Saturday, 29 December 2007

Three Predictions for 2008

 28th December 2007
The Malta Independent - Friday Wisdom

Planet Earth is about completing another cycle round the sun and those who are seeing it through are one year older and most of us are showing it. An additional wrinkle here, a louder ouch to pick a handkerchief from the floor and generally a creeping loss of agility and flexibility. Hopefully we are also one year wiser.

So is it wisdom or folly that in this last contribution for 2007 I propose to make three predictions for next year? The future is uncertain to all and one event could change the basis on which any predictions are made. However we cannot avoid trying to configure and prepare for the immediate future purely because of the possibility, big or small, of some fat tail event that would change the entire landscape.

So whether through wisdom or folly here are my predictions.

The safest bet is related to the Maltese property market. The supply/demand equation is changing so rapidly because of an over-supply in the pipeline that it is quite predictable, with limited risk of error, that the Maltese property market will cool down substantially in 2008 with certain sectors of the market where the supply/demand is way out of balance starting to show outright price reductions in the 10-15 per cent range.

Quality real estate tends to be less affected by such cycles due to more balanced demand-supply situation pulling on our attraction to foreign investors looking for a place in the sun. However, given that the real estate market has gone soft in most countries it is quite likely for the cooling down of the
Malta property market to be felt across the board though in the first-time home buyer market it will be felt in a higher dimension than in the luxury market.

A prediction regarding the outcome of a general election is always risky and given that a week is a long time in politics any predictions will have to be made with great reservations. But how can anyone make predictions for 2008 and leave out the outcome of the general elections which will dominate the political calendar?

After 21 years of nearly uninterrupted tenure by a PN government I predict that by a hair or by a mile this time it will be Labour. There are innumerable satellite reasons why the majority can be expected to switch its political preference in 2008 but the core reason is the electorate’s fatigue with a PN government.

This could be unfair on Dr Gonzi who seems to score consistently higher than Dr Sant in any opinion survey involving a direct choice between the two leaders but this is not enough to overcome the swell of fatigue with his government. People wanted this change in 1996 and did not quite get it. After backing the old horse for another five years between 1998 and 2003 people were also ready for a change but Labour forced their hand by making them choose between it and the EU.

Now the fatigue has reached proportions that it could overcome any obstacle. The absence of any higher order issue, like the EU was in the 2003 general elections, leaves no visible obstacle in the way of fatigue to deliver what it should have delivered in 2003. Add to this that many people do not perceive that the promised EU spring has been delivered through EU membership and the price oppression causing loss of disposable income by high energy prices translating themselves into high surcharges on utility bills which were a core reason why Labour government met its untimely end in 1998, fatigue will have tail wind support to deliver a change of government come next election.

Which brings me to the third and last prediction, which is however dependent on and resulting from my second prediction of a Labour government being returned to power following the next general election. This prediction is that while political administrative power will change, the wide network of power spread across society, which has continually helped the PN to have a smooth time in government, will not change allegiance. The network of power found in the business community, in the ecclesiastical corridors, in the civil service, at the university, among the intelligentsia, in the white collar union organisations, in the media and wherever there is any power to be exercised will survive any election result.

This network of power outside politics, which did its best to help their PN ally in politics, will use their power to passively or actively obstruct a new Labour government. Let me take a silly but telling example. I am sure many would remember the hunger strikers camping outside Castille in 1997 purely because a Labour government did not revoke the building permit for Portomaso project issued under a PN administration. How many hunger strikes have there been since the PN were back in power in 1998?

Today it is almost laughable that anyone would dare thinking of protesting through hunger strike for anything in this totally insensitive society let alone to protest against the highest level piece of real estate development in the
Mediterranean these last 10 years.

When the PN is in government they have total control as it is a political cell in a power network spread across society. The cells in such network feed on each other to restore power to any cell that temporarily loses it. When Labour is in power its power is purely political and will find headwind from the surviving power of the remaining cells who are eager to help the PN recover their lost power. Will it ever change? It would be a happy new year indeed if it were to do so in 2008 giving an enhanced meaning to true democracy.

Friday, 21 December 2007

From Goldilocks to Stagflation

21st December 2007
The Malta Independent - Friday Wisdom

After a long period of benign inflation and relatively high economic growth it appears that quite unexpectedly the international economic landscape is changing to one where inflation is becoming a real threat, and growth is, at best, slowing.

The suddenness of the change in the economic landscape from goldilocks (not too hot – not too cold, with above trend growth and no increase in inflation) to stagflation (low growth accompanied by increasing inflation) goes beyond anything I can remember.

Until the start of last summer we were all singing praises to the wonders of globalisation. Emerging countries that embraced globalisation, in particular
China, India and Brazil, were becoming an economic force to be reckoned with. Their development was creating an unbalanced demand for energy and base metals causing commodity prices to reach record levels in nominal terms.

Yet this increase in the price of energy and basic resources was not transmitting itself to inflationary impulses at the retail level of prices. The transfer of manufacturing activities to low cost emerging countries, particularly but not solely China, meant that in spite of higher input cost for the material and energy elements for manufacturing of consumables, the lower cost of labour and overheads more than compensated, meaning that the retail price of products on the shelves of the Walmarts and Tescos of this world was quite stable and quite often falling.

This globalisation process was on the other hand keeping in check the labour cost in developed countries given that the bargaining power of organised labour (unions) was weakened by the facility of employers to shift their shop to China et al if labour in the home country would get too expensive. This moderation in wage settlements was another reason for the benign consumer inflationary environment we have been having this century.

The low inflation readings were also aided by the methodology of measuring it. Central banks have a habit of reading inflation in two measures. The first is headline inflation which includes a wide spectrum of retail prices, including energy and food. But they mostly track and base their monetary policy decisions on the reading from the core measurement of inflation that eliminates from headline inflation the effect of price movements in food and energy on the pretext that these prices are too volatile to be addressed by monetary policy changes. By tracking the core inflation, central banks were not concerned about the immediate price movements caused by volatile energy and food but were mostly concerned to ensure that there is no transmission of second round inflation to the general price level of the economy.

It seems that suddenly the almost too good to be true economic scenario is falling apart. The obduracy of energy prices is forcing central banks to reconsider their neglect of headline inflation as it is becoming clear that high energy prices are not a passing phase and are unlikely to be compensated anytime soon by lower energy prices. Furthermore on top of stubbornly high energy prices, central banks must now take into account price rises of soft commodities, basic cereals like wheat, corn and barley, which could unleash a general price ripple increase in most food prices given that these cereals are not only irreplaceable ingredients for basic food products, as basic as our daily bread, but are also the basic ingredients for animal feed on which meat and dairy prices largely depend.

But it is not only a question of technical measurement of inflation. It is also that as
China and India move up the development ladder their effect on inflation in the developed world is changing from benign to threatening. The costs of imports from these countries is increasing both as a result of rising domestic costs as well as a result of appreciation of their currency to reflect their enhanced economic status. Coming at a time when their internal development is continuing to make huge demands for energy, basic resources and soft commodities to feed an increasingly affluent consumer, high prices of energy and cereals mean that the inflation scenario in most developed countries is shifting.

Central banks would in normal circumstances have addressed such inflationary threats by tightening up their monetary policy, increase domestic interest rates to tame demand for imports and reducing cost pressures in the economy. The problem is central banks are currently having to fire-fight another more urgent problem caused by the sub-prime mortgage default problems in the
US which demands lower not higher interest rates. Fighting inflation by tightening monetary policy will have to wait.

This gives rise to a serious risk of unmooring inflation expectations from their hitherto low levels. And it is well known that inflation expectations are self-fulfilling. Once consumers expect higher inflation this will realise itself as manufacturers and retailers gain pricing power and consumers demand higher wages to protect their real value.

This is the conundrum that will face unions in 2008 and beyond. Their benign wage demands so far were moored on low inflation expectations and higher value of their residential assets and financial investments. Workers were happy to moderate their wage demands if low inflation was helping to raise the value of their real estate and financial investments. The scenario is changing. Property prices worldwide are falling, financial investments are volatile, and expectations about inflation are worsening.

Can the unions keep their members’ trust if they persist in their benign wage settlements? And if unions become more demanding would this not force central banks to raise interest rates at a time when the economy needs looser monetary policy to cushion the external threats?

And if unions blow their top off and start demanding their full share, would this not give further impetus to inflation forcing employers to accelerate relocation to more friendly economic environment thus causing reversal in unemployment that has been steadily falling.

The conundrum that unions have to solve is whether they want to be flexibly part of the solution to restore goldilocks or whether they revert to their traditional narrow role and risk stagflation. The line between the two is very narrow but the economic outcome is widely different.

I wish my readers a peaceful Christmas full of the best things in life.

Friday, 14 December 2007

Betting Away Spending Power and Social Values

14th December 2007
The Malta Independent - Friday Wisdom

I had clearly pointed out the risk to public morality of privatising the hitherto public lotto without taking precautions not to expose the general public, with an inherent Mediterranean cultural inclination for gambling, to an excessive temptation to spend a disproportionate part of disposal income on such human frivolities.

Writing in The Malta Independent on Sunday on
4 November 2001 I had asked: “what precautions are being taken to ensure that we do not end up with a gaming terminal in every street corner augmenting gaming and gambling far beyond the broad economic growth rate? Has the government calculated the social cost that a sudden surge in gaming would cause through forced recourse to usury and other criminal practices? Has anyone made any calculation of the economic costs of such sudden surge in gaming as expenditure gets shifted from other consumption with much more economically effective multiplier effect?”

Now we seem to have landed exactly where I had feared we would land. Ask anybody around you and he or she will tell of first hand experience of people who hardly earn enough to keep their body and soul together, who are scrounging to somehow live in the false hope of hitting the big Super Five jackpot.

We spend a handful in protecting our kids from vices such as drug and alcohol abuse. Our moral authorities, the Church included, do sterling work to educate the exposed sectors about the stark consequences of experimenting with core drugs and or their modern synthetic derivatives. Admirable people, to whom we shall remain eternally in debt, like those at Caritas, Appogg and similar organisations, dedicate their lives to redeem and rehabilitate those fragile among us who give in to the temptation to seek refuge in drugs or alcohol.

Even the State and the public sector spend a handful in supporting these NGOs through budgetary allocations, sponsorships or outright donations and in running a centre to give controlled drugs or methadone alternatives to those undergoing a rehabilitation programme involving a controlled withdrawal.

It is therefore quite paradoxical that gambling is not only legalised in controlled environments like casinos, but that we have opened it up to full exposure in practically every street of every town or village. We must be working on the false assumption that exposure to the abuse of gambling is morally less damaging then exposure to the abuse of drugs or alcohol.

I am surprised that Church authorities, who regularly find an opportunity to warn us of the great moral pain which would befall this country if we were ever start to consider giving up the privilege of being one of the only two countries in the world that outlaws divorce, has not expressed any reservation about the great destruction to family values being incurred by the undue exposure to gambling (gaming if you wish to be more polite) by overblown jackpot prizes which exploit human weakness to resist being drawn to the quick rich route which inevitably leads to financial and moral devastation.

Even our commercial community is being severely hit as retailers (and eventually wholesalers, importers or manufacturers further up in the delivery chain) complain that when the Super Five prize reaches jackpot proportions a significant portion of the disposable income normally spent on ordinary consumption, gets deflected to frivolous gambling.

A butcher confided to me that sale of meat in a Super Five jackpot week falls dramatically as presumably the reduced disposable income following the spend on the get-rich-quick illusion, forces housewives to feed their families on pasta with plain butter or hobz biz-zejt.

I think it is time for the authorities to take a fresh hard look at the situation before more damage is caused to family values which ultimately hurts society at large. As a simple first step the authorities should direct that the jackpot should once more be subject to a reasonable maximum figure and that any excess is shared by allocating 50 per cent for future prizes in subsequent weeks and 50 per cent to be donated to recognised NGOs who perform valuable social work on a non-profit basis.

Secondly, the authorities need to control the spread of gambling/gaming channels to avoid seeing gaming machines in coffee shops or other large retailers which should be kept clear of gambling terminals. Gambling terminals should only be allowed in recognised offices like lotto offices where the gambler goes purposely to gamble. There should not be a mix of gambling with anything else imaginable.

Thirdly, gambling of amounts beyond a certain limit should be made subject to more formal procedures. In the financial services sector we are expected to keep documentary evidence of identity with anyone we do business with even in the most ordinary course of business and we are expected to have a long nose to smell that we do not handle any money which could have been sourced from criminal activities. How can it be that people authorised to accept lotto/super five stakes are not obliged to keep identity records of people staking above a certain limit let alone satisfying themselves of the clean source of the funds being staked?

What you read so far is perfect reproduction of a contribution I published in The Malta Independent of Sunday on
11 December 2005. Nothing ever changes but dubious patterns start being formed of jackpots tending to accumulate to juicy proportions in the run-up to Christmas.

The government has to take a decision when the gaming licence comes up for renewal in the near future. The government’s responsibility to protect social values cannot be allowed to play second fiddle to the lucrative income government gets in taxes from gaming revenues. There must be also some control on gaming promotion and advertising. As advertising of tobacco has been practically abolished and advertising of alcohol is strongly regulated it is hardly understandable that advertising of gaming remains uncontrolled, creating a situation where the press, a clear beneficiary of such irresponsible liberalism, has a clear conflict of interest and a heavy feet to influence protection of social values.

Friday, 7 December 2007

Surcharge Surprise

 7th December 2007
The Malta Independent - Friday Wisdom

You can tell politicians are panicking when they start contradicting themselves, while pretending to be a shining light of consistency. This is exactly what the minister responsible for national energy supplies did this week, when he announced that the surcharge on utility bills was being frozen at 50 per cent for the period up to June 2008 – even though it should have gone up to 97 per cent – if the full impact of market spot pricing were to be passed through to the consumer.

One can well remember how the same minister, upon the introduction of the surcharge mechanism, had insisted that this should gradually move to market prices and should be adjusted every two months to reflect such price movements with punctuality.

From an economic point of view, this what classical teachings dictate. Subsidies act as a barrier to careful use of expensive resources, and will delay the structural adjustment needed in consumption patterns to reflect the high cost of energy.

When the opposition came out with an electoral proposal that they would half the surcharge, the minister insisted on arguing that the opposition’s proposal was economically treacherous, and that the opposition was not explaining how this expensive measure would be funded. You might agree or disagree with the policy, but at least the minister was being consistent.

Suddenly it seems that political convenience needs to take priority over good economic husbandry, and the minister announced that the government will, in fact, be subsidising the surcharge to the tune of 40 per cent, costing taxpayers some Lm40 million. This, without any explanation of how the subsidy will be funded.

How can one claim consistency and continue to criticise the opposition’s policies, while simultaneously adopting broadly similar policies as those one is criticising?

Failure to explain funding for this sudden conversion from conservative economic doctrine to socially oriented measures for a short period of time, padding a few months on either side of the coming election date, leaves observers with a clear impression that this is more a matter of temporary convenience rather than deep conviction.

This may be politically savvy, but for the informed and objective voter, a small but growing minority, this is political deceit by a government shifting its policies to try to retain its grip on power.

We need to face facts that energy prices have gone up, and one way or another these have to be passed down the line to consumers, to ensure that consumption patterns adjust to the reality of the market. Policies should not be made to fit elections. Polices should be consistent and totally shorn of political convenience.

So, by all means grant exemption to social cases (that are proven by reliable means) from the surcharge. But why on earth should the state subsidise those who consume energy beyond what is considered reasonable, for a fair standard of living?

I fully agree that in line with social policy objective there should be subsidization across product lines. So it makes sense to keep butane gas sold in cylinders subsidised, as this is used for basic cooking and heating, and gives little scope for excessive consumption. There is scope for subsidising utility consumption on a quota per person basis, but anything above the quota should, not only be charged the full market rates, but should be loaded with an extra charge to finance subsidies given to low consumers.

Only such measures would force excessive consumers, with a high standard of living showing their high level of income and wealth, to economise on resources by switching to more sustainable sources like solar heating.

I would also argue that prices of fuel at the pump should cross-subsidise basic utility rates. While in many cases, uses of water and electricity up to a certain quota per person, is inelastic to price movements, as they merely serve basic needs; consumption of fuel bought at the pump is much more elastic to price movements and carries a better dose of discretionary use.

Only by allowing fuel at the pump to carry the full brunt of international pricing, can we promote more use of shared or public transport leading to better traffic management, and ultimately to a better environment.

If we continue to tailor such important policies merely to suit election and political convenience, then the electorate should not be amazed if after the election surcharge freeze we could have a post-election surcharge surprise.