Opinion - George Mangion | Wednesday, 04 June 2008

Post election blues

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
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