With Easter holidays approaching, I am experiencing a warm sense of a spring awakening that usually braces my spirit to look for enlightenment in such troubled days. Yet, hearing the announcement that our national deficit has shot up to €200 million meekly explains why the streets in Tal-Wej –Mosta area where I lived for the past years are still riddled with moon craters even though the winter rains have long subsided (patching is behind schedule this year). But moaning is not my style and I take courage from reading the honest exhortations by our young and energetic Minister of Finance that the economy is resilient. Minister Tonio Fenech lamented in an opinion published in the Times of Malta that his ministry can be a very lonely job. He added that he is the only one who has to think on a national basis evaluating the ultimate consequences that may arise if he gives in to the incessant requests for help. This does not sound overtly cheerful but anyway one appreciates his political penchant for honesty.
Reading such complaints, one retorts by fondly meting out the milk of human kindness that befits such a lonely ministry scrupulously guarding our treasury at a time of wont. Truly he is embattled by so many demands from various economic sectors to dole out a financial stimulus or other forms of assistance. Concurrently, the opposition reminds its faithful that we are over-taxed and assert that our taxation policy needs to be more egalitarian. But Tonio replies snappily that if we are so much over-taxed then why is it that for the past 20 years our budgets show deficits year in year out.
Put simply, our treasury is not brimming with goodies given that debt reached €3.64 billion last month. The alternative use of servicing such debt now matches the annual cost of running the health ministry but at least most of it comes in domestic borrowing.
The predicament to fix our chronic deficit has haunted us for so many years that we can console ourselves that through political prowess we are part of Europe and while in the eurozone we escaped the fracas that is hitting other currencies such as Hungary, UK, Latvia and more so Iceland. True the prognostics are not cheerful. The deficit grew by 39.5 per cent, or €56.5 million, between January and February this year, reaching a total of €199.5 million. This contrasts with the optimistic prediction in the November’s budget speech, that the economy will grow by 2.9 per cent accompanied by a restrained deficit of €98.8 million for 2009. Perhaps the budget estimate needs revisiting heeding the warnings by the Governor of the Central Bank that growth this year will be revised downwards. Certainly he knows something we did not know last November. Nevertheless we can expect more belt tightening to reverse our deficit levels to below 3 per cent if we wish to continue meeting the Maastricht criteria. While the Prime Minister seems to downplay the effect of the dreaded “r” word he placates the party faithful that united we shall triumph .On the other hand the minister of finance is more conscious of the tight-rope the country is walking given the present international crisis. The general consensus of top economists writing in newspapers have stepped out and assert that recession is already with us albeit not as deep as the one which is hitting UK where sadly the majority of tourists originate. Contrary to political sweeteners, the international credit crunch has not given us a miss and may in the end leave us scathed.
This is best exemplified by lower profits registered by the two larger banks, while other manufacturing firms have trimmed their workforce. Only last week, a massive loss was reported by the diversified public listed GlobalCapital Group. It has reported a loss after tax of €6,886,162 for 2008 compared to a profit after tax of €579,935 for the previous year. It appears that GlobalCapital was not spared the severe correction that has hit overseas investments. Whilst significant, this drop in profitability has occurred during a period when the Malta Stock Exchange registered a fall of 35 per cent and the FTSE dropped by 31 per cent. The Group’s business of insurance was adversely impacted by a decline in premiums. The group said its property activities as well as the Agency and Brokerage services registered comparatively lower profits. As a general comment seeing the way business has been hit, entrepreneurs cannot be blamed for acting risk averse. Everyone, particularly in the tourist industry, is squeezed and it’s not a good feeling. It is only to be expected that restaurateurs aim for a lower vat rate on food and drink to attract more patrons to their outlets. In the meantime one cannot just grin and bear it since the State is not cash rich to bail out all distressed firms. Is there a solution in sight writes the secretary general of the GRTU (and an MEP hopeful) in his weekly column in MaltaToday? The fire brand who tends to shoot criticism to the party in government using his no–nonsense approach to economic remedies now advises us to hold tight and exhorts Government to intervene more. Vince wants us to hold our breath and bear it while our politicians are steadfast in their resolve and are showing nerves of steel to survive unexpected challenges. Hubristically he feels there is no immediate need for panic and is quoted to advise members to keep their seatbelts fastened as the there is no happy landing once we misjudged the potency of the current recession. Optimists tell us the recovery is in sight and even oil prices and the stock markets have rallied of late albeit slightly. A pragmatic policy pronounced by the government is that we cannot afford to throw cash to bad businesses but we can perform surgery to qualifying ones who deserve most and thus save jobs. Who qualifies for assistance is not yet defined but the bigger companies have all been taken care of thanks to a rapidly formed task force. This may sound anathema to the notion of small is beautiful but politicians are prone to be stirred by the larger cats purring in the nursery. It begs the question of how can small and medium sized enterprises face the recession and continue to pay escalating bills /energy costs when direct financial assistance from banks or the state is not overtly available. Granted that banks are themselves under pressure from shareholders to prime their performance and return the high dividends achieved up to 2007. Alan Keir, HSBC Group general manager stated at a recent business breakfast that “we do not yet fully understand the causes of the current crisis, nor how those factors will affect the future.”
Yet, in spite of the lack of diagnosis , it is palpable that HSBC have reacted positively to requests by MHRA to seriously consider helping its members who are running a hotel business. A twelve month moratorium plan was suggested by MHRA to help tidy up cash flow shortages from the slashed occupancy expected this year. This comes hot under the heels of accusations that the bank was being difficult in providing a loan moratorium agreed lately with the Tourism Secretariat and MHRA. HSBC has denied accusations that it was being difficult and proposed that more one to one meetings will be held to clarify any mistaken views. Other account holders have strongly protested that the bank euphemistically retrenched and did not to reduce the interest base rate in line with the European Central Bank’s recommendation. To its defence, HSBC has compared the cost of borrowing in Malta with that of the rest of Europe and found that local businesses are not any worst. The crux of the matter is that SMEs urgently need any extra help that will bolster their chances to compete with competitors and considering that local banks have not suffered any losses for toxic debts they can be expected to be more generous at a time of distress. When recession looms, let us pray that banks will rise to the occasion and come to our rescue. After all nobody benefits from insolvencies.
George Mangion
Partner at PKF – an audit and business advisory firm
