George M. Mangion | Wednesday, 16 July 2008

Lisbon out of focus

At a visit to Dublin last year, I was startled by the apparent wealth and affluence enjoyed by all - from taxi drivers to restaurant owners. Naturally, this state of affairs has fuelled a property boom with spiraling prices.
Last May, I also attended a Captive Conference organised by PKF Risk Management at the Four Seasons Hotel and I noticed a marked change. Of late, there has been talk of a slowdown in property prices but bargains are hard to find. Just walking down O’Connell Street one notes the up-market merchandise in world-known franchises, but shoppers are more cautious.
This has not been so evident in the past decade and many attribute this slack due to a saturation level reached in the financial services sector, coupled with rising labour costs and unbridled inflation. Despite assurances that the Irish financial services sector is insulated from the huge job losses, there is speculation that more jobs will be shed with liquidity drying up.
There seems to be a paradox when one recounts myriad stories of the racing Celtic Tiger having surpassed all its competitors in the past decade by its prowess and efficiency. After the slowdown in 2001 and 2002, Irish economic growth began to accelerate again in late 2003 and 2004. The Irish media considered this an opportunity to document the return of the Celtic Tiger—commonly referred to in the press as the “Celtic Tiger 2” and “Celtic Tiger Mark 2”. In 2004, Irish growth was the highest, at 4.5 per cent, of the 15 “old European” states (the European Union, pre-May 2004), and a similar figure was forecast for 2005. These rates contrast with growth rates of 1 per cent to 3 per cent for many other European economies, including Germany, France, and Italy. Granted that the cracks were made more visible by journalists who commented on the electorate choice to vote overwhelmingly against the Lisbon treaty on 12 June . The opposition movement Libertas led by its founder Declan Ganley waxed lyrical about the threat by the Lisbon treaty on matters of neutrality and tax harmonisation. Equally forceful was the war cry that Ireland’s ability to attract foreign direct investment was under threat. Now that over 53 per cent voted against the treaty, one wonders what went wrong with the Yes movement. Can Ireland really blame the treaty for its cut in prosperity when in fact most worries regarding a drop in FDI comes from the US government and not from the Lisbon treaty? It is in this direction that the US government is starting to look deeper into companies benefiting from the low tax regime operating out of the Celtic enclave. But is there need for concern? Yes, one notes a drop in GDP growth. The latest consensus is for it to grow 2 per cent in 2008 and 2.5 per cent next year. Equally ominous is the prediction for a further drop in real estate, which is assumed to continue dropping by 11 per cent in 2008 and 7 per cent in 2009. There is a start of declining consumer confidence coupled with an unofficial rapid acceleration of input inflation.
Is the honeymoon over? One dreads to notice that Irish producers of goods and services are facing ever escalating labour costs. Unless quickly put in check this may seriously depress the export growth coupled with others problems associated with the dwindling dollar and higher energy costs.
Can one draw a parallel between what is happening locally post election and the tarnishing of the Irish dream? With hindsight, the NSO told us that 2007 registered our highest ever GDP growth rate of 3.8 per cent compared to a negative rate in 2003.This is expected to hover around the 3 per cent mark for this year, subject to any correction resulting from damage arising at further oil price hikes. We can learn a lesson from the Irish recipe, which they are planning to use to surmount their economic problems. Indeed, since the launch of their National Development plan 2007-2013, public spending emerged as the only State policy to underpin the future of the island. This spending is heralded as the next big thing for propelling the Celtic tiger to the age of a new comparative advantage. We can all say this with a deep sense of deju vu. It has all been promised with grand fanfare only five months prior to elections. We heard about the rejuvenation and rehabilitation of the inner harbour areas, the turning of Gozo as a ecological island, the introduction of a 25 per cent tax rate, the building of a massive offshore wind-farm, a €50 million MCAST, the development of new roads infrastructure, the trimming of high car registration taxes, the halving of the fuel surcharge, exemption of tax on overtime and a list of hundred other pledges. Is this is the mantra to crown our success as was the case for Ireland in the late nineties? One may add that the 2009 budget is the right tool for our finance minister to concoct the recipe for a better infrastructure, a long-term state investment in education, skills and a disciplined workplace attitude.
It is a sine quo non to rekindle the ‘export or die’ mentality which the heritage of ‘export substitution’ policies of the seventies had obliterated. It has been said many times that the future of Malta Inc as an innovation driven entrepreneurial economy with no natural resources cannot thrive unless measures are taken to lessen the grip of state policies that have resulted in a consolidation of power in the hands of Civil Service, public sector unions and various cost inducing regulatory authorities. Getting the economy out of the rut that one anticipates in the coming winter of high energy costs will take more than throwing borrowed millions of public money while ignoring the plague of declining competitiveness. But the solution is blowing in the wind.
There is no doubting the importance of small and medium sized entities as a top priority in the next budget debate. By comparison we do not seem to think small and act big. Before the election politicians promised us that more will be done to imbibe a new culture of efficiency and pragmatism by top Civil servants towards small and medium sized manufacturing firms serving both domestic and export sectors. A fresh initiative is imperative to regurgitate an armoury of incentives and aid packages to SMEs.
Many times we read in successive budget speeches that excessive bureaucracy is the parasite of our economy and we should do our utmost to eliminate it as it slows down our entrepreneurial culture. It goes without saying that start-ups must find the necessary encouragement through adequate fiscal tools, access to venture funds (remember the Lm4 million fund promised 3 years ago) and the elimination of avoidable charges such as government induced costs. In particular it is pertinent to ask why Malta failed to integrate its trade policies within the European Charter for Small businesses, by fostering an entrepreneurial attitude with a co-ordinated educational reform at MCAST level. Can some of the EU funds earmarked for 2007/13 be partly allocated to promote better prospects particularly covering the export potential of small businesses?
Considering the internal market for EU countries how can Malta Enterprise ensure effective regulatory frameworks and sound economic management practices that nurtures entrepreneurship? We are probably the only country in the new accession countries without a reduced corporate tax rate for smaller enterprises. Again, inflation is creeping relatively high, acting as a disincentive to internal growth for all exporters.
Pundits lament that Malta can only come out of its sluggishness in the export sector by further tightening of State recurrent expenditure accompanied by austere measures in order to reduce waste and generate better prospects for employment.
Pragmatists remind us that the time is now ripe for deeds and not empty talk and posturing. Deflationary pressure is hitting our export markets and the relative strength of the euro versus the dollar is also negatively affecting our exporters. Let us hope that domestic consumption at our main export markets improves and manufacturing business in the export sector can look forward to an increase in demand for products.
To conclude, like Ireland, which saw its growth thanks to export businesses, we can take heed and seriously treat them as an economic powerhouse providing the island with a wealth of jobs. Let us nurture small business-they can be helped to remain smart and sustainable.

George Mangion
Partner at PKF – an audit and business advisory firm
[email protected]