News & Events

Malta News - 21/02/2020

Economic growth is increasingly reliant on domestic demand

Author: George Mangion
Published on Malta BusinessToday 20th February 2020

This is the second month of the year and regrettably destiny has showed us many outlandish things have happened since the 26 November 2019, when three ministers and a chief of staff voluntarily resigned. A prime minister resigned on 12 January 2020, giving vague reasons for doing so.

This means, it is time to for us to start thinking about ways by which we can properly interpret our political and social barometers to assess how we can repair the reputational damage that is tarnishing Malta’s reputation as a pristine financial domicile. These are facts which some pundits (due to a hidden agenda) prefer to ignore at their peril. They treat the political upheaval as the elephant in the room ignoring stark facts that GDP dropped to around 4% in 2020, from 7% in 2018 (then, mostly boosted by domestic demand).

The slide reflects weaker foreign demand. With the unforeseen Coronavirus hitting international business particularly from Asia, our GDP growth is projected to dip further.

This results in less exports due to global uncertainty – as our own domestic private consumption moderates. But, it is not all doom and gloom as Silvio Schembri – the campaigner of “Blockchain Malta” now minister for economy and SME’s, announced a string of new capital projects to be financed by existing investors in their drive to expand production.

Naturally credit is also due to the approval and guidance in factory extensions from Malta Industrial Parks. The names are very familiar and include Toly Products, Playmobil, Trelleborg, Lufthansa, Methode and SR Technics. This is welcome news as the minister announces it will create a demand for 800 trained workers.

The question follows that as such numbers are not available on the Jobsplus register, most likely this will tighten up demand and push up wages for qualified expatriate staff. More plaudits are showered on Silvio Schembri’s ministry when taking into account:- Fitch rating of A+ positive outlook, DBRS an A(high)+ and last but not least – Moody’s A2+ rating.

The penny dropped, when we read IMF’s latest report which inter alia highlights our failure to address identified shortcomings in the AML/CFT framework, as laid out by Moneyval. It proceeds to warn about “difficulties in processing bank payments could potentially arise as well as pressures on related sectors of the economy”.

Banks were again expected to tighten their governance and invest in sophisticated systems to improve their understanding of risks and supervising the on-boarding of new business. It mentioned high-risk sectors (milking cows) – such as remote gaming, cryptocurrency assets, and the IIP—these should continue to be strengthened.

The IMF did not sugar its criticism saying that while new fiscal buffers were built yet economic growth has relied on large inflows of foreign labour, which is augmenting the pressure on the island’s housing, infrastructure and natural resource management.

As in previous reports, more structural reforms are recommended to encourage the elderly and women to participate in the working world.

Moving on, we notice how pensioners and those living on low-income lament that the cost of living award of €35 per family hardly compensates for inflation in staple items.

Caritas continues to push government to consider announcing a living wage index as is the case in the UK. It is a contradiction, when we hear of 80,000 living on the poverty line when at the same time high street supermarkets are brimming with shoppers in a frenzy shopping until they drop – burning their credit cards to the limit.

Can there be a two-tier economy running in parallel? Party apologists wax lyrical that these are the “best times ever” pointing to restaurants and pubs brimming with diners while champagne flows at corporate parties. In reality, the disparity between the fat cats (sporting Ferrari’s, skiing holidays or sipping aged single malts on expensive yachts) and the working classes is getting wider.

Ideally, this imbalance is reduced and attempts made to reach a wider distribution of wealth. It is not a dichotomy, reading how IMF praises government for its success in planning a flourishing economy. This has registered an extraordinary growth in the past six years, yet this trend must not hoodwink us or lure us to wave a flag of complacency.

Let us give credit where it is due and certainly we congratulate Professor Scicluna, the minister for finance on his prowess. Suffice to mention, that “debt to GDP” ratio receded below the 60% official EU threshold. It hit almost 73% at the end of 2012 and we just managed to scrape by not being fined under the Excessive Deficit mechanism. It is expected to go down further below 45%. Lower debt means a welcome drop in servicing costs.

The IMF is chasing us to address our weaknesses but really and truly compared to other ailing EU countries – we have achieved a lot in a short time. As they say, Rome was not built in a day and it is well documented that the elusive trickle-down mechanism takes time to work its miracle cure.

A chronic malady is the need to combat rising rents which can be a social curse particularly for tenants earning lower incomes or having large families to sustain.

As always, pensioners come in with a load of demands. There is a general feeling that the statutory two-thirds capped pension mechanism unless supplemented by external income is not sufficient to help people from sliding into the poverty trap.

To analyse this issue, three years ago PKF designed a number of ‘one to one’ questionnaires and ran a confidential survey among residents in old people’s homes housed in three government run centres. Not surprisingly, when one breaks up this data by age group or household type, one finds that the above mentioned ‘feel good factor’ has not benefited everyone.

Another observation is that people are living longer and by 2030, the number within the 65years plus group will exceed that of young people aged 15 to 24.

This inexorably shows how society is getting older and will inevitably face challenges due to a tectonic movement in demographics. In conclusion, Moneyval has warned that Malta risks being blacklisted unless concerns are addressed, and in a presentation to financial practitioners Finance Minister Edward Scicluna has acknowledged the need for the regulatory and police authorities to “score more goals” when it comes to financial crime.