How Low can the Dollar Go

 

27^th July 2007

The Malta Independent - Friday Wisdom

The value of the US dollar in the foreign exchange market has been falling like a stone and this week touched a record of over 1.38 dollars per euro. This time last year it was about 1.26 dollars per euro, meaning it has dropped nearly 10 per cent over the last 12 months.

The US dollar is a freely traded currency and its value is fixed by the market. It is the most important reserve currency offering international liquidity to finance international trade. Central Banks hold the largest portion of their reserves in US dollars and international commodities are generally priced in US dollars.

There is pretty little that monetary authorities can do to influence the value of their currency on the foreign exchange markets, although they do sometimes attempt to influence the markets by direct or verbal intervention.

Why should we care whether the dollar rises or falls? Simply because we import a lot of stuff priced in USD, most notably all our energy requirements, so the value of the dollar has a direct impact on the Maltese lira (or euro) cost of such things as vital to our life as fuel for our cars, machines and electricity generation or wheat for our daily bread.

The more the dollar falls, the cheaper in Maltese lira terms will be these important imports. So the fall in the US currency foreign exchange value has some benefits. The problem is that there seems to be some direct correlation between the dollar price of these commodities and the US dollar value and as the dollar falls, the price of oil and commodities goes up. Commodity prices are subject to their own demand and supply mechanism, and it is difficult to argue that their price movements reflects US dollar fluctuations. It is more likely that the value of the USD is influenced by commodity price movements, and US authorities adopt an unofficial policy of benign neglect for the US dollar value more willingly when commodity prices are shooting up rather than at times of commodity price stability.

The value of the USD is not fixed by the markets in isolation. If the dollar falls on the foreign exchange markets, then some other currencies are compensating by rising in value. Recently it was the euro, the pounds sterling and the Canadian, Australian and New Zealand dollars that had to act as a counter-balance for the depreciation of the US dollar. On the other hand, the Japanese yen has itself lost value against the USD and consequently has depreciated more aggressively against the other currencies. Other currencies that are benchmarked or pegged to the US dollar, especially the Chinese currency, have broadly moved in sympathy with the US dollar.

Why have currencies behaved so differently in so far as their US dollar values. For those currencies that are not freely convertible, especially the Chinese renminbi, the move in sympathy with the US currency is the direct result of administrative decisions by the monetary authorities of the respective currencies. As the economy grows and efficiency gains are made, this creates financial problems of its own in their domestic economies, particularly regarding price stability, and therefore countries that grow the way China is growing have to shift gradually to a freely traded currency status.

The value of other currencies that are freely traded are influenced by their level of the rate of interest and their position on the economic growth cycle.

So the Japanese yen has fallen against the USD dollar as Japanese interest rates are still very low and their economic growth following a decade of deflation is still fragile, as it is dependent on such low exchange rate for the yen to keep propping up demand for Japanese exports.

The strength of the Canadian, Australian and New Zealand dollars against the US dollar is because these currencies have a high rate of interest needed to control domestic price pressures resulting from resource-based economic growth. These countries are blessed with natural resources the price of which has exploded and resulted in strong economic growth, leading to excess demand over the productive capacity of these economies.

The enigma is more related to the euro. Why has the euro increased so much in value against the US currency, when interest rates in euro are below those of the US dollar in spite of narrowing differentials? The growth in the euro area is stronger than in the US but not by much to justify a 10 per cent relative change in just 12 months. So why are the markets pricing up the euro so aggressively against the US dollar?

I can think of two reasons for this. The euro is gracefully establishing itself as an international reserve currency second only to the US dollar. The more the US dollar falls, the more motivation international central banks will have to diversify their resources away from the US dollar, thus creating additional demand for the euro and additional supply of the USD as a direct result of such portfolio shifts rather than as a result of normal trade flows. The second reason is that European monetary are not totally displeased with the euro’s strength, as it neutralises the increase in the US dollar cost of energy and commodities.

But there is a limit as to how much the euro can go up and how much the US dollar can fall. And this week we must have come very close to that limit. Further increases in euro value in dollar terms will start hurting European export potential and will give more credence and support to French President Sarkozy’s claim that the European Central Bank cannot continue operating monetary policy in total disregard to the euro’s external value. If the euro remains this strong, the European Central Bank will be hard put to justify further euro interest rate increases. The bond markets can sigh with some overdue relief.

Not Pressing

20^th July 2007

The Malta Independent - Friday Wisdom

 

We have a press that does not press. Former Minister John Dalli made very serious accusations against his own government regarding financial housekeeping adopted in financing the Mater Dei hospital project. Writing in the Sunday Times on 1 July 2007 he maintained that negotiations by the Gonzi administration with Skanska were conducted in a vacuum of continuity from the government’s side.

He maintained that as the person with most experience in such negotiations from the very origins of such project, he had enormous resources useful to ensure that the Malta side gets a fair settlement in the disputes with Skanska.

He lamented that these resources were totally disregarded by the Gonzi administration purely for reasons of internal pique which led to the forced resignation of Mr Dalli from the cabinet. Very pointedly Mr Dalli maintained that this lack of continuity served Skansa very well to the detriment of the Maltese taxpayers.

According to John Dalli, in previous negotiations Skanska had contractually committed themselves to finish off the part of the project under their responsibility within a budget of Lm93 million which was based on their own calculations. All representations subsequently made by Skanska to lift this budget cap were strongly refused by the Fenech Adami administration when former Minister Dalli was leading negotiations for the Malta side.

With John Dalli forced out of the negotiations, Skanska were able to score easy wins under the Gonzi administration and easily achieved their long sought objective of lifting the budget cap they had committed themselves to previously.

What was strongly denied by the Fenech Adami administration was conceded by the Gonzi administration. The budget cap of Lm93 million was lifted and the budget excess that Skanska were contractually obliged to fund were passed as a burden on the Maltese taxpayer. All this according to the revelations made by former Minister Dalli.

These are very serious accusations indeed. Serious because they involve huge sums of money which at this stage are still difficult to quantify but when all is crystallized they will amount to more millions than one can count on the fingers of several pairs of hands.

However the gravity of the accusations is further emphasized by the credentials of who is making them. This is not the Leader of the Opposition seeking to score a quick political point. It is not an opposition spokesman criticizing whatever the government comes up with. This is a voice from the government’s own stables - indeed a person who presented eleven budgets for the government and who was directly involved in the Mater Dei negotiations from the very beginning. His accusations ought to carry tremendous weight.

This ought to have been a great story for the press to exploit in any country where the Press performs correctly its expected role in a working democracy. A normal Press would have been pushing their microphones under the Prime Minister’s mouth seeking his government’s reactions to John Dalli’s statements. A normal press would be pressing Mr Dalli to explain further what he was implying.

Was he making a subtle declaration that his removal from Cabinet was in any way designed to suit the interest of Skanska who were finding in Dalli an obstruction to their objective to escape from their commitment to finish the project within the budget figure they committed themselves to?

A normal press would be burning the telephone lines of the Prime Minister’s office seeking answers to the questions raised by John Dalli’s revelations. Why was the budget cap lifted reversing previous objections? Why was John Dalli kept completely out of the negotiations with Skanska and was not even consulted as a matter of continuity? Why has government kept complete silence about Mr Dalli’s revelations? In the absence of a firm rebuttal is their accuracy to be taken for granted?

Clearly we have a press that does not press the government. Why this is so, one is free to reach one’s own conclusions, including the hypothesis that the press has a conflict of interest and that it attaches priority to fanning the government’s agenda over the obligation to inform the public and shed light where darkness prevails.

What a difference from the way the press behaves when there arises any situation that could make life difficult for Labour. At the slightest hint of internal disagreement in the Labour camp the press jumps to try to exploit and widen such differences.

There are others however who have a legal and constitutional obligation to press. Primary among them is the National Audit Office (NAO).

What action is the NAO taking to investigate the accusations made by Mr Dalli against his own government? Faced with these accusation from people in the know how can the NAO persist with its stand-offish posture with regards to whatever is happening at Mater Dei?

Or is the NAO, like the press, only willing to press when Labour is in charge?


 

   

Only in Malta

13^th July 2007

The Malta Independent - Friday Wisdom

We are unique. Absolutely unique. If we do not defy the laws of natural physics, we certainly defy the laws of economics.

Take the property market. In the US an explosion in the price of real estate property is being followed by a property recession which is forcing significant reductions in property prices. Over here, property prices do not have boom and bust cycles; only boom with an occasional plateau.

Because we are unique, certain things can only happen here. Where in the world would the government parade with pride and expensive glitz the official opening of a hospital project which has gone wildly beyond its budget of time and expense, before it is ready to receive its first patients? It sounds like the joke that when the project reaches 90 per cent efficiency it will be ready to take its first patient.

In which country in the world would a public transport service be started to a hospital which is ready from construction but months away from receiving its first clients?

Where in the world would accusations by a former Finance Minister that his successors messed up the contracting of this hospital project involving substantial additional expense, pass by as if nothing matters? Writing in The Sunday Times on 1 July former Minister John Dalli wrote:

“The commitment to the budgeted figure was lifted and Skanska were allowed to overrun the Lm93 million target, which they themselves had established, on which we had decided to continue with the project. The Finance Ministry could have sought my advice during these negotiations as the one with a deep knowledge about this situation, but as at that time I was out, they did not. It is their (and the country’s) loss because if they had sought advice, we would surely have saved the country many millions.”

Where in the world would a Finance Minister with great experience in the negotiation of this mega-hospital contract be forced to resign on the basis of unproven allegations, causing disruption in government resources for continuity in negotiations with the major contractor who clearly exploited such continuity gaps to its advantage and at the expense of Maltese taxpayers?

And on what basis does the Maltese Prime Minister decide which resignation of his ministers to accept and which to reject? Former Minister Dalli does not mince his words that he did not resign willfully but was forced to resign by the incoming Prime Minister, whom he had contested in the party leadership election, before any proper investigation was made on allegations which were subsequently proved completely false.

Yet the Prime Minister has not accepted the resignation of Minister Mugliett who has been caught making pressure on Malta Transport Authority (MTA) to suspend a decision to fire his district canvasser who was found guilty of criminal offence by the Court that ordered him banned for life from holding public office.

Minister Mugliett can try to fool himself thinking he is convincing his ‘dear readers’ that his involvement in this case was for information only and was not meant to influence due process at the MTA. The CEO of the MTA resigned because he could not accept being ‘told’ to suspend a decision for dismissal pending the outcome of presidential pardon request.

The minister had no business even to contact anyone at the authority regarding an operational decision and should have definitely not done so where one of his canvassers was involved. And if the minister has to speak to anyone at the authority he should speak only to the chairman whom he appoints and generally on matters of strategy and national interest. If the minister starts speaking to this and that executive he undermines the whole rational for creating these supposedly auto-nomous authorities.

And what is this business of presidential pardons? Shall we start leaving blank application forms for presidential pardons in our court rooms so that whoever is found guilty will have a one-stop-shop where to apply for a presidential pardon?

Last weekend through a wide international poll there has been a redesign of the seven wonders of the world with Rome’s Colosseum, built in the first century AD, being the only European wonder among the top seven ranking. The whole world is wrong. Malta in its entirety should have topped the list as the best wonder of the universe.

Joking apart, we truly have no idea how to value and promote our treasures. Our Neolithic temples are the oldest free standing structures in the world built between 5,000 and 3,500 BC. No other chosen wonder carries the same value and mystery as our temples. Can Christ the Redeemer of Rio de Janiero have any wonder value in comparison with our unique temples? Pity the Temples that found themselves in the wrong place and missed their deserved appointment as a wonder of the world.


   

Measuring Greatness

6^th July 2007

The Malta Independent - Friday Wisdom

Politicians make regular claims to greatness. We heard all too often, whenever there is a change of government, claims for a new beginning, a new dawn, a time when the sun will start rising again after the darkness of the former party in office.

The latest claim to greatness came from the government with regard to the Mater Dei Hospital. The biggest project ever done in Malta proclaimed billboards and other advertising media tasked to impress us with the greatness of this project.

How does one measure greatness in order to justify such claim? I cannot find any criteria which corroborate such claim.

If one measures by the cost of the project, I doubt whether this is the biggest project ever undertaken in spite of clear evidence of over-spending and inadequate planning that pushes up cost without adding value.

Probably the Marsaxlokk harbour project eventually turned into Malta Freeport cost in monetary terms much more than the Lm250 million claimed for Mater Dei. In real terms, it cost much more given that most of the investment was made between 1981 and 2000 when money had more value than it has today. My estimate is that over all these years, an investment of between Lm400 and Lm50 million was sunk into Marsaxlokk/Freeport project.

Or does one measure greatness by the engineering and architectural challenges it presents? If such criterion is used, there is again no comparison between the challenge of Marsaxlokk/Freeport and Mater Dei. The former involved challenges like dredging, underwater excavation, breakwater building in deep waters and other engineering challenges that were totally absent at Mater Dei, which involved building inland on quite a flat surface. Even the Mosta Dome is probably a bigger architectural achievement than the Mater Dei.

Perhaps greatness to justify the government’s claim can be certified by the value added that the project will generate. This is hard to quantify as Mater Dei is no commercial enterprise whose value added can be measured in accounting or commercial terms. But I feel quite on safe ground arguing that a commercial resale value of Mater Dei would not come anywhere near the commercial resale value of Freeport or even of other private-sector projects like Portomaso if its value grossed back with the value of residential and office buildings as if they were not sold.

So frankly I cannot fathom on what basis this has been proclaimed as the greatest project ever undertaken in Malta. Maybe a claim nearer to the truth would have been the longest project ever undertaken in Malta. It started in 1992 and is about to finish 15 years later, that is if we truly get it operational by year-end.
Freeport may have taken just as long but it was constructed in phases, which were rendered operational while other phases were still under development. So probably yes, Mater Dei can be proclaimed as the longest project ever undertaken in post-war Malta as I am sure in earlier days, when hand tools where the only way projects could be executed, many other projects took much longer to execute.

There are other things I don’t understand about what is going on at Mater Dei. Why was it necessary to make an official opening, take two (prior to the 2003 election there was already some sort of official opening), when the edifice is still a soulless building? The official opening of a hotel is done when it is ready to take its first guests. Why should we have a propaganda boom costing God only knows what when not a single patient has set foot in Mater Dei?

Why really do we need an official opening at all if not for the personal gratification of politicians who once proclaimed that this would be a present for Maltese people, even though unlike traditional presents, the recipients are paying for the gift through their nose?

Mater Dei is not a commercial enterprise which uses publicity from its official launch as a promotion to sell its services.

Whoever will use Mater Dei does so because he or she would have no other option. It is not an elective buy. It is a forced buy requiring no advertising and promotion.

So the promotion is not for Mater Dei; it is for political mileage.

I bet you this. By the time Mater Dei will get fully operational, we will have similar events officially opening this section and that section by the dozen, piling up the bill of this overspent project.

In the end, the taxpayers will pay for politicians’ ego trips.