George M. Mangion | Wednesday, 30 April 2008

Isle of milk and honey

Last Saturday, In-Nazzjon came out with the headline that Malta’s economic future looks bright. This follows the publication of a study on small and medium sized companies in Malta penned by the international organisation BusinessEurope. The report was entitled Spring 2008 Economic Outlook for Malta, a study conducted in collaboration with the Federation of Industries based on information received from their members.
The outlook certainly looks bright and airy, expecting an improvement in growth of GDP next year of 4.1 per cent, more than double the European average.
The good news continues. Inflation will still be under wraps, predicted to go down from 3.1 per cent this year to 2.4 per cent in 2009. While more employment is generated, the jobless rate is expected to go down from 6.4 per cent to reach 6.1 per cent. This is all very encouraging for us although one is less buoyant when the less rosy conclusions of the EU Commission are read.
While recognising the strong headwinds, BE is cautiously optimistic as it discounts the risk of a downturn or an ill wind from the US. The Commission is pushing its prophecy in favour of a revival in European business that it can weather any damage from the maelstroms hitting the other side of the Atlantic and certainly though not to the same extent of bad luck affecting Italy.
BusinessEurope quotes six reasons why the prognosis for Europe is audacious. First, that around three per cent growth over the past two years has been underpinned by a strong Euro which not withstanding its drawbacks, it has fostered new business horizons. Or rather, certainly more than anyone would have expected by virtue of the dollar having weakened so much. The second observation is that European labour markets have, in most cases, been better poised to take the slack for production, which was evident once the improved productivity started to leave its mark. Again one notes with pleasure the creation of over ten million jobs over the last three years partly due to the Lisbon agenda initiative. More advantages are linked with the existence of strong balance sheets and better investment prospects for this year, which will leave more scope for SME’s to flourish. The interplay of a strong Euro has partially buttressed the pangs of rising oil and food prices and thus has cushioned the blow in the short term.
The latest sub-prime crisis hitting American banks so badly has not fully damaged the European counterparts. This is due to a lower profile and a less outstretched housing market in Europe, although a major casualty in Britain was the demise of the now nationalised Northern Bank. Despite these positive points one can only expect growth of just two per cent in Europe, and a lower figure of 1.7 per cent in the Eurozone.
This all makes it rather surprising how Malta can buckle the trend and achieve double average growth next year, according to FOI replies. Just consider how the figures for government finances published last week by the National Statistics Office show how expenditure for the first three months of 2008 exceeded budget, possibly due to election promises costing more than expected. In fact capital expenditure shot up from last year’s €49 million to €82 million.
On the other hand, credit should be given to the previous government for reducing the shortfall in 2007 to a manageable €109.1 million - an improvement of €25.6 million over 2006 which works out at 2.1 per cent of GDP. So is this pointing to a golden era of manufacturing and a garden is full of budding roses? As can be expected there are some grey clouds lurking over the horizon. Our banks are already sensing the approach of the so called international ‘credit crunch’ and the stigma associated with sub-prime rates, although they are not exposed to it but they are certainly over stretched in the mortgage and property sector. Suddenly we are feasting our eyes on colour adverts by prominent estate agents brandishing their 20 per cent discount on selected properties, or a reduced ‘sales’ pricelist (never heard of in the past 25 years).
Why are estate agents so interested in giving first time buyers attractive packages linked to subsidised interest rates negotiated with selected banks? Can the news revealed in the pre-election campaign, that we have over 55,000 vacant dwellings, have dampened buyers appetite? And why are investors being lured to buy property in exotic countries, where three bedroom villas are offered at the price one pays for a studio flat at Portomaso? Is this the quiet before the storm or is it a mild correction over prices which have been escalating without control over the past decade? Certainly the strong Euro has not helped matters in attracting non-residents paying in Sterling, Kroner or Dollars. But does the positive forecast by BusinessEurope sound too optimistic? Can we outbid the rest of Europe and due to our improved productivity and reduced costs of production, outpace competition from third world countries? Not so fast. Reading the comments last week by the Finance Minister on the grey clouds looming over ST Microelectronics, one wonders why the problems have been left to simmer or lie partly hidden under the carpet for so long. The Minister described the situation at ST as worrying for the government, adding that talks had kicked off after the company informed the authorities about the prevailing circumstances. We all know that more than half of our exports have, for a number of years, depended heavily on one sole producer of microchips. This company, which has aggressively expanded its operators over the past thirty years, has been our main earner of foreign currency and a pivotal supporter of Air Malta as far as the cargo business goes. The going was good for us when wages and salaries were relatively cheaper than other western economies, but now that China and Asia are competing, the situation has been tarred by a wide brush.
No scope for alarm here but naturally as we pump €23 million in direct marketing of the island’s tourist facilities, low-cost airlines and Air Malta for their contribution to the economic pie. we should do equally to manufacturing.
Certainly what is good for the goose is equally good for the gander. I am no apologist for ST, but on an altruistic level it is commendable that government formally offered investment aid. The Times of Malta reported the minister saying that the aid is for the company to continue investing in Malta, including in new product lines that are not being produced in its Asian plants. Apparently, the aid offered was “substantial” but would not give further details because talks with the company are still in progress. We all know that ST, employing about 2,000 people, is thought to be planning to reduce its workforce after being put under pressure by a downturn in the global electronics market and the plunging Dollar. Sources say it lost $55 million. As stated above, we cannot compete with the likes of Far East, including China, where the labour cost is a mere fraction of the Malta costs. Although it is heart warming to recall that our annual deficit is lowered, further progress must be made to attract more high value added manufacturing to replace less competitive entities. To put it into perspective, we hear how due to losses ST has over the last 12 months trimmed its labour force by about 400 personnel.
Being realistic, one observes how an ST plant in Morocco, manufacturing similar type devices to the Malta Plant, has already been closed down. To conclude, while it is positive that we are now putting our money where our mouth is by assisting manufacturing companies, we should also top up more resources to agencies such as FinanceMalta and Malta Enterprise to accelerate their drive for more foreign direct investment. It is a fact that FinanceMalta took a long time to take shape and is currently terribly under funded and under resourced. All over Europe, governments are doing their utmost to foster the emergence of new industries and this is the overall objective that GonziPN had instilled in the willing electorate when it promised to turn the island into an isle of milk and honey within the Vision 2015.

George M.Mangion
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