George M. Mangion | Wednesday, 13 May 2009

The silver lining

The editorial of last Saturday edition of the Times of Malta felt rather smug about the economic situation in Malta. It gleefully stated that the island may have not been hit as hard as other countries by the economic downturn. In my humble opinion, as a past columnist in the Times of Malta, this statement is nothing but a generous use of palliative which the paper is renowned for when dealing with sensitive political issues. Naturally, it cannot sugar the pill forever so it goes to announce the nasty bit that news from Brussels are far from cheerful. Of all the woes listed in a country struck by recession, the editor happens to target the one where Commission is forecasting that the islands will remain in recession. But this was not what everyone expected when politicians sought to compare our robust economy to other fragile European economies. The editorial continues to weave a web of fancy saying that the political class had different expectations of growth (definitely a higher one of 2.9 per cent for 2009). Alas, the penny dropped and the writing on the wall is the shock announcement that economy is expected to contract by 0.9 per cent but as a consolation the editor reminds us that ours will be far lower than the EU average. The editor continues to tone down the miscalculation of the predictions by condescendingly concluding that every government tends to downplay unpleasant circumstances in times close to general elections. On the other extreme of the pendulum, one reads how recently, Labour MP Gavin Gulia accused the Prime Minister and the Finance Minister of denying the true effect of the global financial crisis. In fact, he contends that while the government continuously boasted about foreign investment, the NSO statistics showed that capital goods investment - which is an indicator of investment in machinery for production - in the last quarter of 2008 collapsed by almost 50 per cent or €92 million. But is it right for the opposition to create a sense of doom and gloom when the island has so far fought its way amid unforeseen challenges of dwindling tourists, loss of jobs, a high increase in inflation (double that of EU average), banks charging higher rates then ECB directives and of course the inevitable escalation in fuel and energy prices? Our inflation rate is now exceeding 4 per cent. It is surprisingly high when considering that taxes were reduced in three consecutive budgets. The Euro zone rate is at a record low of 0.6 per cent. This is a paradox since one expected that with the downfall in oil prices and interest charges, the inflationary pressures will abate and not double. But lending to factories in Malta is by far more expensive than our counterparts in Britain, even more so in sterling since lately the Bank of England kept its lending rates at a record low of 0.5 per cent. The silver lining is that our economy will not shrink the full amount forecasted in the euro zone of 4 per cent. More good news comes as it was recently revealed that the government has granted direct aid to four manufacturing companies negatively affected by the global recession. This amounted to a total of €3,698,766 in financial aid over the past two months. The four companies, employing close to 2,000 workers had been running on a four day week before being assisted. These are Methode Electronics, Trelleborg Solutions, Stainless Steel Products and Dedicated Micros. It is hoped that the doling of taxpayer’s monies will be judiciously used in training of employees particularly those who face layoffs. Other desirable uses will be for research and development. Naturally once a certain sub-sector of the economy is given aid, there will be a queue of Olivers asking for their share.
Here, one is tempted to revisit the severe criticism unloaded over the Obama administration in its fragrant use of TARP funds to bail out amongst others greedy banks and the bankrupt motor industry. Locally, cynics draw parallels with the past policy of the labour government to bail out ailing state-owned industries. One can mention the huge debts paid on behalf of the Shipyards culminating with the €50 million golden handshake and terminal benefits expensed as a precursor to preparing the yards for privatisation. Another example was the diluted price charged for the privatisation of MidMed Bank on condition that all employees will be retained. With hindsight, we see how post privatisation the same bank armed with astute management and even less overheads has succeeded to multiply its capital investment tenfold. Reverting back to the issue of use of platitudes, one cannot but feel smug when we read about the travails of the British economy and the sudden weakening of the sterling currency. Was this predictable? Did the Labour government mislead its electorate that the going was so good during the golden ten years of its administration that everyone is now shell shocked when the party stopped and the good feel factor vanished among the spin, smoke and mirrors? Just to give a taste of what went so wrong, we notice how the Institute for Fiscal Studies (IFS) predicts a decade of pain for the UK following the reading of last week budget. Sadly, the UK will have to borrow a record £175 billion, because the economy faces its worst year since the Second World War.
Is this an analogy to what the Times editor would say that every government tends to downplay unpleasant circumstances in times close to general elections? I disagree. In this case the Labour government is expecting to go to the polls in less than a year and yet had no illusions but to issue an austerity budget without the sugar coating. True, each cloud has a silver lining. Currency movements were complimentary as we see that Sterling bounced off two-week lows against the dollar last February after consumer price inflation fell less than expected in beginning of this year. The dollar received a boost as well. The pound strengthened against the euro after Moody’s ratings agency said recession in Eastern Europe would affect Austrian, Italian, French, German, Belgian and Swedish banks due to their exposure to the region. Thus we notice how amid the gloom and doom it is easy to overlook the good news which inevitably it is harder to notice but it exists. Back to Malta, we must take courage and thank heavens for little mercies such as the massive drop in oil prices linked with a plunging cut in interest rates and the bailouts to exporters mentioned earlier. With oil price being dirt cheap at below $50, this is acting as a compelling stimulus to consumers and oil importing countries alike. With short-term dollar interest rates at zero, no doubt this massively helps the world’s number one economy to start seeing early grass shoots.
By sheer comparison, the Great Depression stands out a mile away from the present crisis and it was noted for its length and the depth of political interference in the market processes. Really and truly the consensus among world leaders at the G20 summit did give some respite to the positive signs that governments are pulling one rope to speed the recovery. This is no consolation for us since the pain is with us and recessions always seem like the end of the world, and some gloom writers enriched with doomsday theories make them even scarier. Sometimes it is best to turn off foreign media channels and the sinister websites and observe how the grass shoots are slowly but surely growing as the medication kicks in. With eyes wide open, you will notice the silver lining embellishing each cloud in the firmament.

George Mangion
Partner at PKF – an audit and business advisory firm

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