Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 17th February 2022

Given the international uncertainty prevailing as oil has peaked at over $100, with the Ukraine /Russian military standoff and the threat of rising inflation, it was the perfect time for finance minister Clyde Caruana to announce measures and extension of others in a bid to safeguard businesses.

Previously, he announced an extension in the tax deferral scheme for businesses, with all income tax, social security contributions and VAT payments between August 2020 and December 2021 being eligible for deferral until May 2022, when they can be repaid in instalments.

On the contrary, the PN is asking for an eight year tax deferral and the abolition of fines and interest over such arrears to help businesses walk out of the post-pandemic crisis. In the absence of the Ukraine/Russian crisis, it was encouraging to note how the EU commission predicted a return to economic normality would come in 2023, with inflation in the eurozone sinking to 1.7 per cent – below the European Central Bank’s two per cent target. Most certainly, interest rates will go up to restrain the growth of inflationary pressures.

This scenario may possibly lead to the FED increasing interest rates partly to clam inflation which in USA is hovering around 7%. Banks in Malta will certainly breathe a sigh of relief at this prospect as they can look forward with greater visibility to the day when they are not charged a negative rate on the balances they deposit with the Central Bank.

But for many local savers, this is also an important step towards returning to the concept that you are rewarded for saving rather than penalised for it. Back to the Ukraine crisis and indirectly the instability that had the effect of increase in oil prices. This closed on the $100-a-barrel mark last seen in 2014, as investors grow increasingly worried about supplies in the event of a war.

This was in reference to the more than 130,000 Russian troops that are deployed on the border with Ukraine, raising Western fears of a possible attack. The crisis has brought major uncertainty over the supply of energy from Russia, which accounts for roughly 40 per cent of the gas that heats homes and powers factories in the 27-member EU.

The crisis comes with crude prices already tight, owing to a pick-up in demand as economies reopen after the coronavirus pandemic and people return to a more normal life. Now with a high oil price and the cost of LNG deliveries peaking, it will not be long before the existing temporary subsidy by the Malta government will not suffice to keep fuel and electricity tariffs stable this winter.

On the international scene, despite the widespread risk due to border skirmishes by Russian troops, there is mounting tension among companies fearing disruption of supplies. An invasion by Russian troops will definitely lead to the imposition of new sanctions by the West slowing down trade and bank transfers.

As can be expected, European oil and gas companies would benefit on balance due to a potential oil price jump. During such grey times, the media talks in terms of the impact on the broader equity markets, yet history shows that as long as military conflicts remain relatively localised, the impact is generally not expected to be felt for too long.

This is a relief yet in the short term, one notices how the average freight spot rate per 40-foot container, as registered by the World Container Index, is 79 per cent higher than it was a year ago. This is a worrying trend and is affecting adversely importing countries (including Malta) seeing their imports cost higher and inflation creep in. The current situation has, and is, directly hitting the freight transport sector as the first point of contact – sea, road, air, and other intermodal transportation have all been challenged.

Availability of containers is low (albeit recovering); some key ports remain congested and cargo is hence blocked; freight rates have increased; and, ultimately, cargo deliveries are delayed. All this is adversely hitting Malta as it sees its cost of living shooting up. A one-time remedy proposed by the prime minister is the issue of a one-time €100 voucher. Regrettably, this is not a Midas touch.

It will hardly dent the spiral effect of rising prices hitting pensioners and low-income groups. This was in context, to more Russian troops and assets deployed on the border with Ukraine, raising Western fears of a possible attack. The crisis has brought major uncertainty over the supply of energy from Russia, which is a major player accounting for roughly 40 per cent of the gas that heats homes and powers factories in the EU.

In Asia, we note the warning issued by Eli Lee at the Bank of Singapore. He argues that the volatility that had characterised markets so far this year would probably continue considering the possibility of military action by China over Taiwan.

He predicts a spike in oil and gas prices, which would exacerbate the issue of inflation over the near term. Investors last week, got a taste of the sort of market shock that could come if Russia invades Ukraine.

The alarm was triggered after the White House warned Americans should leave Ukraine immediately due to worries about an imminent invasion by Russia. Investors had hoped on a diplomatic resolution of the matter, but recent developments indicate this may be wishful thinking and therefore, not fully priced into the markets.

In conclusion, the sabre-rattling exercise by Mr Putin deploying Russian armed forces circling Ukraine’s borders may lead to a recognition of how fragile is the Western alliance (including NATO) against aggressors and how utterly dependent is Europe on the Russian supply of oil and gas (not to mention wheat and cereals).

In short, Mr Putin appears to be keeping all options open. He could invade Ukraine “at the drop of a hat”, yet, he could keep troops deployed for an extended period as a form of armed diplomacy. Surely with his diplomatic overtures, he has also given himself the means of turning away from war if he thinks he has gained enough clout without having to take more risks.

Only time will tell if 2022 will be marked as the start of the all-out war at the Eastern front ushering in a recession while hopefully the pandemic eases its deadly grip on the world.

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 17th February 2022
Get in touch: info@pkfmalta.com