The Malta Independent 21 September 2019, Saturday

Summer of fear

Noel Grima Sunday, 18 August 2019, 08:23 Last update: about 2 months ago

This was one of the titles of an article by Rana Foroohar in The Financial Times last Monday. Another was ‘Braced for the global downturn’.

She added: “It’s the calm before the storm.”

The week before, market volatility was ostensibly triggered by the US–China trade conflict turning into a full-blown currency war. There are a number of indicators already: weak purchasing managers’ indices in the US, Spain, Italy, France and Germany, rising corporate bankruptcies and a spike in US lay-offs. The global downturn has already begun.

There are also a number of other indices that point to a great resemblance between the fateful years of 1929, 1999 and 2018.

It is a moot point whether we are moving towards a hard crash or a soft one. We all know, at least in general terms, about the current crisis between the US and China but we do not know how it will pan out. Then there are the other crises: the situation in Italy, for starters; the gradual slowdown in Europe – including in Germany, otherwise the motor of Europe; the current heightened uncertainty regarding Brexit. Each one of these has its own toxicity and, cumulatively, they amount to a perfect storm heading our way.

Now, becalmed in the height of the festa season and the sacred annual shutdown, and mesmerised by the many very positive ratings by the international rating agencies, many of us simply refuse to see this even though, as said, the signs are all around us.

And even in the latest, and most positive, ratings by DBRS only last week, the warnings were there but they were not taken up by the mainline media: “Malta’s open economy is the smallest in the euro area and is vulnerable to weak external demand and lower foreign direct investment. In the short term, major risks stem from an escalation of protectionist trade measures hurting global trade and growth as well as the impact on tourism from Brexit. Also, addressing emerging infrastructure bottlenecks and labour shortages in certain sectors, which could weigh increasingly on growth, will remain a challenge. In the medium term, changes in international corporate taxation, changes to the EU regulatory framework, or slow progress in enhancing its governance framework could reduce Malta’s attractiveness as a financial and business location.”

And: “DBRS views the main sources of risks as arising from a sharp deterioration in Malta’s growth outlook, a weakening primary balance, or the materialisation of a contingent liability. In addition to its large and concentrated financial system, another source of contingent liabilities could come from vulnerabilities in its SOEs, with liabilities of 18 per cent of GDP in 2017 and accounting for most of 8.5 per cent of GDP of outstanding guarantees in Q1 2019.”

However: “Malta’s current public finance position and debt dynamics provide the government valuable room to support the economy in the event of a negative shock without materially jeopardising debt sustainability. DBRS views the main sources of risks as arising from a sharp deterioration in Malta’s growth outlook, a weakening primary balance, or the materialisation of a contingent liability. In addition to its large and concentrated financial system, another source of contingent liabilities could come from vulnerabilities in its SOEs, with liabilities of 18 per cent of GDP in 2017 and accounting for most of the 8.5 per cent of GDP of outstanding guarantees in Q1 2019.”

Back to Rana Foroohar: “At some point, the markets and the real economy must converge. I think that point is now. Capital expansion plans are being shelved. Existing house sales are dropping despite lower mortgage rates. And, perhaps more tellingly, American consumers are cutting both credit card balances and their usage of motor fuel, as Gaskin Sheff points out – two things that are uncommon at any time, let alone in the middle of the vacation period.”

 

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