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 As the 8 March election fever subsides, businessmen predict a
drop in consumer demand due to bouts of uncertainty being experienced in the
market. Other reports from trade associations show a different picture, stating
that confidence has since rebounded. We are slowly witnessing capital projects
being put on hold, pending the outcome of the election to start taking shape. On
a positive note, the fact that both parties supported the euro project did also
reduce any hiccups in the euro change over since 1 January. Government envisaged
that the deficit will be further reduced. We are aware that from a high of 9.7
per cent of GDP in 2003 this was trimmed to below two per cent in 2008 and a
further drop is expected thereafter. The Central Bank Review also noted that the
Maltese economy expanded during 2007 with a healthy 3.8 per cent growth in GDP
although this may slow down to 3.1 per cent this year in real terms. More good
prospects when one reads that during the first four months this year, the
Consolidated Fund recorded increased in income tax revenue of €26.0 million,
followed by a jump of €13.9 million in value added tax.
These good results did
not match increases in expenditure, and the first quarter ended with a shortfall
of €208.7m - which grew by €76.6m. Quoting the Central Bank one reads that
Government debt outstanding at the end of April amounted to €3,309.5 million, an
increase of €78.0 million compared to the gross Central Government debt
outstanding at the end of April last year. All this may be partially attributed
to a heightened activity in expenditure such as social security benefits, the
health ministry, public debt servicing which amounted to €68.3 million and
others. The Capital Programme reached €93.3 million. Equally encouraging is that
the unemployment rate continued to decline and, at 6.2 per cent - the lowest for
over six years and half a percentage point below the year-ago level.
 A
consumer and business confidence survey conducted by the European Commission
revealed that consumer sentiment improved, in line with recent trends, while
industrial confidence remained positive. But not everything is rosy. There is a
silent under-current of opinions fuelling scepticism about the future costs and
creeping inflation in general partly due to the euro changeover but mostly due
to higher fuel and cereal costs. Oil increased from a modest $40 per barrel in
January 2005 to reach an astronomical high of $135 last week. In the first
quarter of 2008 the Central Bank reported the annual HICP inflation rate edging
above the 3 per cent level. Unless kept under control, this can turn out to be
public enemy number one and unbridled inflation will eat into our
competitiveness edge. To mention an example on the effect of the inflation on
recent EU members, one can point to improved economic ties between Germany and
Poland. In the enlarged Europe, Germany is Poland’s most important trading
partner. With the abolition of general customs controls there are new
opportunities for Polish SME‘s to expand towards Germany. To a significant
extent with the advent of liberalization cross border business has flourished
with skyrocketing of sales of Polish food, cigarettes and drink to German border
traffic. Petrol prices are slightly cheaper and this fact has lured German
motorists following the abolition of customs controls. On its own this may have
fuelled inflation in Poland due to increased demand for products.
Reverting
back to the subject of the state of the post-election local economy, we
experience the tight rein kept by Tonio Fenech. Allegorically he advised that
once the patient is taking prescribed medicine then he/she knows that this is
for the better. With a new cabinet (less some dead wood) and a new opposition
leader in place next week we shall look forward to a debate in parliament
concerning the allocation of EU funds.
Another hot topic is the marshalling
of SmartCity plans, which performed topmost in the elected government
manifesto.
Party apologists remind us that this Gulf Arab investment is a
massive ICT project expected to generate work in all stages of a gargantuan
construction project in the south. Hopefully it will counterbalance any
redundancies in the shipyards and generate surplus employment opportunities that
may arise in other factories. Cronies waxed lyrical about the untold prosperity
hitting the fan. But down to earth, the new cabinet is expected to concentrate
on taking unequivocal decisions on hot issues such as the accumulated debt,
environment, competitiveness and attracting sustainable investment. Since time
immemorial we have been promised a holy fight to trim unbridled bureaucracy as
this often leads to sleaze and corruption in high places. With a one seat
majority the incumbent party should still not hesitate on taking bold decisions.
 After all, we had a number of legislatures in the past who survived well with a
one seat majority. A lot depends on how we can weather the storm during this
global high oil and crop prices crisis. There are no quick fixes and sweeteners
to help us swallow the bitter pill of restructuring yet optimists are seeing a
modest light at the end of the tunnel. Three cheers for Dr Gonzi who predicted
in 2007 an annual growth this year of 4 per cent in real terms and this was
almost spot on. It is quite an achievement in the short period of incumbency
since he assumed office. In 2003 the GDP growth was trailing in negative
territory. Dr Gonzi like a later day Indiana Jones whip-lashed the mythical
concept of “money no problem”. But after hearing the PN propaganda machine and
cutting through the smoke, spin and elusive mirrors can we truly say we are out
of the woods. Let us review some notable example. The new kid on the block is
Latvia.
This country growth results jumped from 8.6 per cent to 11 per cent.
By comparison, to match this effort our minister responsible for competitiveness
needs to prime the engine. The right conditions need to be created when he sets
the direction of strategy. Growth only materialises when a solid strategy to
attract investment is set, and lay sensible incentives to enhance productivity
policies. Can Finance Malta and Malta Enterprise be bold enough to negotiate the
right trading relationships with other countries and trading blocs? Who is the
incumbent responsible in these entities to make certain that competition
policies have the right bearing on the attractiveness of exports? Who is minding
the store to cater for small and medium sized entities? Are they receiving the
administrative, fiscal, financial or legal support to enter into the rewarding
sphere of exports?
 Sadly, the competitiveness of our country remains
extremely fragile as remarked by the latest IMF report. This comments that the
bulwarks in the economy are financial and business services, as well as the
burgeoning remote gaming industry. Although the report is on the whole
favourable, it warns us that “weak competitiveness within monetary union could -
absent corrective policies - result in growth remaining weak for a prolonged
period”. It also comments that our GDP per capita in terms of purchasing power,
compared to that of the euro area, has fallen from 72 per cent in 2000 to 68 per
cent in 2006.
Dark clouds are looming over St Microelectronics our primary
export company and a major single employer, which faces massive losses on
exchange due to a strong euro/ weak dollar. ST. Microelectronics is an assembly
and test facility for ST products that use the most advanced chip
packages.
In the meantime, the Financial Times last week reported ST
.announcing plans to divest three to five of the company’s 30 product divisions
and to close six factories, in a bid to save about $150 million from the
downsizing.
To conclude, we are still suffering from post election blues but
once the euphoria subsides then we must tackle the issue of sustainability.
Quoting Dr Gonzi, the problem is no longer about the need for economic
sustainability on its own, but on the need to balance economic sustainability
with social sustainability and environmental sustainability.
George M. Mangion
gmm@pkfmalta.com
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