Solutions Starts with a `D`

Maltastar 

It is almost becoming boring repetition every time a set of economic data comes out having to argue that the economic situation in general and public finance situation in particular are a serious cause for concern.

The July 2003 (for the month of July 2003 and for the 7 months up to July 2003) public finance figures released late last Friday 29th August 2003 is yet again a further confirmation that matters are deteriorating at a sharp pace. The deficit for the 7 months reached Lm128 million up a further Lm14 million from the position as at end June 2003.

Compared to the position last year, the deficit as at July 2002 was Lm72 million. But to be consistent with past criticism it is fair to say that the real deficit was Lm93 million as in July 2002 Lm21 million extraordinary revenue from MIA privatisation was included as ordinary revenue.

On a real like for like basis the deficit is Lm35 million (38%) more than last year after adjusting for last year’s extraordinary revenue. At the June mid-point the situation compared to last year was also Lm35 million worse off so one might argue that in reality July this year essentially produced the same dismal result of July last year.

Between August and December 2002 the deficit in these last 5 months of last year deteriorated by a further Lm10 million. So if we keep pace with last year the end of year deficit will increase by Lm10 million over the position as at end July touching the LM138 million.

If, and it is big if, grant revenue of some Lm20 million from the EU and Italian financial protocol materialises in real cash flow terms by end of this year, the deficit will close at some Lm118 million compared to an original projection of Lm74 million.

So when we were recently informed that the deficit this year will overshoot the budget and will exceed Lm100 million we were in fact being told part of the real picture. The deficit, failing accounting camouflages, will be anything between Lm120 and Lm140 million depending on whether grant revenues materialise this year or not.

Which tells us that we have a problem but does not tell us much about the solution. Which tells us that unless we start taking serious measures to address our macro-economic faults and our structural public finance deficit and worrying speed with which national debt is accumulating (+Lm171 million over this time last year despite MIA privatisation revenues in November 2002 from sale of 20% equity to the general public for some Lm 9 million) we would be extremely irresponsible to set any date in the near future where we can hope to join the Euro.

 

If we were to join the Euro when we have such strong imbalances and when we are clearly losing our competitiveness on a global basis, we would be giving up one of the major policy tools with which we can address and manage a road to recovery.

So I think it is about time that we start the debate about the level at which the Maltese Lira will at some distant future time be fused into the Euro. Before we come to such point of fusion we must ensure that our economy is growing at a sustainable level, and is competitive globally both on a level of trade (exports and imports) as well as on a level of capital transfers particular the attraction of FDI.

We are far away from such sustainability and we can get to this point either gradually by keeping a domestic inflation rate below that of our competitors for a long period of time, or immediately via a revision of the external value and composition of the Maltese Lira. I am not concerned that we have to time for a gradualist approach after years of neglect and in any event with international inflation rates at historic lows it is difficult to beat our trading partners on this score.

So more and more I can convinced that we should not rule out the immediacy of a solution that starts with a D provided we accept the this is only the start of a solution and that further restraint and adjustment would be necessary to render our economy more flexible and more competitive. The solution starts with a D. It certainly does not end with it.

Portfolio

Strategy 1 No Risk Lm 1007.417
Strategy 2 Medium Risk Lm 1011.220 (after Lm40 charges)
Strategy 3 High Risk Lm Lm 1180.000 (after Lm31 charges)
Strategy 4 High Risk For Currency. Lm 1066.000 (after Lm40charges)

All prices and rates of exchange are the latest available on Saturday 30th August 2003.

Strategy 1 continued to accumulate simple bank deposit interest.

Strategy 3 is temporarily all liquid cash after cashing in the profit from Maltacom shares. This strategy is the one most ahead so far with 18% net of charges.

Strategy 3 & 4 kept steady this week as equities and bonds (international) were mostly involved in sideway moves which left them at the end much the same as where they started from. This is not bad considering that normally August sees soft equity prices.

Strategy 4 is 2nd most profitable with 6.6% net of charges.

All 4 strategies started on 1st June 2003 with Lm1000 each and percentages above mentioned as since start date of the portfolio not p.a.