast throughout.  In fact it is a further strength of our financing structure that over 93% of our government debt is held locally.  This ensures that the government is largely able to continue financing its needs, with interest payments reflecting transfer payments back into the local economy as a result.  Over the next 5 years this will be critical as almost 50% of government bonds will require refinancing.

The question that we must at some point stop and ask ourselves is, when should we pay down this pile of debt?  To my mind, if this is not done when our economy is growing at 5-7%pa, then when is it going to happen?  If we look at the wider economy, our research suggests that individuals are currently paying down their debt at a faster level than they have done in the past.  This is a function of the prudence of our society.  It is a good thing.  When times are good, we should not only spend more but also save more.  One wishes that this philosophy resonates at government levels too.  The early evidence does not bode well.  We should today be saving for that rainy day when government needs to spend to build capacity within the economy. Economies are cyclical.  Ours is no different.  At some point the private sector will not be able to drive the economy forward. This is where government will need to step in, but it needs to have the capacity to do so.  It does that by reducing the absolute level of its debt today.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.