George M. Mangion | Wednesday, 18 March 2009

The Czechs are coming

It was a dull and cold Tuesday in Prague that started Malta Enterprise’s second attempt to assist Maltese entrepreneurs in a business delegation. This happened thanks to the support of a local bank and an international hotel chain. Equally important was the presence and collaboration of the Ministry of Finance. This was in turn hosted by the Czech Chamber of Commerce via the leadership of the Consul for Czech Mr Casapinta.
The welcome address was warmly presented by Mr Zdenek Kocarek - a director of Foreign Relations, and was further amplified in a second presentation by Mr Lubos Joza - a director within the ministry of Trade and Industry.
In his keynote speech, Finance Minister Tonio Fenech gave a detailed introduction to the various aspects making up the mix of the Maltese economy with particular reference to the ever growing ICT sector heralded by Smart City as a futuristic development. He quoted a recent Ernst & Young survey announcing positive comments from investors when surveyed on their reaction to their experience in their ongoing success achieved in Malta as a location for business.
Certainly, as a prime factor one cannot underestimate the highly adaptable workforce and a user-friendly regulation coupled with a favourable tax structure. His comments were positive that with a careful approach, we can maintain the success achieved last year as an island with an open economy - much like a jewel in the southern most corner of the Eurozone, gallantly moving ahead amid the challenges buffeting the central Mediterranean. The minister explored ways and means of how both countries can learn from each other in the manufacturing sector but of course, on a humorous note, he doubted whether Malta can surpass the high level of engineering in building cars registered by Czech Republic.
The meeting was proceeded by a presentation given by Mr Alan Camilleri, Chairman of Malta Enterprise (ME is the counterpart of Czech Trade).
Mr Camilleri gave a summary of the bilateral economic relations with the Czech Republic. He stated that ME is selective in targeting good potential in applicants who can prove that their projects can add the value chain in various sectors.
ME also works very hard to encourage technical innovation in Malta by encouraging entrepreneurs to invest in product improvements thereby expand and improve their horizons in exports. Surely unnecessary bureaucracy needs trimming as it is recognised as a number one killer thwarting ME attempts to encourage start-ups. Mr Camilleri was gung ho that the can-do attitude is vital to move forward in these turbulent times.
ME is in fact doing its utmost to help creating a framework where the grass shoots are nurtured to grow in their nursery within a protected environment. Pharmaceuticals in Malta is another success story which ME is currently receiving serious enquiries from – particularly from countries such as the UK, India and also from Central Europe.
This fully complements the drive by ME to attract Research and Development agencies to set up in Malta.
So what are the possibilities that both countries can realign their synergies to promote bilateral trade?
It looks like one has first to review the present factors which are affecting the economic dynamics of the Czech Republic.
The change in mood was amply explained by Mr Joza, the director within the Ministry of Trade and Industry. The positive factor is that since Czech joined EU, its trade turnover almost doubled. Unfortunately, the recent international financial downturn saw a huge slump in industrial production. The drop was to a major extent caused by a fall in manufacture of transport equipment that has been a motor of Czech industry and exports so far. This appears to the very first indicator of a more substantial and visible impact of the financial crisis and consequent economic hardship in the CEE area countries. For example, its neighbour Hungary has asked for financial assistance from the IMF to bolster its weak financial sector.
Such stress will be felt immediately since the Czech economy is an open one depending on the strengths and pitfalls of the spending power of its neighbouring countries particularly Germany and UK.
It is reported that exports of goods and services to Europe comprised 66 per cenr of exports in 2007. Not unlike Malta, the key drivers of Czech manufacturing sector are the machinery and transport equipment, which are by their character rather long-term investment goods and demand for them is highly sensitive to economic cycle. These products are the first ones to be hit by the attenuation of economic activity. It is noted that a similarity exists between the two countries when it comes to comment on the moderate plunge in construction when compared with the drastic drop in other Eurozone such as Ireland and Spain.
In fact Czech Republic saw a moderate plunge in its construction index reaching a drop of 5.6 per cent, mainly due to large investment projects in civil engineering, financed from the state and European budget. When it comes to inflation we see that Czech Republic has fared worst than us to control the rise of consumer prices irrespective of the drop in oil prices. Certainly, the positive influence resulting from the fall in prices of transport due to a decrease of prices of automotive fuels, telecommunication prices and prices of clothing has helped. Yet prices of foods increased regardless. On the other hand, prices of tobacco products went up as a delayed result of the increased excise tax and prices of housing increased, too. The average inflation rate in the last year amounted to 6.3 per cent. Although this is much higher than the average of 3.3 per cent inflation registered in Malta it is expected that the outlook in 2009 points to a drop sharply. It will go down to 2.5 per cent in Q1 2009. Compared with the challenging times which faced Malta in the last two quarters where the economy shrank by a small percentage the Czech economy is expected to grow within the 2 per cent bracket this year. Having set the pace for integrating the threats and opportunities that face the two countries one cannot avoid commenting on the jobs situation. Both countries are proud of their achievement in reaching a stable an the world markets.
Very similar to our economy, the Czechs have been proactive to ensure a healthy job opportunities not withstanding the drop in export orders that are inevitable in this credit crunch which is affecting trade worldwide. The job market in Czech is rather resilient and managed a reasonable unemployment rate last December of 6 per cent. This compares well to Malta which is currently suffering from a mild recession with only a relative small number of workers on a four day week. In the Czech scenario one is predicting a moderate increase in unemployed list. This year, the number of unemployed registered a further growth, along with an increasing pace of jobs erosion. Unavoidably the drop in employment prospects reflects a sharp deceleration of the Czech economy, which is a consequence of the recession effects. The positive side of the coin is that inflation will not be unduly pushed by pressures due to wage hikes. Speakers at the seminar predicted that at best the unemployment rate will edge up to 7.3%. It is apparent that the Czech industry has already been hardly hit by the negative effect of recession in the eurozone and worsened export opportunities in Russia and Ukraine. So what can we learn from such a well organised business development event? The answer is very clear that we need to go forth and lower our inhibitions that can slow our economy. It has to be all hands on deck, much like a social pact with all stakeholders to try surmounting the challenges that are now prevalent in such turbulent times. Certainly the positive approach which our young and energetic minister of finance has taken is fully appreciated. Tonio Fenech honed his communicative and qualitative skills by working close with business.
Certainly as quoted by a recent article in the Economist, Malta is branded as a nibble player within the 27 members who can play the game with skill and intelligence to paddle up the creek in choppy waters.

George Mangion
Partner at PKF – an audit and business advisory firm



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18 March 2009

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