The year has begun with the election of a new Prime Minister. We hail the choice of the tesserati who have been given the grave responsibility of electing a new captain of the state, following the resignation of Joseph Muscat. He inherits a country with solid economic fundamentals and a modest surplus. 

The sustained economic growth resulted in ever-present acute labour shortages which were filled by strong inflows of foreigners. GDP growth is averaging 6.5 per cent in 2018, slightly lower than the previous year, and a modest 5 per cent in 2019. All this is driven by buoyant domestic demand.

This bonanza has given birth to a feel-good factor which is commendable. Similar good performances have also blessed other EU countries such as Poland and the Czech Republic, both of which faced labour shortages that were temporarily filled by imported labour.

The IMF report on Malta goes on to mention a number of steps to help ensure sustained future growth. Among the number of recommendations, one finds the standard advice urging the government to improve support for start-ups. These are finding access to credit being hindered by red tape and the perennial demand by banks for tangible collateral. 

Equally important, in the opinion of the IMF experts, is the need to improve the quality of the labour force in order to attract more international companies that are being tempted to relocate to Malta. An ideal way to improve the quality of the local talent is by setting up an innovation hub of international repute.  Attracting foreign talent, and placing more resources on higher education to continue churning out more PhDs graduating in science and ICT, are the ideal building blocks to populate a vibrant industrial ecosystem.

We have heard this nonchalantly promised many times in budget speeches, and a feeling of déjà vu has set in. Not surprisingly, critics lament the fact that the Muscat government was more than delighted to attract mega manufacturing projects lured by state agencies which, for the right applicant, guarantee bank loans and the building of custom-made factories - all rented out at low rates.

This is not to forget the protest from the public when it reads that, on a number of occasions - in a move to assist upmarket tourism - the government has granted prime sites on generous terms to mega developers for the erection of high-rise luxury units. The independent press is criticising the Muscat legacy, when - in such cases - public land worth millions is granted at fire-sale prices.  This is not a level playing field where SMEs are concerned: the latter are struggling to keep pace with competition and find it impossible to secure the extra funds needed to innovate their products. Perhaps due to their small size - although they account for 85 per cent of local industry - the facts show that they face perennial problems when it comes to innovation.

Really and truly, although the bureaucracy speaks of business concessions, the facts show that they are not the darlings of the government. Regardless of this incongruence, it is an undisputed fact that such accelerated growth in GDP under Muscat's baton fuelled an unprecedented exuberance - and voters are enjoying the ride. Indirectly, even the SMEs that operate for the domestic market cannot complain, given that sales in January are improving. There is no denying that consumers have more spending power. 

Equally resonant are the developers - these are in a race, to flaunt their egos by building concrete and glass units in the Eldorado area in Paceville.  Every week, we read that the PA has given approval for another high-rise tower. For an island which, for many years, has not witnessed such unprecedented growth in high-rise buildings, it seems incredulous to inhabitants to see all this sudden affluence. 

As was to be expected, all this building frenzy has come under heavy attack from environmentalists, Caritas and the Church authorities, who believe that confidence in such Dubai-ification can only be a symptom of wanton greed - and will lead to the ruin of traditional core values and way of life as it has in other countries.

Sceptics retort that we are living in a time warp - painting a fairy-tale picture about a fleeting feel-good factor when, deep down, foundations are weak. The millions that are pouring in to sustain this gentrification drive has encouraged real estate agents to train a bigger sales force in order to cater for the influx of foreign buyers. The price of quality seafront apartments has never increased so spectacularly as has been the case in the past five years. 

Party apologists think that the home-grown aversion towards land speculation can be a temporary phenomenon and say that prices will resist pressure to fall dramatically, since land is scarce. They feign any comparison to what happened in other EU countries with property bubbles that swept over Ireland, Spain and Portugal. The bursting of the bubbles had dire consequences on banks, leaving unpaid suppliers and high unemployment in its wake. Naturally, when a property boom led to a bust, politicians rushed cap in hand to the IMF.

To mitigate this potential calamity happening in Malta, the IMF report noted that while local banks are adequately capitalised there is a need for more prudence in bank lending and a programmed reduction in non-performing loans. We notice how HSBC and BOV have become risk sensitive.  Again, it stands to reason that in order to cushion the ill effects of a slowdown, the IMF recommends an extra effort by the government to support start-ups and create a culture that small can also be beautiful.

Needless to say, the new Prime Minister will be encouraged to increase links between academia and the private sector which, at present, can be pictured as two trains running in parallel. It is a dichotomy that Malta is spending big on education yet still faces a high proportion of early school-leavers. This is criticised in the 2018 edition of the European Commission's Education and Training Monitor.

Another topic in the IMF report that merits our attention is the need for more social housing, with some 3,500 families seeking decent accommodation. This human problem is partly due to the onset of gentrification (mentioned earlier) which has resulted in an escalation in the cost of housing. It is no surprise that low-income workers cannot afford the rents demanded. But not everything is doom and gloom and one must congratulate the outgoing Muscat administration for creating financial stability, jobs for all and a general feel-good factor. 

The fact that more tourists are being attracted to Malta which, in turn, has contributed to the recovery of Air Malta, are positive factors that have helped generate a healthy multiplier effect. Rating agencies are praising us for our success in navigating the ship of state in choppy waters amid the uncertainty of a faltering Eurozone, immigration challenges and the deleterious effect in the event of a no-deal Brexit.

 

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George Mangion is a senior partner of an audit and consultancy firm with over 25 years' experience in accounting, taxation, financial and consultancy services.  His efforts have seen that PKF has been instrumental in establishing many companies in Malta and placing PKF at the forefront of professional financial service providers on the Island.

He can be contacted at [email protected] or on +356 2148 4373.