While the island ‘s unions are focused on how to persuade the government to solve the energy tariffs conundrum, world leaders meeting in Washington at G20 are hell bent to stimulate stagnant economies through tax cuts and launching ambitious infrastructural projects.
Indeed, the Group of 20 pledged to tighten oversight for major banks, study limits on salaries paid to bankers and in general cut taxes. In view of the transitionary period of the president-elect in America they agreed to re-convene next April on a follow-up summit.
So one may ask what is the cause of all this global meltdown?
The epidemic all started last year with the spiralling of the sub-prime crisis in US leading to bankruptcy of Lehman Brothers and others. The resulting credit crunch plagued national banks some of which have now been bailed-out and others partially privatised by governments as an emergency step to alleviate further job losses and halt the contagion mauling other sectors.
But economists argue that merely bailing out banks and cutting interest rates isn’t enough. What is crucial is a flood of government public spending in sustainable projects.
The message on the wall is clear - solve the worst financial crisis ever by spending until it hurts.
In such a downturn, companies and consumers alike tend to focus single-mindedly on reducing debts thus curtailing the normal flow of credit.
Simply put, no one borrows because everyone is frightened of the next round of redundancies or the need to save against higher food and energy costs.
The eurozone and Japan have both technically entered into a recession although in the EU, this has hit each member state with a varying intensity. In Europe, one can mention that Italy and Portugal are facing a deeper recession.
Another member in the spotlight is Hungary, who joined the EU in May 2004. It has suffered severe financial setbacks such that it had to be bailed out by the IMF. Although to its credit, Hungary has attracted substantial overseas investment since accession. It is particularly strong in the auto sector where international firms such as General Motors, Bosch, Audi, Valeo and others set up manufacturing plants.
Again as can be expected demand for cars has plummeted and these auto plants are already announcing job cuts.
Analysts predict the jobless rate may shoot up to reach 10 per cent by mid-2009.
Hungary is not an isolated case suffering from a deteriorating GDP growth. Slovakia has cut its 2009 GDP growth outlook to 4.6 per cent from a high this year of 7 per cent.
Similarly Czech Republic will slow down to 2.9 per cent from the high of 4.5 per cent registered early this year.
Here Volkswagen will cut back production by 31,000 cars due to falling demand.
Again almost 10,000 autoworkers may soon face redundancy.
Luckily the storm has not hit us locally as this usually takes a few months until its full impact is felt in our open economy.
Logic dictates that it is only natural that Malta will be affected in the coming months with increased layoffs in export oriented companies. Banks such as BOV reported a 61 per cent drop in pre-tax profits.
According to Central Bank Governor Michael Bonello there are as yet no economic indicators which point to a looming recession in Malta but obviously our open economy is not immune to international problems.
Due to a higher deficit recorded for this year, the government has shelved its pivotal electoral promise to drastically widen the income tax bands and introduce a lower top 25 per cent tax rate for managers earning up to €60,000 p.a. Naturally the finance minister acted responsibly as this tax cut can only be financed from an even higher deficit for 2009. He would have preferred to defer the burden of energy tariffs especially at a time when the world leaders are acting in unison to spend lavishly. The stark truth is that Enemalta, as the sole energy utility needs bailing out. Enemalta itself is alleged to lose €50 million p.a.
The €50 million black hole is based on figures compiled and as reported by The Sunday Times given the last audited accounts were filed for 2005.
Enemalta is disputing this alleged loss. In any case, one hopes that the current external audit commissioned by MRA on the tariiff costings (officially backdated to 1 October) will throw some light on the subject.
Higher tariffs are lambasted as the death knell to the manufacturing sector and in particular the hotel industry which is still recovering from low occupancy in past years.
Employers, in contrast, have been calling for a stimulus package but the message so far appears to be that this is not affordable. Naturally, commentators are starting to point fingers at past mistakes.
Need we blame past administrations for subsidising the employment of thousands at the ailing Drydocks and a burgeoning civil service?
More than one billion euro has been showered in subsidies to make up for chronic losses.
With hindsight one may comment that if the political will was forthcoming twenty years ago we could have saved millions. This windfall may have been a solution to decommission the old Marsa power station and enhance Delimara with new fuel efficient power plant.
But the political temperament to downsize the Drydocks in the late eighties was not favourable.
Back to reality and, sadly, this is not a good time to increase energy costs at the time when the country can least afford them.
Cynics point that some respite can be taken due to the lower crude oil prices (€56 per barrel and falling). Surely, solving the operational inefficiencies of Enemalta can wait.
To his defence, the minister rebuts this criticism saying that in an effort to safeguard manufacturing jobs, Enemalta will cap its tariffs to assist 26 major companies when their bills exceed surcharge capping levels so that their costs would not rise by more than 40 per cent.
But though commendable this capping is not enough at a time when investors are clamouring for serious reflationary measures.
It is not surprising that the Chamber of Commerce noted in the budget an absence of new access to finance tools, such as micro credits, proof of concept funds and venture financing that go hand-in-hand with such a stimulus.
In Britain, quoting the Guardian newspaper, Prime Minister Gordon Brown has called on major countries to cut taxes and provide a fiscal stimulus to prevent the global economy sliding deeper into recession.
He also recommended at the G20 summit a new “college of supervisors” to oversee the management practices of the global list of 30 major banks.
We note how Gordon Brown took advantage of low inflation and lowered interest rates. Equally impressive is the immediate priority of Barack Obama’s incoming administration to put together a US stimulus package to reinvigorate a faltering economy that saw US unemployment hit a 14-year high. It is no secret that US carmakers reported billions in losses.
China, which for the past decade was growing at an average neck-breaking rate of 12 per cent per annum, also experienced a slowdown in export. The State Council approved a 4 trillion yuan stimulus package on first week of November. The plan stipulates new investment in welfare housing, healthcare services, education and improving the environment in urban areas.
My visit to Beijing this week left me a lasting impression on how resolute the Chinese authorities are in their aim to promote economic growth particularly in the southern province of Guangdong.
They are targeting SWEs and making sure credit facilities are improved.
Likewise the state authority in China is pursuing a regional re-guarantee service aimed specifically for SMEs to help them secure bank credit.
To conclude, let us bring this into a local perspective.
Opposition leader Joseph Muscat suggested the launch of a fiscal stimulus to help protect jobs and retain competitiveness.
For a moment can we stop and reflect on what other countries are contemplating to smoothen the bumpy road that we all face due to the global slowdown? Surely the clear answer to buttress the coming storm in the short term is to spend our way to prosperity.
George Mangion
Partner at PKF – an audit and business advisory firm [email protected]
