George M. Mangion | Wednesday, 25 November 2009

Mimicking the Irish recovery

George M. Mangion

A lot of hubris was in the air last week when government proudly announced an investor creating 350 jobs over a five year span. The business has relocated from the Ireland where it employed over 1,000 but due to internal restructuring it needed a more cost-effective domicile.
This success scored by Malta Enterprise augurs for more jobs in the near future. Naturally the larger investment of Smart City (announced with much fanfare prior to the last general election) is still by far the largest jewel in the crown which set the pace for an ICT project creating over 5,000 new jobs. Still kudos is in order and we can only hope that the fiscal stimulus being offered to new investors will succeed to attract more projects.
All this encouragement is welcome, however it runs contrary to the caution expressed by the Central Bank in it’s Quarterly Review which showed a predominance of negative sentiment registered in surveys submitted by the business and consumer sectors.
So far it is not clear whether demand will catch up sufficiently in the pre-Christmas period in order to alleviate the domestic sector from the pains of a perennial tightening of cash flow.
But it seems clear from a slew of recent data released during the budget speech that the recession will ease sometime during the second or third quarter of 2010.
Government aims for a rise in nominal Gross Domestic Product (GDP) next year. At the risk of tempting fate, the evidence suggests that, barring another oil hike beyond the US $80 per barrel, we should see an improvement in both tourism and exports during 2010.
All this places us ahead of the Celtic Tiger economy which has fared badly with an annual deficit expected to reach 12 % of GDP. It was an ill wind that blows nobody any good and with the deficit zooming, Ireland would have to borrow even more money or else raise taxes enormously.
Either route would prove extremely damaging. Ireland’s borrowing is already slated to drive its debt as a portion of GDP to 80% by 2012, close to the danger zone.
That could raise its already lofty interest costs to unaffordable levels. Once it reaches that critical stage, Ireland would need an international bailout from the IMF, much similar to the one registered with Iceland, Hungary, Romania and Latvia.
Ironically, the glorious days of the Celtic Tiger era are over. Many attributed its magic to an expansion of cheap bank credit, low cost taxes and excellent financial services regulation.
All this fuelled a property bubble linked with sky high prices that has collapsed leaving a mountain of so called “toxic” debts.
The patient is now in intensive care while its deficit may reach €24 billion this year unless immediate remedial action is taken. The first radical measure is the creation of a National Asset Management Agency by the State in a bid to buy up to “a maximum” of €80 billion to €90 billion in impaired assets, mostly real estate loans, meandering in the bad loan books of Irish banks.
Amid much political maneuvering all this has landed the Irish politicians to propose extreme austerity programs. Unlike our Finance Minister who opted to go for more borrowing next year to finance a mild stimulus, the Irish politicians hoped for a quick deficit reduction to materialise from higher income taxes, coupled with deep cuts in public sector payroll.
But how can savings be achieved in public sector expenditure in Malta? Just consider the millions invested in I.T Systems which still rendered no saving in human resource cost.
Again the cost of governance for a tiny island like ours with 80 fully manned councils and a Cabinet of ministers with the usual trappings are a drain on the public purse.
This translates into a structural deficit which for the past 22 years has averaged €180 million annually. The latest headcount in public service reveals a total exceeding 41,914 out of a working population in private sector of just 102,000.
This certainly seems a high overhead cost for the size of the island’s small population. Still any downsizing will be fiercely resisted by the unions such as has been the case in Ireland.
Ireland’s leading party, Fianna Fail not unlike the Nationalist Party in Malta - in power for the past 15 years - takes moderate, centrist positions but more than often in the end, bends to the will of the powerful public-sector unions. But then, our recession virus is of a milder form than that which attacked Ireland.
Last April the Irish government unveiled a plan to reduce the deficit from almost 12% to 3% of GDP by 2013. Certainly we cannot sustain a debt with a servicing cost which now reaches higher than the amount spent on the educational budget.
Invariably as a result of the reduced growth we are now facing a higher national debt reaching 69% of GDP which is in excess of the 60% threshold allowed by the Maastricht criteria.
As in the case with the Celtic economy we also saw a steep jump in general inflation. Party apologists have said that the unexpected hike in expenditure was mainly devoted to a one-off (not repeatable) €50 million payment to shipyards workers which is currently targeted for total privatisation.
Still ,the recessionary pressures slowed down the pace of economic activity as both investment and exports contracted substantially.
As noted in the Central Bank reports, one can conclude that inflation trends in Malta do mirror those of Ireland. In Malta our hike in inflation is mainly attributable to the food, medicines and energy components of the overall Retail Price Index.
Let us now turn to the cold winds that battered the Irish flagship. Prior to its downfall, its GDP growth equaled and at times exceeded that of its neighbouring country, the United Kingdom.
Some may ask why the Irish economy which up to three years ago was the pride and envy of many is now ridden with recession and has unconsciously dipped into negative territory.
Some of the causes for the Irish malady have already been discussed in this article and at this juncture one may venture to compare and contrast the Irish sudden misfortune to the mild dip into negative territory suffered by our local economy.
With hindsight, our economy registered a high of 3.6% GDP growth in 2007 followed by a slide down to a lower rate of 1.6% in 2008. This year it is expected to contract to about 1.5%.
In contrast, the Irish economy is expected to shrink at a faster rate of 10 per cent this year.
Sadly the Irish experience is exacerbated by a sharp rise in job losses. This translates in a record unemployment rate of 12.6 per cent, coupled with price deflation hitting the 4 percent mark. Surely there is no similarity when comparing the severe drop in the Irish unemployment to our moderate loss of over 1,200 jobs registered this year.
Luckily Malta suffered no bank bailout costs, while Ireland has pledged to give its two largest banks, US $4.65 billion each in new capital, in exchange for preferred shares.
The Irish government took immediate action in its emergency budget to stem the tide. These steps included taking austere measures spiced with higher taxes and lower government spending to try to bring the deficit in line.
This begs the question, do we need to imbibe the same medicine to cure our financial ills or shall we continue to mortgage the future and wait for the proverbial ace card to bail us out of our structural deficit.
Ireland by contrast has decided that palliatives will not wash nor accept to drink the poisoned chalice. No pain, no gain….. so they opted for cuts in social welfare, the introduction of university fees and a broadening of the tax base.
Only this way will help the patient get rid of its aflu. Do we follow suit or shall we take a gamble to borrow more in order to stimulate the economy? It seems that now money is the problem….


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25 November 2009


Malta Today


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