The Malta Independent 22 February 2020, Saturday

Jittery markets exert more pressure on our exports

George M Mangion Tuesday, 27 August 2019, 11:02 Last update: about 7 months ago

One appreciates how the government is so gung-ho about economic growth and this is the regular message that is being fed to TV audiences in the evening news. We cannot doubt that the wellbeing is tangible and that full employment is generating so much towards better living conditions.  

We only need to look back to the early 1950s to see the remarkable transformation of the economy. Since independence, our political leaders have crafted the transition from a fortress economy to one that is market-oriented.  They also set the scene for the deepening of Malta's trade integration with its immediate economic neighbours.

It is no exaggeration to say that we have indeed made full use of our limited size and good position in the centre of the Mediterranean. Our strategic position and harbour facilities have allowed us to trade and attract goods for centuries, both for the national economy and for transhipment (for example, growing cotton on a large scale and exporting it). Historical circumstances led to us becoming a British colony (some say 'protectorate') and the navy and air-force bases, together with berthing facilities spread around the islands' natural harbours, provided employment for many.  

As the island became less dependent on HMS, it began to direct itself towards commercial facilities such as the enlarged commercial dry docks and the building of factory estates to attract manufacturing companies with export in mind. It also started a tourist industry by granting 10-year tax holidays and cheap seafront sites to various local investors, such as the Salina Bay Hotel, The Hilton - later Portomaso, the Ramla Bay Hotel cum time-share complex, Les Lapins Hotel, etc).

Over the past 70 years, all this has contributed towards a higher standard of living and a solid welfare state where education and healthcare is totally free for everyone. To achieve this growth, there have been solid efforts to improve the infrastructure, especially in the provision of a reliable electricity supply to meet the growing demand. We survived the 2007-13 austerity period and can now claim to be among the EU members with the highest GDP growth rate.

This is confirmed by last year's EU Commission report that commented how Malta's economy had grown by more than five per cent for the fifth successive year. It also noted that growth in the employment sector had resulted in more cash-in-hand and record private consumption.

The fly in the ointment is that while domestic consumption has grown steadily, exports have declined and there has been an increase in imports. The report also said that consumer confidence had remained at historic levels above average but that this year this sentiment had begun to decline, especially in the services sector.

A brief look at the latest Commission country report reveals salient points such as that regarding domestic demand. This is set to be the main driver of growth, supported by strong investment growth. Starting from 2019, investment growth is to be boosted by large-scale road infrastructure, projects in the health sector and investments in the tourism and real estate sectors.

The public investment profile is expected to benefit from various investment projects co-financed by EU structural funds. Private consumption is projected to remain dynamic, on the back of increasing labour market participation and higher disposable income. Regrettably, we note how export growth is expected to slow down from the high growth rates registered in recent years, in line with the projected moderation in global demand, while imports are expected to rise, driven by investment growth.

The services sector, composed of financial services, gaming, tourism and aviation, continues to underpin Malta's current account surplus. Inflation is below the recommended two per cent rate but what goes up can come tumbling down and Malta's economic growth is projected to gradually moderate to an annual average rate of 5.2 per cent this year and 4.6 per cent in 2020.

This bonanza has generated impressive tax revenue to fill the state's coffers and it is hoped that, in the 2020 budget, the government will share the surplus to improve minimum wages and the plight of pensioners and to reduce the number of people considered to be circling close to the poverty trap.

Corporate tax revenue has also improved and there are higher than expected proceeds from the Individual Investor Programme (the citizenship scheme) in 2018/9. However, it is not all peaches and cream. Recently - due to the Panama Papers and the Pilatus, Sata and Nemea bank debacles - there has been international pressure on the government to tighten its anti-money-laundering and terrorist financing regulations by strengthening the professionalism of the staff working at FIAU and MFSA. In the light of this, it is encouraging to observe how Malta has taken steps to amend some aspects of its tax system to curb aggressive tax planning, in particular by implementing European and internationally-agreed initiatives.  

Efforts are currently ongoing to ensure proper supervision, but additional challenges for the financial supervisor have arisen.  Last year, the Malta Financial Services Authority engaged external advisers to improve its set-up which, on its own, has cost in excess of €6 million. In fact, it reported a deficit close to €7 million.

The new legislation, rushed through to regulate DLT assets and crypto-currencies, has added to the risks and heaped more pressure on a small supervision team in the MFSA. This gives the thumbs up to the administration, but can we rest on our laurels?  Certainly not, because the omens on EU economies are not favourable.  Starting with Germany, they show an economy that is shrinking, with interest rates negative all the way from overnight deposits to 30-year bonds.

Closer to us, Italy is facing acute turbulence. It is heavily indebted (130 per cent   of GDP) and is crisis-prone - with its Vice President Salvini pushing for an early election.  Rome's coalition government - comprised of the anti-establishment Five Star Movement and the League Party - is on the ropes.  Slower growth spells big trouble for populist-led Italy, where huge amounts of government money are swallowed up each year to help pay about two trillion euros in public debt.

In America, the safe-haven dollar is up against many other currencies and the price of gold is at a six-year high. Despite Iran's seizure of oil tankers in the Gulf, oil prices have sunk to $60 a barrel. Such problems do not bode well for our export potential. Further escalation in global trade tensions (such as the US/China trade war), the intensification of geopolitical uncertainties and increasing protection could limit economic growth, given Malta's open economy.

As stated earlier, export performance in goods has been declining, reflecting strong specialisation in services. According to studies, from 2012 to 2017 our goods export market share decreased by 16.6 per cent.

To conclude on a moderate note, private investment growth in the first half of

2018 was driven by residential construction and investment in machinery and equipment.  Starting from the second quarter of 2018, domestic demand has   continued to replace net exports as the main driver of growth.  Perhaps Malta Enterprise can ratchet up its efforts to help boost exports - albeit this is no mean task.

George Mangion is a senior partner of an audit and consultancy firm and has over 25 years' experience in accounting, taxation, financial and consultancy services.

He can be contacted at [email protected] or on 2149 3041.

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