The Malta
I think it is worth musing on and analysing the background, motives and what led to such rags and riches simultaneously co-existing on this small rock, where millionaires and the have-nothings rub shoulders, even if they want to avoid each other.
Let me start with the rags. There is nothing unusual with factories closing down when they reach the end of their economic life. The cycle of life works like that. Globalisation, which we cannot escape even if we had economies of scale let alone given that our size constraints to export most of what we produce and import most of what we consume in order to retain an acceptable level of efficiency, accelerates the rollout of the cycle of economic life.
The Denim Group has been one of our industrial success stories. Unlike most other exporters, it was wholly owned by local investors who managed to find a competitive niche in the global denim-wear market. A combination of international downturn in the denim-wear fashion trend and an increasing local cost base brought about the inevitable closure of the local outfit, with unpleasant consequences both for investors but especially for their employees.
If we had a bit more realism in our economic management then we could have been in a position to accept such events as normal run of the mill occurrences, where factory closures are compensated for by factory openings of new competitive projects.
Unfortunately, because our economic managers have allowed our economy to lose its international competitiveness, the rate of creation of new manufacturing jobs is far inferior to manufacturing job losses, and this trend may be expected to persist, possibly accelerate.
If we had had the foresight to make the wage setting mechanism more flexible, rather than persist with COLA-mandated increases irrespective of micro efficiency gains, a system devised in the 1970s when we had a closed economy and which is therefore totally unsuited to the current realities of globalisation, then companies like Denim could have survived here for a few more years.
If we had had the discipline to operate strict monetary and exchange rate policies to control the inflation adverse differentials with our trading partners, then we could have emerged with a rate of exchange regime which helps rather than hinders our international competitiveness.
What will actually happen, now that the consequences of our past indulgence and excesses are translating themselves into private sector job losses? The investors will quite understandably explore if they can remain in the global game by transferring their activities to a lower cost location.
The employees, many of them without technical or tertiary education and quite a few with decades of experience in a trade which has been rendered irrelevant, will have to face the humiliation of begging for a new job for which they are ill-prepared.
The unions are powerless to protect their jobs and can only promise to do their best to try to find new openings. Unlike what happens when public sector jobs are rendered redundant, the unions cannot demand that Denim employees be offered a public sector job or that they get paid terminal benefits for voluntary resignations.
The apartheid in our work market condemns these employees, quite a few of them in their 40s, to eat humble pie, to suffer in silence until at least the next minister calls at their residence nearer election time to pitch for their vote. Then they can, for once, have a lever with which to attempt to trade their family’s vote for a public sector job.
If we still have any social conscience left, and if we really mean to restore competitiveness to our economy, balancing the rights and obligations of employees across both the public and private sector is a priority. Unfortunately, it has been put back to 2010, following the recent signing of the collective agreement for government employees.
The riches being made by investors in equities of the three quoted banks are ridiculously unbelievable. Up to close of business last week HSBC Malta shares are up YTD 76 per cent, Bank of Valletta shares are up YTD 53 per cent and Lombard Bank shares are up YTD 65 per cent.
These gains are in addition to the sizeable dividends which they have distributed. While all the banks reported a strong increase in operating profits, only possible, at least in part, due to their dominant position, nothing can really provide a strong argument for the size of the capital gains experienced.
In a very narrow and illiquid capital market like ours, the risk is greater for the market to over or under shoot beyond what is reasonable and sustainable. My personal feeling is that the market has now entered a distinctly overshooting range which discounts irrationally huge future profit growth of the three banks.
Investors had better beware and ask themselves by what logic is the HSBC Malta share price trading at 23 times earnings per share, when HSBC’s parent’s share price trades internationally at 12.7 times earnings, as do most shares of other strong and highly profitable international banks.
Which serious bank is going to invest in the Bank of Valletta privatisation at these high multiples?
One could irresponsibly argue that the market knows best and that the market is always right. But even if one does that, the point arises whether such speculative riches should continue to go untaxed when others are suffering factory closure rags.
Taxation is a delicate matter and should not be tampered with to suit particular circumstances, because it could destroy the confidence that is so necessary to safeguard the integrity of our financial markets. But the argument for higher taxation of banks that are registering profit growth through the strength of their dominant position is growing stronger. If not a windfall tax – which I dislike – then a special profit surtax for operators who enjoy a dominant position should certainly be within the realms of the possible.
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