The Malta Independent on Sunday
22nd August 2004
The government friendly media nearly popped the champagne this week when the NSO issued the GDP figures for the first quarter of 2004 showing growth of 2.3% in real terms over the same quarter of 2003.
For objective economic analysts the figures released provide no cause for celebration and in the interest of prescribing the right medicine following accurate diagnosis of our economic ills, the country should not be fed false illusions that we have hit the bottom and the worst is now behind us. The jury on this is still out and my personal view is that the worst is yet to come even though the international economic scenario is brightening up increasing foreign demand for our exports
Let`s first set some background. The reported 2.3% real increase is benchmarked against the first quarter of 2003 when the economy had contracted 1.9% in real terms over the same quarter of 2002.` So basically we are comparing against a very low benchmark and effectively in real terms we are still largely where we were in the first quarter of 2002.
If one takes the Income approach to GDP one finds that compensation to employees has reduced even in nominal terms and effectively it has contracted some nearly 3% in real terms. It is therefore no wonder that even if there truly is productive growth in the overall economy this is not cascading down to the consumer. It is therefore little wonder that in spite of the reported overall growth, household final consumption expenditure has dropped 2% in real terms over last year.
The increase in income from the growth of the economy has benefited mostly the government that has pocketed the bulk of the increased growth through taxes on production and imports. I suggested elsewhere that this is not just due increased VAT rate but also due special concession for registering onshore yachts that were previously offshore and an exceptional fee for a license given to a foreign company granting a seven year monopoly for the operation of public lotto and gaming. Obviously government needs all income it can lay its hands over, and this is not meant as criticism for raising revenue from such one-off sources. But statistics need to be interpreted realising that these are one-off sources and not a solid basis for recurring growth for the GDP or for permanent improvement in government finances.
Operating surplus of the business sector enjoyed very marginal benefit from the overall economic growth and mostly this growth is concentrated in the Financial Intermediation section.
And this is a very interesting notion that requires further analysis. Financial Intermediation in layman`s language means the banking and financial sector.
How is it therefore that whilst the general economy is performing well below its capacity, our credit and financial institutions seem to be performing exceptionally well increasing their individual operating performance in step change not just in incremental terms`
It is important that this concept be well understood as it would be difficult otherwise, without such understanding, to make the connection between the overall economic growth reported in the GDP figures and the rather negative first-hand economic experience that most people are having to contend with day in day out.
My interpretation is that the oligopoly that has long existed in the banking sector has, since the arrival of HSBC, been freed of its social obligation to keep a fair balance between maximising profits and helping macro-economic stability and growth. Banks are now fully focussed on maximising profits whilst dishing out well publicised donations to wash their well brazen conscience in public.
Their oligopoly power is being used to drive up interest rates margins. Banks have reduced the interest rates paid on deposits in line with reduction in interest rates announced by the Monetary Policy Council. But they have not reduced their borrowing rates with similar speed and intensity. Where they reduced their base rates to reflect official rate reduction they have often been successful in increasing the margin they charge over such base rates which in a liberalised scenario is not in any way controlled in spite of the ease with which the Banks can dominate the market.` One particular bank has not even dared to reduce its official base rate and is still charging interest rates as if there were no reductions on deposit rates.
Furthermore banks have become very selective in their lending approach. Personal lending for house purchase or personal consumption is liberally available and indeed pushed aggressively. This needs little maintenance and carries good margins.` However when it comes to corporate lending, small and medium enterprises are having to struggle to get the finance on the quantity and terms that would keep them competitive. Banks have no time to service such commercial lending and seem rather inclined to discourage it so as to` use their funds in portfolio investment activities which is more lucrative, less costly to manage and does not involve any bad debt provisioning. Larger corporations would not have the same problems with Banks as the larger amounts they borrow make it commercially attractive for banks to devote their resources to service such rather large corporate lending.
All academic research shows that SME`s are the main sources of growth and employment.` However our banks have become insensitive to their social obligation to help foster growth with generous finance for SME`s. In search of profit maximisation they are abandoning our SME`s for the more profitable portfolio investing, personal loans and large corporate finance packages.
I am stating this in the context of my analysis of the GDP figures because it is obvious to me that the 20% growth in the value added of the Financial Intermediation section of the economy is at the expense of other economic sectors.` The problem is that the increased value added of the Financial Intermediation sector has very low multiplier effect whereas the sectors which are suffering, including manufacturing and hotels/restaurants, are the sectors with high multiplier effect. Hence why there is disconnection between overall growth and the bad feeling at ground zero.
This shows clearly when stretching the GDP figures to GNP levels by adding Property Income received and paid (income not earned out of production but as a return on investment such as interest, rents and dividends). The national income for the first quarter is down 2% in nominal terms and 4% in real terms as there has been registered a substantial increase in the profits paid out of the country.` One can safely bet that the foreign ownership claim on bank profits have much to do with this negative shift.
So it is unfortunately too early to pop the champagne. Indeed it is high time to stop producing reports and documents and see what practical measures need be taken to render competitive again the two main productive sectors, manufacturing and tourism, which are clearly suffering.` They are not producing the opportunities of employment which we need to ensure that the GDP increase, when it really happens, filters down to the consumer so that families can increase their savings and consumption based on real earnings not on easy household debt.
22nd August 2004
The government friendly media nearly popped the champagne this week when the NSO issued the GDP figures for the first quarter of 2004 showing growth of 2.3% in real terms over the same quarter of 2003.
For objective economic analysts the figures released provide no cause for celebration and in the interest of prescribing the right medicine following accurate diagnosis of our economic ills, the country should not be fed false illusions that we have hit the bottom and the worst is now behind us. The jury on this is still out and my personal view is that the worst is yet to come even though the international economic scenario is brightening up increasing foreign demand for our exports
Let`s first set some background. The reported 2.3% real increase is benchmarked against the first quarter of 2003 when the economy had contracted 1.9% in real terms over the same quarter of 2002.` So basically we are comparing against a very low benchmark and effectively in real terms we are still largely where we were in the first quarter of 2002.
If one takes the Income approach to GDP one finds that compensation to employees has reduced even in nominal terms and effectively it has contracted some nearly 3% in real terms. It is therefore no wonder that even if there truly is productive growth in the overall economy this is not cascading down to the consumer. It is therefore little wonder that in spite of the reported overall growth, household final consumption expenditure has dropped 2% in real terms over last year.
The increase in income from the growth of the economy has benefited mostly the government that has pocketed the bulk of the increased growth through taxes on production and imports. I suggested elsewhere that this is not just due increased VAT rate but also due special concession for registering onshore yachts that were previously offshore and an exceptional fee for a license given to a foreign company granting a seven year monopoly for the operation of public lotto and gaming. Obviously government needs all income it can lay its hands over, and this is not meant as criticism for raising revenue from such one-off sources. But statistics need to be interpreted realising that these are one-off sources and not a solid basis for recurring growth for the GDP or for permanent improvement in government finances.
Operating surplus of the business sector enjoyed very marginal benefit from the overall economic growth and mostly this growth is concentrated in the Financial Intermediation section.
And this is a very interesting notion that requires further analysis. Financial Intermediation in layman`s language means the banking and financial sector.
How is it therefore that whilst the general economy is performing well below its capacity, our credit and financial institutions seem to be performing exceptionally well increasing their individual operating performance in step change not just in incremental terms`
It is important that this concept be well understood as it would be difficult otherwise, without such understanding, to make the connection between the overall economic growth reported in the GDP figures and the rather negative first-hand economic experience that most people are having to contend with day in day out.
My interpretation is that the oligopoly that has long existed in the banking sector has, since the arrival of HSBC, been freed of its social obligation to keep a fair balance between maximising profits and helping macro-economic stability and growth. Banks are now fully focussed on maximising profits whilst dishing out well publicised donations to wash their well brazen conscience in public.
Their oligopoly power is being used to drive up interest rates margins. Banks have reduced the interest rates paid on deposits in line with reduction in interest rates announced by the Monetary Policy Council. But they have not reduced their borrowing rates with similar speed and intensity. Where they reduced their base rates to reflect official rate reduction they have often been successful in increasing the margin they charge over such base rates which in a liberalised scenario is not in any way controlled in spite of the ease with which the Banks can dominate the market.` One particular bank has not even dared to reduce its official base rate and is still charging interest rates as if there were no reductions on deposit rates.
Furthermore banks have become very selective in their lending approach. Personal lending for house purchase or personal consumption is liberally available and indeed pushed aggressively. This needs little maintenance and carries good margins.` However when it comes to corporate lending, small and medium enterprises are having to struggle to get the finance on the quantity and terms that would keep them competitive. Banks have no time to service such commercial lending and seem rather inclined to discourage it so as to` use their funds in portfolio investment activities which is more lucrative, less costly to manage and does not involve any bad debt provisioning. Larger corporations would not have the same problems with Banks as the larger amounts they borrow make it commercially attractive for banks to devote their resources to service such rather large corporate lending.
All academic research shows that SME`s are the main sources of growth and employment.` However our banks have become insensitive to their social obligation to help foster growth with generous finance for SME`s. In search of profit maximisation they are abandoning our SME`s for the more profitable portfolio investing, personal loans and large corporate finance packages.
I am stating this in the context of my analysis of the GDP figures because it is obvious to me that the 20% growth in the value added of the Financial Intermediation section of the economy is at the expense of other economic sectors.` The problem is that the increased value added of the Financial Intermediation sector has very low multiplier effect whereas the sectors which are suffering, including manufacturing and hotels/restaurants, are the sectors with high multiplier effect. Hence why there is disconnection between overall growth and the bad feeling at ground zero.
This shows clearly when stretching the GDP figures to GNP levels by adding Property Income received and paid (income not earned out of production but as a return on investment such as interest, rents and dividends). The national income for the first quarter is down 2% in nominal terms and 4% in real terms as there has been registered a substantial increase in the profits paid out of the country.` One can safely bet that the foreign ownership claim on bank profits have much to do with this negative shift.
So it is unfortunately too early to pop the champagne. Indeed it is high time to stop producing reports and documents and see what practical measures need be taken to render competitive again the two main productive sectors, manufacturing and tourism, which are clearly suffering.` They are not producing the opportunities of employment which we need to ensure that the GDP increase, when it really happens, filters down to the consumer so that families can increase their savings and consumption based on real earnings not on easy household debt.
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