Sunday, 28 December 2008


28th December 2008
The Malta Independent on Sunday

This time last year I had made three predictions for 2008. It is time to review how well I performed before making fresh ones for 2009.

My first prediction was related to the property market. I had predicted that “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.”

Spot on you might say. The process is still unfolding and while we may have not yet hit the extent of price reductions indicated the trend is clear.

My second prediction was related to the general election:

“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. 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.”

I missed this one by a hairline. A week is a long time in politics and, with hindsight, it is clear that Gonzi and clan snatched victory from the jaws of defeat through capillary persistence in bringing out the vote in comparison to Labour’s misplaced confidence that its success was all but wrapped up.

The third prediction was dependent on realisation of the second one and accordingly there was no opportunity to test it in practice.

As for 2009, it is almost obligatory to be gloomy. We are living in dangerous times as 2008 draws to an end and goes on record as the year when the international financial system nearly collapsed, when the banking system changed from a titan of strength to a sickly behemoth needing extraordinary government support to stand on its feet, and which changed its dictum from being too big and too strong to fail, to genuine concern that it could be too big to save.

Reality is we are flying blind. The world financial system can currently be compared to an aeroplane that was flying in full control when a storm suddenly knocked out all its equipment, forcing its cockpit crew to fly blind and attempt a soft landing without the assistance of the technology instruments they normally rely on.

The world economy for 2009 is largely in the hands of officials appointed rather than elected and who have tremendous autonomy, power and responsibility in managing the main central banks of the world. Our cockpit crew for this highly risky journey towards a soft landing are Ben Bernanke of the US Federal reserve, Jean Claude Trichet of the European Central Bank, Masaaki Shirakawa of the Bank of Japan, Mervyn King of the Bank of England and their counterparts in China, India, Brazil, Mexico and elsewhere.

Never before have central banks had to switch focus so suddenly from watching inflation to guarding against the risk of deflation. Never before have central banks been forced by a crisis of confidence to cut interest rates so savagely in a co-ordinated manner where the destination is clearly zero rates on a global basis for a considerable time. The USA, Japan and Switzerland are already there or nearly so. The Euro area and UK are well on the journey to that destination and are being joined by others such as China and Australia.

Our instruments cannot tell us whether this will work to kick start the economy and restore consumer confidence because we have never been here before. Keynes had mused that cutting interest rates so aggressively could be likened to the sterility of pushing on a string, leaving the economy anchored in doom. Would anybody fearing loss of their job be interested in buying a new house because the mortgage rate got cheaper?

So what if zero interest rates won’t work? As a precaution, governments are loosening their fiscal purse to fill the gap created by falling private demand by creating public demand.

Tax credits or tax reductions are generally considered ineffective for stimulating demand, as it is likely that in the face of uncertainty consumers would save the tax rebates rather than use them to stimulate the economy.

There is however a limit to how far fiscal largesse can get us. Spending on infrastructure, if well planned and judiciously chosen to support growth when the cycle turns, is sensible but the lead time needed between decision making and execution probably means it cannot be relied upon to support global demand in 2009. The irony is that governments who were fiscally prudent when the going was good, like Germany and China, and consequently have greater capacity for fiscal stimulus seem the least interested to stimulate their consumers to spend, whereas those who were fiscally reckless, like the US, now feel compelled to raise their fiscal deficit to frightening levels.

So what can we expect for 2009? There are three scenarios that may evolve. On the gloomy side, what if all the fiscal and monetary loosening will not restore confidence and the world economy remains in deep recession bordering on the depression, with property and commodity prices continuing to fall, unemployment exploding and governments continuing in fire-fighting mode to keep their banking system on its feet by effectively re-nationalising it?

On the optimistic side there is a scenario where the monetary and fiscal medicine will prove effective, aided by lower energy and commodity prices (which effectively are equivalent to a consumer tax cut as proven by the 20 per cent reduction announced last week in prices of fuel at the pump) leading to a short recession and a quick re-bounce. The risk is that this could ignite an inflationary spiral as the tremendous increase in liquidity injected by the central banks to ward off a deep recession starts creating excessive demand in the context of low interest rates.

Maybe excessively leveraged countries like the US and the UK, suffering from a deep property crisis, will tacitly accept an overdose of inflation as the most practical way to reduce leverage and increase value of real assets as money values erode through inflation. In reality this is already happening vis-à-vis the rest of the world as the external value of the USD and the GBP plummets. In circumstances of high inflation and low interest rates, commodities, especially precious metals, will be an attractive investment.

The third and least likely scenario is that central banks succeed in using blunt monetary policy with clinical precision in raising interest rates quickly when the economy is stabilised in order to avoid the risk of a quick shift back from deflation to inflation. This would be a feat as heroic and miraculous as the safe return of Apollo 13. But nothing forbids us from hoping for it. However, I would still put gold in a diversified investment portfolio for 2009. Happy New Year.


Friday, 19 December 2008

This Grinch Could Restore Christmas

19th December 2008

The Malta Independent - Friday Wisdom

I got inspired by last Sunday’s editorial in this paper’s weekly sister whose message was that the general economic slowdown, the probability of an acute recession, and the further uncertainty created by the confusion still prevailing regarding the utility bills we have to pay retroactively as from last October, are making for a sombre Christmas build-up, with consumers holding much tighter to their purse strings than they normally do at this time of the year.

While it is too early to draw firm conclusions about the performance of trade in this holiday season, it is evident even from a firsthand visual look that there are much less flickering lights than norm in house windows and balconies. Evidently Christmas light decorations were the first victim of households treading receipt of their first utility bills based on the new rates, whatever they may be.

I thought I should take a positive side to all this fear and apprehension. Could this Grinch of a recession help us to re-discover the true spirit of Christmas? Could the economic uncertainty bring families and friends to enjoy and appreciate each other rather than the gifts they normally exchange?

On my home office desk I have an expensive fine bone-china pen tray that I had received as gift from a large international corporation when as a consultant to my business clients we had signed an important commercial agreement after long and arduous negotiations. Next to it is a rather deformed carton open top box with two side ears made of sea shells and a nose made from an egg carton pocket. My daughter had brought it from school as a Father’s Day present quite a few years back.

There is no comparison between the commercial values of these ornaments on my desk. Yet for obvious reasons I value the carton ornament much more than the fine bone china one. Value in the eyes of a gift recipient goes beyond the intrinsic material content. More weight should be given to the efforts, care and love that the donor gives along with the gift, whatever its value.

A recession is unquestionably painful. Those who lost their jobs, those on reduced pay as their employer firm is on a short work week, those who feel insecure in their present job, those who have seen their income shrink as a result of less overtime or part-time jobs, all these cannot go on spending as if Santa’s reindeers will evaporate all economic uncertainty.

Businesses that are seeing their sales falling and their stocks piling up cannot pretend their cash flow can continue to support their future investment plans. Shop owners watching clients window shopping rather than actually buying cannot take consolation from the consistent human traffic through their shops if their tills are not ringing with the usual rhythm of the season. Plants that are watching their order book shrink cannot just hope that things will return to normal in the short term without providing for measures to cut costs to see themselves through this rough patch.

Yet together we can make the pain more bearable and we can re-discover human values which had got buried under materialistic consumption. Who needs expensive heating if we can warm each other with honest and heartfelt Christmas hugs? Who needs expensive gifts when last year’s gifts are probably still sitting uselessly on some shelf or in some cupboard? Take a look around your home and see how many useless gadgets have been accumulated over the years.

This recession will help us do away with expensive superficialities and see who our true friends are. We can see who is there for us in lean times as much as in good times. Those who love us for ourselves not for our position. Knowing one’s true friends has much more value than the most expensive gift.

So let’s make an effort not to let the recession steal away our Christmas spirit. On the contrary we have an opportunity to re-discover it. We have had recessions before. This one may be longer and deeper but it does not really matter. What matters is that we accept that recessions are necessary periods for restraint and restructuring so that we can form a strong sustainable base for the next economic upswing.

There is a natural tendency to always assume that the future will be a mere extension of the present. Just as we thought that strong economic growth will continue indefinitely when the going was good, there is a tendency to assume that we will be in eternal gloom now that the mould of economic growth has been broken.

History shows that nothing lasts forever and that economies have strong inbuilt cyclical mechanisms to turn themselves around. The fall in interest rates will reduce the monthly mortgage payments leaving consumers with more disposable income. The drop in the price of international energy will eventually lead to lower utility bills and cheaper prices of fuel at the pump once government swallows its pride and admits its mistake in raising rates when the whole world is cutting them. The value of your house and of your investment portfolio is probably lower than what it was this time last year. But unless you cash out you stand a good chance of recovering your unrealised losses as recessions do not last forever.

My next contribution will be on 2 January 2009 so I take this opportunity to wish my readers a peaceful Christmas and a prosperous New Year. Let’s take the opportunity of what will probably be a holiday season with less material noise to re-discover the true spirit of Christmas and accept that in life we have to accept the rough with the smooth, that a crisis offers tremendous opportunities for restructuring to shape up for future challenges, and that we have accumulated enough blessings to overcome a short period of instability.

Till next year!

Sunday, 14 December 2008

The Gorilla in the Room


14th December 2008

The Malta Independent on Sunday

Questions are being asked about the acute financial crisis that hit the world, especially ever since Lehman Brothers declared bankruptcy last September. People obviously want to know how is it possible for such a crisis to erupt so suddenly, how no one predicted its outbreak and most of all what caused it.

The suddenness of its eruption is not unlike that of a long dormant volcano that suddenly springs into action. Living for so long in perceived safety at the foot of the volcano tends to give a false sense of security that what has not happened for decades or even centuries is unlikely to happen tomorrow. When it happens we call it an outlier event, a black swan, or in technical terms, an event several standard deviations away from the reversion to mean what is statistically feasible to expect.

Stating that no one predicted its outbreak is not quite accurate. There are always a few contrary-minded individuals around who are generally wrong but if they persist in their predictions of doom long enough, they will unavoidably be proved right at some point in time. After all, even a dysfunctional clock shows the correct time twice a day.

The truth is that market movements tend to be very asymmetrical. On the upside, when the economy is growing, asset price increases generated by improving investment risk appetite, or greed if you wish, is a process that builds on itself rather gradually, sometimes over several months, quarters or even years. On the downside, when the economy slips into a recession, asset price decreases generated by an aversion to risk, or fear if you wish, is an instant process. It is panic that builds on itself as people in the room all try to get out of the narrow door at the same time. So doctors of doom like Roubini and Taleb are generally wrong very slowly, almost unobtrusively over a long period of time, but then, when the black swan arrives, they are proven right instantly and in magnanimous dimensions, so that they can shout ‘I told you so’ from all rooftops.

What I wish to dwell on more here is the theme of what caused it. So many reasons have been given that one gets confused in distinguishing between cause and effect. Yet it is important to understand what caused it if we are to take steps in devising a new world financial order that avoids such predicaments in future.

In identifying the causes one has to distinguish between the triggering event(s), the intermediate causes and ultimately the fundamental causes which created the intermediate causes which ultimately led to the triggering event.

The triggering event is a point in time that is easily identifiable. There seems little doubt that this was the bankruptcy of Lehman Brothers on Sunday 14 September. This was a game changing event that crushed the basic assumption on which the modern credit and financial system was built, i.e. that large banks could safely provide inter-bank market liquidity to each other on the assumption that no government would allow one of its major players to go under. This notion was strengthened in March when the US Treasury and the Federal Reserve intervened to lend their tangible support for the takeover of troubled Bear Stearns by J P Morgan Chase.

Who could have guessed that if Bear Stearns was too big or too inter-connected to fail in March, larger Lehman Brothers was not similarly worth salvaging in September? The answer to this question in the coming years will be subject to epic writings, books and probably movies.

The intermediate causes that led to the triggering event are many and varied, some evident and some less so. Probably, if they need to be defined simplistically, the best way to do it is by invoking securitisation.

Securitisation is the process whereby banks take financial assets that produce revenue streams over a long number of years (like mortgage loans, credit card loans, or rental of immoveable), package them into bundles, slice them as to the risk they carry (i.e. which package takes the first loss, and which package takes the next loss and so on), often get such financially packaged complex products rated by a recognised rating agency and then sell them to ultimate investors who are attracted by a coupon which is higher than what is generally obtainable from similarly rated simple products like straight uncomplicated bonds. Names for such complex products (now referred to as toxic products) come by such acronyms as ABS (Asset Backed Securities) MBS (Mortgage Backed Securities) CDO (Collateralised Debt Obligations) CLO (Collateralised Loan Obligations) and so on.

There is nothing intrinsically wrong with such process of securitisation, which until recently was praised as a formidable financial innovation which helps to keep the market stable by spreading the risk, helping investors to take on exactly the type of risk they prefer, reducing concentration of financial intermediation through the banking system and generally providing liquidity to the financial markets to extend further credit supporting robust economic growth. That was when the going was good, when easy credit was fuelling asset prices and making homes available through easy credit to people who couldn’t really afford them and who depended for their solvency on an ever-booming real estate market.

Nothing lasts forever. When the property bubble burst in the US somewhere in the first half of 2007, the benefits of securitisation turned into problems. The fact that risk was too spread made it difficult to understand who was carrying it, leading banks not to trust each other causing seizure of inter-bank markets. Liquidity disappeared making securitised assets difficult to value. Mark to make accounting rules forced banks to report theoretical losses, which turned many banks insolvent needing recapitalisation. Banks consequently lost all appetite for new lending and started hoarding liquidity fearing worse to come from a developing credit crunch. Without adequate supply of credit and with the banking system extremely fragile, the problems in the financial system were quickly extended to the overall economy as consumers were shocked to see trusted big name banks go cap in hand for government support or for external capital beyond their loyal shareholding base. Globalisation made sure that such economic problems did not stop at America’s shore but were exported throughout the world having all major economies go into recession at the same time, something never experienced since the great depression of the thirties.

Still problems with securitisation were only the intermediate cause and not the ultimate cause of why the property bubble was inflated in the first place. Few seem to be focusing on the ultimate cause, which indeed is the 800-lb gorilla in the room. After China joined the WTO, it became the factory of the world, exporting not only physical goods but also reduced prices, which lead to low inflation and easy capital through re-investment of the huge balance of payments surpluses that it started amassing.

Low retail inflation sourced by cheap imports from China led to maintenance of low interest rates for an unduly long time. Even when Central Banks started raising interest rates in 2004/2005 from the record level they were allowed to fall in 2002 – 2003 to protect against recession from the aftermath of the tech bubble which burst in 2000/2001, interest rates at the long term end of the curve remained obstinately low as China continued to pump its massive reserves resulting from accumulating balance of payments surpluses into long term Treasuries and Bonds. Greenspan had referred to this as a conundrum.

Economic boom, low retail inflation and low long term interest rates were a perfect recipe for asset price inflation that inevitably led to the creation of the property bubble. So the ultimate cause of the current financial crisis is the simple truism that strategic and obstinate balance of payments surpluses are as unsustainable and as dangerous as symmetric obstinate and strategic deficits. China’s surpluses were US deficits.

The basic lesson we must take home from this is that it is dangerous for longevity of the system for a huge economy like China to partake in free trade and globalisation only by half. A free system would normally have ensured that China’s wealth from its economic development would have cascaded down to the consumers, rather than being filtered by the State who thus become the gorilla in the room. If we are to avoid similar recurrence and sustainable growth, China has to play all the way spending its wealth by providing more social security to the population accordingly reducing their need to save and allowing Chinese consumers to upgrade their lifestyle in a way that would recycle the balance of payments surpluses through two-way trade rather than mere financing. In the equation there must also be factored in the floatation of the Chinese currency to reflect the country’s efficiency gains and protect from explosive domestic inflation.

Unless the ultimate cause of the current crisis get addressed in whatever international financial order that will emerge in the aftermath of the crisis, unless we accept that structural balance of payments surpluses and deficits have to be addressed rather than carried indefinitely through artificial financing, we would only be storing troubles till they erupt again when another black swan arrives.

Friday, 12 December 2008

Fat Fingers

12th December 2008

The Malta Independent - Friday Wisdom

In these days of electronic communications it is quite possible to come across problems of fat fingers.

Sitting at a keyboard giving orders for execution of financial transactions, it is not unknown for mistakes to be made with fat fingers punching in an extra zero that makes an order for one hundred thousand become an order for one million. Such fat finger errors often become a market changing event, at least until they are discovered and corrected.

Recently in local politics we seem to have experienced a dramatic fat figure event. It also has the potential of becoming a game-changing incident.

A very confidential e-mail sent by the secretary general of the PN to cabinet ministers and secretariat officials at the Office of the Prime Minister speaks in quite detailed terms on the cooperation necessary between Customer Care officers at the ministries and the PN on a project of “data sharing” about complaints from the electorate, seeking personal details together with the nature of the complaint and action taken. It says in black on white that the “aim is to create a strong network of communication with collective synergy so that together we can be more effective towards whoever approaches the Party or the ministries/parliamentary secretariats... The thinking is to render the pre-election process spread over the whole legislature.”

How did this extremely confidential information come to light? The PN secretary general seems to have had a problem with his fat finger. Instead of sending the e-mail to Jason 1 (Parliamentary Secretary Jason Azzopardi) he sent it in error to Jason 2 (Jason Micallef PL secretary general). Fat finger sent this confidential information directly from its source straight into adversarial territory.

Clearly there is strong prima facie evidence that the government and the party in government were working on a project to exchange or share data which would enable the party to gain electoral advantage over its opponents who have no access to such information. By so doing there was going to be gross breach of data protection obligations that are now enshrined in our laws, which breach could even become a criminal offence. The very fact that state officials paid by tax-payers’ money attended a meeting, during office hours and in the course of their normal duties, at the PN headquarters, addressed and attended by senior party officials is already questionable. It shows how the long tenure of power seems to have enmeshed into a single entity the structures of government and of the governing party with clear intention for both structures to reinforce each other even if in the process, national resources would be put at the disposal and advantage of a political party.

The desperate effort to limit the damage of these very serious revelations have all the ingredients of panic by someone who has finally been caught out after getting away with it for a long time.

Firstly, we had a warning by the Head of the Prime Minister’s Secretariat that no minister or government official should breach the Data Protection provisions and any exchange of information can only be done after obtaining written approval of the individual concerned. In reality this warning is, if anything, further supporting evidence that the original intention was for data sharing in breach of the data protection legislation.

If the intention of those that attended the meeting was to play within the limits of the Data Protection Act, why was this not included in the original communication thus avoiding the need of a panic clarification once it was realised that the e-mail was sent to the wrong Jason? The original e-mail had all the indications to the contrary i.e. that the intention was for the data to flow freely between the two organisations with little concern to the provisions of the Data Protection Act.

When it was clear that the PN was losing this battle in the realms of public opinion, the PN secretary general decided to go on the attack and threatened Jason 2 with legal action for abusive publication of a document which was sent to him in error. The PN argued that the email was a customer service enhancement exercise and that it was mere prodding by the party to government to give full attention to client complaints and for such information to be centralised within the OPM where personal information would stay, without in any way breaching the Data Protection Act.

Believe it if you want but if this was the intention, why was it necessary to have government paid officials attend meetings at PN Headquarters? If the intention was one of mere prodding, it would have been enough for the PN secretary general to simply communicate his wishes to the PM and then let the PM delegate to his secretariat coordination of such a strategy within the structures of civil service.

This shows the importance of having an effective Data Protection Office headed by a competent and autonomous person. The void in this respect means that even if a detailed investigation is conducted after the appointment of a Data Protection Commissioner, this will be done after allowing ample time for suspects to cover all tracks.

Whatever may turn out, the damage has been done. There is little doubt that where it matters, in the realms of public opinion, people have little doubt that hanky-panky was going on and the government and the PN have lost all sense of their respective and separate roles. Long tenure of power brings about over-confidence which in the end will kill the cat. Thank goodness for fat fingers as they proved very effective in throwing light on illicit activities which would otherwise have continued to thrive in the dark!


Friday, 5 December 2008

Hubris - Vintage 82

5th December 2008
The Malta Independent - Friday Wisdom

One of the advantages of accumulating a fair quantity of years is having lived through so many experiences that it is often possible to draw comparisons between a current situation and some distant event with similar characteristics.

Government performance since winning a third consecutive term last March is giving me flashbacks of the horrible third consecutive term of a Labour government between 1982 and 1987. Shall we call it the curse of the third term?

Both governments were returned without a clear strong mandate from the electorate. Labour won the election of December 1981 by winning a majority of parliamentary seats but a minority of electoral votes. The result eventually led to a series of constitutional changes aimed at ensuring proportionality between the electoral votes and parliamentary seats.

The third PN government elected last March also failed to get a clear majority mandate from the electoral vote and won government by thinnest imaginable relative majority.

One would expect that a government so elected would take the message delivered by the electorate that it is not happy with its performance and that it should grow a dose of humility to wash off the arrogance that accumulates with long tenure of power.

The opposite happened and this government is not behaving much differently from the Labour government of 1982 that had increased its dose of arrogance and hit out at the electorate with senseless education policies which kept Church schools closed for several months. It was as if Labour wanted to punish the electorate for failing to give it a clear mandate which hubris made it assume that it deserved as of right.

Rather than adopt a touch of humility, this government’s hubris has reached proportions which are making me re-live 1982. Instead of opening up to hear the concerns of the electorate, it is assuming we are all morons and that with a super dose of arrogance it can persuade us to be thankful even for its policy and operational gaffes.

It started with the supposed liberalisation of the public transport sector. The country at large was left at the mercy of public transport operators who took the law into their hands with impunity and we were told that the sacrifice was worthwhile as part of a process to liberalise the public transport with the promise of major benefits of the consumer. What do we have to show for our sacrifices? We have a supposedly liberalised hearse service which hopefully we would need very, very rarely when price considerations are the last thing on our minds and when we trust to be safeguarded from being overcharged by regulation rather than the workings of a free market.

Where we really need liberalisation in the transport services we use, or would use, every day, we are told that we have to wait till 2010 to move to execution stage. Permit me to say that I heard that before and that I am more inclined to think that the hoopla leading to the liberalisation of hearse service was motivated by considerations other than offering the consumer a better deal.

Then we came to the utility rates. Raising the surcharge from 50 per cent to 95 per cent last July was painful enough but we sort of accepted it as a logical consequence of enjoying low rates in the pre-election period and an exploding price of international energy when crude oil prices reached record USD 147 per barrel last July.

However the additional pain of a further rise in utility rates effective retroactively from October is unbearable economically, socially and morally. How can any sensible person accept utility rates to increase with a surcharge equivalent to 194 per cent according to Labour and 135 per cent according to government when the oil price has plummeted to below USD 50 per barrel? How can we accept to pay higher prices of fuel at the pump when other countries are experiencing a consistent reduction of such prices leaving more spending power in consumers’ pockets? Have we become detached completely from global reality just as Labour government of 1982?

The honest truth is that apart from having hedged forward at high prices, government is withdrawing the cross subsidies from easy profits by the petroleum division which is now being privatised. Government policy after the election seems to be one of privatising profits and socialising losses!

The government has now pooh-poohed EU policy for stimulating the economy to guard against the negative effects of an on-setting recession by voting an extra 1.5 per cent of GDP to add economic activity or consumer demand in the economy. The government simply argued that it’s Budget 2009 already provides for this when in reality Budget 2009 actually cuts by half the deficit of 2008 and is as such restrictive rather than expansionary. We are proposing to adopt fiscal tightening when in reality everybody agrees these are exceptional circumstances requiring exceptional fiscal loosening.

What however carries the crown of concentrated arrogance is Minister Gatt’s curt reply to the owners of he Danish Village at Ghadira Bay. Upon complaining about a proposed new motorway passing right next to their property, they were simply informed that after spending 35 years making an appreciable contribution to our tourism they count for pretty nothing and if they can’t live with a motor way adjacent to their so far peaceful property they should sell out to ready buyers.

Equally offensive and arrogant is the argument that there is no alternative when in fact there is a far simpler, more practical and sensible solution of elevating the current road which can be pushed back a few metres to extend the beach. This will keep the nature reserve totally undisturbed, extend the beach by at least the width of the road, facilitate through traffic and offer motorists a unique elevated view while driving through with Ghadira Bay on one side and the nature reserve on the other.

There is great similarity between Labour’s decision in 1982 that we have to pay three months salary to buy the only make of colour TV on the market and these strings of arrogant decisions by the third term PN government. They are all made to suit particular interests at the expense of the general well-being of the population at large who in government’s arrogant view needs to be punished for failing to show enough gratitude at the last ballot box exercise.

Re-living the flashbacks of 1982 is only eased by the hope that we will eventually re-live the redemption of 1987.


Sunday, 30 November 2008

Change is out. Bring in Transformation

30th November 2008

The Malta Independent - Friday Wisdom

There comes a rare moment in time, once in a handful of decades, where the pace of change evolves into a complete transformation in the way we do things. 2008 is proving to be one of those years where a new generation and a new way of thinking takes over as old paradigms are invalidated.

Never since the great depression of the 1930s did the world financial system been under so much stress. The paradigm that we have an efficient international financial system with deep liquidity and sophisticated tools for managing and distribution of risk, which had dominated regulatory thinking since the Reagan/Thatcher revolution of the eighties, has been invalidated by the Black Swan that hit us since Lehman Brothers filed for bankruptcy in mid-September.

The transformation we are witnessing in this sphere will be multi-faceted. At micro level the general theme will be back to basics. Bank will be banks again and there will be the re-introduction of rigorous separation of traditional commercial banking from modern investment banking. Deposit taking banks that enjoy too big or too important or too inter-connected to fail status, cannot expect to continue enjoying the freedom of channelling these funds into risky investment banking ventures.

Investment banks will have to come under the same supervisory regime as deposit taking banks and will revert to their traditional core competence in corporate finance and financial engineering related to mergers, acquisition and takeovers. Investment banks will revert to merchant banking status where most of their revenues will be fee income without having to fund the deals they advise on. Their balance sheet will be de-risked. Those who maintain money brokerage as core competence will do so for clients’ account and proprietary trading will be considerably curtailed.

Hedge funds cannot expect to persist with their unregulated status. They will find it difficult to raise credit to leverage, as they have been doing even if they are properly regulated, let alone if they continue to defend their jungle status.

Transformation is also needed in the carbon footprint of our lifestyle. I do not think that anyone would make the mistake of reverting to past habits of excessive energy consumption assuming that the price of oil will remain at current lows, below a level that can encourage increase in supply. While oil may not reach the record levels of last July, we must assume that present price levels are unsustainable and our energy demands must adjust to permanently expensive oil prices. 2008 will be the year when consumers decided things have to change. Americans kicked their habit of buying gas-guzzling SUVs and are taking to driving fuel-efficient cars even though gas at the pump is back to below two dollars.

Even locally I get the feeling that finally we have accepted the wisdom of investing in domestic systems for alternative energy. We must no longer depend on Chavez whims or Chinese government energy demands to define how much spending power remains in our pockets.

Another major transformation is happening in the political world. The election of Barack Obama as the 44th US President is not normal change; it is a transformation. This is not only because a post-war baby boomer with very limited Washington experience carrying a name more typical of an Islamic fundamentalist has made it to the most politically powerful post in the world; and not only because an Afro-Asian in the White House seemed an impossibility even if his name were Paul Newman, but principally because his agenda goes against conventional wisdom.

Rather than continuing Bush’s policy of unilateralism attempting to shape the world to the US agenda, Obama proposes that America’s interests are best served by becoming a global player willing to engage with adversaries and to treat friends with respect without attempting to overpower them or steamroll over their legitimate concerns.

Obama knows that in the end the buck stops at the Oval Office. However, he has a record of listening to different views, indeed encouraging outlier opinions and taking all into consideration before arriving at his own conclusion and decision. This policy has been well reflected in the appointments he is making in his Cabinet and executive. It is a policy of meritocracy and inclusiveness. Retaining Robert Gates as Secretary of Defence crosses party lines and avoids change for the sake of change. Tim Geitner’s appointment as Treasury Secretary shows Obama’s ability to look beyond his immediate ranks to hire technical competence where it is critical. The appointment of Paul Volcker to furnish advice based on the view of Main Street to parallel that of the view from Wall Street from Economics adviser Larry Summers, shows the President-elect’s means to consider decisions from all angles before plunging in. He means to bring in those that elected him, not just the powerful lobbies, in the equation leading to his decisions.

Even locally we are witnessing Labour transforming itself. Changing the name, logo and other symbolism is important but not really transforming. More in line with the transformation that Labour needs is the disbanding of the Brigata and the abolishment of Bord tal-Vigilanza u Dixxiplina (BVD). Children should be allowed to enjoy their childhood and be spared Madrassa politics. The BVD had become the party’s worst enemy and rather than enforce ethics and good conduct, it was used as a censorship tool to quash internal criticism. Good riddance!

Friday, 28 November 2008

Governments Matter Again


28th November 2008

The Malta Independent - Friday Wisdom

Thinking was shaping towards a notion that national governments were gradually becoming less relevant and seemed destined for irrelevance. They were being sandwiched between two opposing forces which in their own way were eroding governments’ room for manoeuvring and decision making powers.

On one hand governments were being forced to act more and more collegially and operational decisions were being usurped by multi-national organisations. Organisations such as the UN, EU, IMF, ECB, WTO, ASEAN, NAFTA, G8, G20, NATO and similar acronyms, started forcing national governments to avoid going it alone and to coordinate their economic, political and social decisions with other countries with whom they share membership in such organisations.

The forces of globalisation were on the other hand forcing governments to take account in their decision making processes the ability of capital to move without barriers and away from countries without competitive taxation policy and those showing hesitations in accepting the discipline of free trade. Owners of capital, be they large multi-nationals deciding where to locate their foreign direct investments to achieve maximum long term profit, or huge hedge funds buying strategic stakes in quoted companies to force them to restructure or to go back to private equity, started dictating what governments should or should not do.

In some ways it was erosion of the national democratic will and subjecting it to supranational considerations.

In a new book titled ‘The Post-American World’ by one of the most contemporary visionary journalists, Fareed Zakaria, editor of Newsweek International, presenter of a CNN current affairs weekly on international geo-politics and author of the best-seller ‘The Future of Freedom’, there is this excerpt which epitomises this shift towards irrelevance of national governments:

“Functions that were once controlled by governments are now shared with international bodies like the World Trade Organisation and the European Union. Non-government groups are mushrooming every day on every issue in every country. Corporations and capital are moving from place to place, finding the best locations where to do business, rewarding some governments while punishing others. Terrorists like Al Qaeda, drug cartels, insurgents and militias of all kinds are finding space to operate within the nooks and crannies of the international systems. Power is shifting away from nation states, up, down and sideways. “

No more! Even though Zakaria’s book is just coming off the print in hard back form it has already been rendered somewhat obsolete by the financial crisis that erupted following the bankruptcy of Lehman Brothers on 15 September. Governments have started to matter again!

Suddenly governments have moved back in centre stage even in the most liberal economies like the USA and UK. Nationalisation, or quasi, of the banking system has had to be resorted to protect the system from imploding. It has been forced by crisis as a choice of the lesser evil, saving Wall Street to avoid untold harm to Main Street, and is in no way under-pinned by any new economic doctrine or strategic conversion to earlier thinking that certain sectors are too important to be allowed in private hands.

Whatever it is, it is unsustainable. While presently we are in fire-fighting mode and the objective is to put out the fire rather than save the furniture from getting wet, the present reality that profits are privatised when the going is good and losses are socialised when the going gets tough, is unsustainable.

Those who expect governments to step in to save them with taxpayers’ money have to accept that governments have a duty to ensure some sort of discipline on private operators in sensitive sectors to operate with the necessary prudence to avoid having to seek government intervention when the going gets tough.

What is not clear yet is whether this reversal of trend, where suddenly we have all converted to Keynes economics in the background of an on-setting recession, of a degree not seen for a quarter century, is a temporary or a more structural phenomenon.

The challenge is to ensure that globalisation will not get replaced by beggar thy neighbour policies. Temporary problems apart, there is no question that globalisation and free trade have extracted more people out of poverty than direct aid can ever do. People living on less than one dollar a day plummeted from 40% of the world population in 1981 to about 15% presently. Rather than revert to past insularity what we need is for globalisation, free trade, and especially financial markets to be underpinned by better, smarter regulation. More regulation won’t work; better regulation will.

And in so doing we have largely to go back to basics. Banks have to return being banks led by bankers. Hedge funds have to be regulated with strict limits of leverage to prudent levels and clear rules on shorting. Disclosure has to be enforced and over the counter markets have to be shifted to properly exchange regulated markets.

To avoid cracks in fragmentation regulation has to be streamlined under a single regulator in every jurisdiction, a regulator who can coordinate policies with peers on a global basis to ensure uniformity of standards and disclosure.

But most of all regulation has to be counter-cyclical. It has to notch controls a few gears up when the going gets too good and credit becomes easy and plentiful, and it has to ease up when the going gets tough. Banks have to be forced to lend more when the economic tempo slows down and pull in the reins when the economy is overheating, whether this shows up in retail inflation or asset price bubbles.

Government now matter more than ever for putting together smarter regulation which would be ready to kick-in after we work our way out of the present crisis. More regulation now when the markets have cracked will not help the recovery. But suggestions from banks that they can self-regulate should not be taken seriously.

Friday, 21 November 2008

Stop Doodling

21st November 2008
The Malta Independent - Friday Wisdom

The Prime Minister himself seems unconvinced about the 2009 Budget presented in parliament; so much so that in his replica to the Opposition Leader;s criticism he was not defending the budget as presented but a Plan B which is still in his drawer.

I got further confirmation of this when Prime Minister started making concessions on the utility tariff which his ministers had emphatically declared as a closed matter that was not even mentioned in the budget speech. The government has now agreed to absorb through general taxation the cost of phasing out the capping mechanism, which was applicable to large industrial users, rather than having it cross-subsidised by other user segment(s). Furthermore the Prime Minister has agreed to meet the unions following their national protest of last Friday and presumably he has to offer them some concessions on the same scale as allowed to the business organisations.

This looks like doodling when in fact what we need is determined action to protect the economy from the harsh consequences of the coming recession. Most governments in the world are taking specific measures to supplement substantial easing of monetary policy by using fiscal policy to stimulate domestic demand in order to fill the slack created by falling external demand. The G20 meeting over last weekend delivered a broad agreement for governments in developed as much as in emerging markets to stimulate their economies in a concerted action by using fiscal policy to create a surge of demand to reduce the risk of the recession turning into a deflation.

If the government does not have a plan B then it better prepare one quickly. The parting shot should be voting a special one-off stimulus budget equivalent to about two per cent of the GDP as an emergency measure. This would amount to a supplementary budget of e110 million which would be spent in a mix of measures which meet the following objectives:

· Measures which stimulate the consumer to spend more on products and services with the least possible leakage to imports.

· Measures to render our products more competitive to stimulate foreign demand in sectors with high value added.

· Measures to increase investment that underpins future growth and render our economy more competitive.

Let me be more specific. In the category of measures to stimulate consumer demand, government would have to absorb the cost of concessions that the Prime Minister has made and will be making for reviewing the utilities tariff. With international price of energy still falling this should be pretty minimal if it would cost anything at all. But the government should go beyond that.

I would consider reducing the VAT rate on restaurant bills during the Christmas period i.e. between 15 December 2008 and 1 January 2009. It will generate some badly needed feel good factor and increase consumption in a sector that has high value added with low import leakages. It will also carry little risk of future expenditure being merely shifted forward due to seasonality aspect involved.

Another measure to be considered in this category is a one-year abolishment of duty on documents for first time home buyers subject to a cap up to say e120,000. This should keep the property market underpinned by demand from genuine buyers who intend to buy and keep rather than merely buy for re-sale.

In the category of measures to render our products more competitive to stimulate foreign demand this will have to be entirely focussed on the tourist industry. Extending for a period of six months to June 2009, the low VAT rate as applicable for hotel accommodation also to other tourist services like restaurants, car-hire and local tours should help to stimulate foreign demand for services with little or no import leaks.

In the category of additional investments to underpin future growth, there should be a more aggressive roll-out of the green measures announced in the budget to make it accessible to more households and industries. We should also launch an urgent project to build elevated traffic solutions at the many traffic inter-sections where we waste too much time and fuel negotiating our way during rush hours.

Another thing government should do is to desist flattering itself for the decision to join the euro monetary union at the earliest possible day. The argument runs that had we not joined the Euro we would have been financially flattened out just like Iceland was. This is ludicrous. I still think that joining the Euro was a good decision and timely one as well. But stating that if we stayed out we would have been ‘Icelanded’ is an exaggeration. Iceland was flattened out financially because they partied too heavily when the going was good and over-leveraged their economy to make expensive foreign acquisitions.

It is probable that had Iceland been in the euro there would have been rule discipline which would have impeded them from such over-leverage excesses. That’s a fair argument. But stating that the same would have happened to us if we were out of the euro is not a fair argument. Outside the euro and within it, we always had conservative banking policies and our banks never ever contemplated undertaking aggressive foreign ventures leading to leverage of their balance sheet totally disproportionate to the country’s GDP.

Let’s focus on protecting the future rather than on exaggerating past achievements through illogic analogies.

Monday, 17 November 2008

Still Can`t Get It

16th November 2008
The Malta Independent on Sunday

Try as I may, I still can’t understand what the government is trying to achieve with Budget 2009. I was hoping that the Prime Minister’s reply to the criticism of the Opposition would somehow illuminate, but really the Prime Minister seemed to be talking about something far removed from the Budget his Minister of Finance presented to Parliament on 4 November.

There are two major issues which remain an enigma and for which I can’t find any explanation using a minimum of economic logic.

The Prime Minister, echoing his minister’s original presentation, placed great emphasis on the international economic gloom, which acts as a threatening background to our economic fortunes in 2009. He is right. None can dispute that our major trading partners are speedily slipping into a serious recession the length and depth of which remain highly uncertain. Dysfunctional financial markets could make the current recession much more damaging and painful than an ordinary cyclical one. As the financial system is constrained to de-leverage, credit is bound to become scarce and expensive notwithstanding desperate efforts by central banks to push down short-term interest rates. Without properly functioning credit markets, consumers will be forced to retrench their spending and businesses will be constrained to abandon their investment plans.

Lack of global demand will have unpleasant consequences on an open economy like ours, which depends on foreign demand for our manufacturing exports and for success in our tourism industry. The government’s estimates of real growth of 2.5 per cent for 2009 seem optimistic. Its expectations to increase the tax take by eight per cent bear no justification by normal economic growth, which even at nominal level will struggle to exceed five per cent.

So it is understandable that the Prime Minister in his reply put great stress on the economic need to use the budget to give an economic stimulus to compensate for the expected drop in foreign demand. So far so good! The problem is that the Budget 2009 provides no such stimulus. On the contrary, it caused a shock, indeed a series of shocks, which will reduce domestic consumption demand without providing additional demand on any significant scale through additional investments. Was the Prime Minister referring to the same Budget presented in Parliament, or does he have a Plan B we know nothing about?

To be considered as an economic stimulus, a Budget has to have two attributes. It would have to leave more spending power in consumers’ pockets to stimulate consumption demand. And it would have to increase the capital investment budget to mop up idle resources and build infrastructure that supports future growth.

The Budget 2009, taken in tandem with the revision of utility rates, has shocked consumers and takes away, rather than increases, their spending power. How can the Prime Minister speak of a fiscal stimulus if the deficit is expected to fall from e200 million in 2008 to e99 million in 2009. Arguments that the 2008 Budget has special items related to the shipyards’ early retirement schemes and energy support measures amounting to e99 million, do not alter the fact that in 2009 consumers will be left with e101 million less in spending power than in 2008. Even if for argument’s sake the special items are knocked off the 2008 revised deficit, is the adjusted deficit of e101 million of 2008 still projected to fall marginally to e99 million in 2009? So where is the economic stimulus? There can be no short-term impact economic stimulus without an increase in the deficit. That’s the stark reality the government seems oblivious to.

Even when it comes to the capital budget the government is planning a spend of e348 million. The government regularly under-spends this budget by some 20 per cent, principally due to our inability to handle the EU co-funding process with the necessary speed. If, as is typical, we spend about 80 per cent of the amount voted, the actual spend will be about e280 million, which is roughly on the same level of the 2008 spend. So where is the economic stimulus?

The other thing I just can’t get is why we are the only country in the world raising fuel and utility prices at a time when the cost of international energy is dropping like a rock. The Prime Minister made two arguments to try and explain this. Both are feeble and unsubstantial. He said that the price of refined oil is not falling as fast as the price of crude oil. This could well be so, but though prices of refined oil products do not move in perfect harmony with the prices of crude oil, both shadow each other closely and it is only a matter of time that refined oil prices will reflect the fall in the price of crude. Fuel prices at the pump in the US are already half of what they were at their peak.

Secondly, the Prime Minister said, and rightly so, that energy supplies are contracted forward and we are currently burning oil bought at high prices. Certainly, we should take the opportunity to buy or hedge forward at current prices so that we can average down the acquisition price to smoothen excessive price changes at retail level.

There is something sinister about the new utility rate system. Why is the structure being changed now? Is it to make it difficult to compare future reductions with prices under the present system? Now that we should expect a reduction in the surcharge due to the falling price of international energy, why are we being denied the transparency to make comparisons with the applicable surcharge of previous years?

Consider this. When the surcharge was fixed at 50 per cent in August 2007, the average price of crude oil was US$70. When this surcharge was revised in July 2008, the price of crude was peaking at US$147 and the surcharge was fixed at 95 per cent. However, we were warned that without subsidies and hedging gains the surcharge would have been fixed at 160 per cent. Going forward it is fair to assume that with the world in the throes of a recession the average price of crude oil in 2009 could stay within US$70 (currently it is US$58). So logic would suggest that rather than increase the 95 per cent surcharge further, it should soon go back to 50 per cent (or say 60 per cent to take account of the strengthening of the USD since last year).

The only reason why government is moving away from its own past logic is that it is changing the rules of the game without being open and frank about it. We have subtly moved from a long held model where profits from sale of petroleum products subsidise recurrent and investment costs for the generation and distribution of electricity, to a new model where generation and distribution of electricity should become commercially viable on its own merits.

I question the new logic. We are competing with countries who get their supply of water free from nature and who have economies of scale in the generation and distribution of electricity. What is wrong in cross subsidising Enemalta’s electricity division to remove disadvantages we have vis-à-vis competitors?

I am afraid there is a hidden agenda. We are privatising importation and distribution of petroleum products and in the process we are privatising assured profits previously used to subsidise electricity costs. Obviously, without this cross subsidy the consumer will have to bear the brunt not only of full recovery of recurrent costs for generation and distribution of electricity, but also to fund capital investments. Costings published in fact include a charge of e25.5 million being 6.61 per cent on capital employed of e386 million. This huge figure includes past as well as future investments.

In layman’s language, we have embarked on a regressive model where we are privatising profits and socialising losses. So much for social solidarity! And now that we are about to privatise the gas division, which will involve the removal of all subsidies and give yet another shock to the consumer, it is fair to question if the further increase, unjustified as it evidently is, in electricity rates is meant to favour the private operator of the gas division that needs expensive substitutes to maintain and increase the consumption of unsubsidised gas.

Or is all this part of scheme to put as much pain as possible at the beginning of the legislature to amass space for easing up in the run up to the next election? Once I can’t get it, I search for reasons beyond what is immediately obvious.

Friday, 14 November 2008

A Matter of Definition


14th November 2008

The Malta Independent - Friday Wisdom

I am always sceptical when politicians brand any initiatives with catchy words. The 2009 Budget has been labelled as the embodiment of responsibility, sustainability and solidarity. I think it is a matter of definition because from where I stand and according to my economic and social dictionary, the budget does not come anywhere near deserving being labelled responsible, sustainable and generating solidarity.

Let’s start with solidarity first. Where is the solidarity in bloating the 2008 budget with a deficit of thrice that projected to fund e56 million grants for shipyards’ able-bodied employees to take early retirement and now to fund such madness by taxing all the rest? What sort of solidarity is it to present exploded utility bills to unprotected private sector employees who are being hit by international recession and have to absorb a 25 per cent cut in their wage packet as their employer is forced to a 30-hour week? Public sector employees get bundles of cash to retire early while private sector employees get higher bills to pay from reduced salaries. Some solidarity!

What solidarity is being shown to families who cannot fit within the limited quota for green initiatives? Those most in need are the least capable firstly to finance their share of the proposed investment and secondly to seek and obtain the necessary technical advice leading to a proper and informed decision on how to save on energy consumption. A maximum of 5,700 households are expected to benefit from such schemes. The other 140,000 odd households will have to make do with the energy saving lamps that are being distributed more uniformly. Rather than trying to be all over the place spreading itself extremely thin, would it not have been more effective and proper if the budget voted a 75 per cent subsidy for installation of a solar water heater for every household and provided for condominium rule provisions for installation on inaccessible roof tops.

Sustainability is not evident either. We have inverted macro-economic use of fiscal policy right on its head. All governments, with few exceptions like Iceland who partied so heavily when the going was good that they have now to be rescued by the IMF’s austerity prescriptions, are putting together special fiscal stimulus packages to sustain domestic demand at a time when the recession will reduce external demand.

Our economy will also be affected by reduced external demand. Our exports are already showing it and sudden imposition of short work weeks at some of our factories indicates there is more in store for those outfits with long order to execution lead times. Our tourism will similarly be negatively impacted and as from November we will see statistics heading down compared to last year, leading to a very unwelcome trend reversal.

Thankfully, unlike many other European countries, our government did not need to fund any recapitalisation of the banking system so it should have had more fiscal room to manoeuvre a fiscal stimulus to the economy. Yet because in the election year we overspent as if there is no tomorrow, next year’s budget deficit will be half of the actual deficit of this year. Even if the “special items” related to shipyard early retirement schemes and the claimed Enemalta subsidy is detracted from this year’s budget, then next year’s deficit will only be marginally above the “adjusted” deficit of this year when the economy in reality needs a boost to fill the gap of falling external demand.

No, the budget is not sustainable. Projecting an income tax take increase of eight per cent when the economy will grow at a fraction of that, if at all, is not sustainable. The government claims credit for providing a capital budget of e348 million. From past experience, the government lacks the capacity to process such expenditures in a timely manner. In 2007, it under spent voted capital expenditure by 22 per cent. In 2008 it plans to under spend it by 16 per cent. There is an inbuilt inclination to over spend on recurrent budgets and under spend investment budgets. Possibly it is related to our restricted capacity to process co-funding from EU grants. So if we again under spend the capital budget in 2009 to the order of 20 per cent, which is quite the norm, the actual investment will be on the same scale as this year without getting any real additional impetus from the meant fiscal push.

The economy needs a shot in the arm and it needs it now. It cannot wait for the bureaucracy to process capital projects applications. If we do that we could be applying the medicine too late when it might not be needed because the patient would have recovered on his own steam after suffering unduly without the support of a fiscal stimulus. We need investments that make a difference and generate efficiency. The compulsory installation of a solar water heater in every household has already been mentioned. Building proper elevated road networks at main traffic intersections cannot be done soon enough. We waste too much time and money negotiating intersections like Kappara, Msida, l-Iklin and Marsa.

The budget is anything but responsible. Someone has to explain the logic of exploding utility rates at a time when the underlying cost of energy is dramatically falling. Even if we hedged at high prices we could average down the price by hedging further into the future at reduced rates rather than shock the economy by the sudden shift to full recovery of all recurring and investment costs, past as well as future. What responsibility is it that we are changing the surcharge structure now that the underlying prices are falling? If we kept the surcharge system the consumer would have had transparency in seeing prices charged adjusted to international fluctuations in energy costs. But with the confused system now being proposed, easy comparison is impossible. This looks like a purposeful fudge to eliminate transparency.

If the government says that the opposition’s claim that the new price structure is equivalent to a surcharge of 194 per cent is an exaggeration, can the government kindly explain what surcharge is it equivalent to?

Let’s establish some facts. In August 2007, when the price of crude oil was USD 70 per barrel, the government fixed the surcharge at 50 per cent, where it stayed till June 2008 to ride peacefully through the elections. In July 2008, when the price of oil peaked at USD147 per barrel, DOI press release 0939 stated that at this level without any gains from hedging agreements, the surcharge should have been 160 per cent but could reduce to 115 per cent after taking the benefit of hedging covers.

The government then considered that at 115 per cent the surcharge would put too much pressure on consumers and subsidised in part reducing the surcharge to 95 per cent. Now the price of crude is less than USD60 per barrel and falling. Consequently the surcharge, permitting full recovery should be, by the government’s own calculations, around 60 per cent after taking into account the strengthening of the dollar rate of exchange to the euro.

How could the government call this budget responsible if it does not give proper explanation of why the world all over is being treated with lower fuel and utility prices and we are being oppressed by inexplicable higher prices resulting from monopoly power and political calculations to put all the pain in the front years of the legislature.

Responsibility, sustainability and solidarity are in scarce supply in the 2009 budget.

Thursday, 13 November 2008

Looking into the 50 year future Mirror of Economics

13th November 2008

The Times of Malta
BPC Future Pointers to celebrate their 50th anniversary

Economists are generally better at explaining why yesterday’s prediction about today did not get realized than in making accurate forecasts about tomorrow. That is a health warning readers would do well to bear in mind.

And whilst in the investment world we generally attach a health warning that past performance is no guarantee to future results in futurology past performance is a good guide for indicating at least the extent of changes to be expected.

So let me start by giving a glance back to where we have come from over the last fifty years. Our economy then was totally dependent on the spending of the military base which oscillated according to the needs of a disintegrating British Empire. As the colonial masters were economising on their military spend, economic activity was getting progressively insufficient for offering employment opportunities to the growing population. Emigration was the safety valve to keep economic resources in balance.

If I were writing this piece 50 years ago would I have been able to predict that mass emigration would in fact reverse and nowadays we have generated a high degree of economic activity, totally unrelated to any military spending by a foreign power, to offer not only full employment for all able bodied who wish to work, but also offer employment to foreign nationals who come to work here, some legally and quite a few even illegally? It would have taken a brave man to make such a forecast.

What has contributed to this stratospheric change where more development has occurred in the last 50 years than in all previous millennia of civilisation on this island combined? Without any doubt it is the people’s will to invest in their own country. Their belief that irrespective of doubts that could have emerged from research studies about the sustainability of a micro state in a globalised economy, local investors believed that this is a place where they can do business and where foreign investors would be attracted to do business ranging from manufacturing to tourism, from financial services to real estate development, from logistical distribution to internet gaming, from ICT to back office operations.

So let it be clear that I am positive about Malta’s economic potential for the short and for the long term. We have overcome great challenges over the last 50 years and we will do it again for the future whatever it may bring.

Even on a global basis I am confident that none of the endoftheworld scenarios will materialise. We will not have an ‘end of oil’ disaster or a crippling environmental wreck. Humans have adjusted to all challenges and market forces will ensure that if oil gets short its high price will be the source of innovation for viable alternatives which over fifty years could possibly make fossil fuels irrelevant and in the process addressing the problem of carbon dioxide induced global warming. The only thing which is bigger than man’s ability to invent is Mother Nature’s and market forces’ ability to correct our excesses leading to long term sustainability. Mother Nature and market forces are bigger than us and as in the past they will step in to save us from ourselves by forcing upon us painful but temporary corrective measures along the way.

What will this place look like in the year 2058 depends mostly on us. But who will be the ‘us’ of 2058?

There is every likelihood that we would be a much more mixed population where the traditional Maltese race (there is no pure Maltese race as we are ourselves a result of mix of the various civilisations of our ancestors) will be sprinkled with a high percentage of new Maltese nationals with foreign blood in their veins be they African immigrants or European nationals opting to domicile themselves in what is to me one of the most comfortable places to live on this earth.

This dilution to our traditional composition will be a severe threat to the only factor which has so far distinguished us amongst all people of the world i.e. our language. As we continue to make investments to protect our physical heritage, which is itself a great economic asset that generates substantial economic activity mostly through tourism, we have to be very vigilant to protect the soft heritage of our national language by keeping it a crucial part of our curriculum and by promoting its continued usage in everyday life.

Another probable feature of the ‘us’ of 2058 is that we will be much older on average mostly as a result of extension of life into triple digits years. Aubrey de Grey, a biogerontologist at Cambridge University maintains that the first person who will live forever is probably already alive. Such predictions may be mere fantasy but de Grey firmly asserts that the laws of probabilities indicate that medical breakthroughs in discovering the composition of our genes will in the next decades put humans in an ability to slow, stall or even reverse the aging process of the human body.

Irrespective of whether de Grey is a day dreamer or not, there is no doubt that longevity is an accelerating reality. We have extended average longevity by some twenty years over the last fifty years and probably can do better than that in the next fifty.

This will have grave economic consequences and will change the way we live in a manner that is presently unimaginable. Very probably the present concept of retiring on pension will gradually disappear. Longevity will make current pension arrangements unsustainable or irrelevant in quantum terms thus forcing people to continue working indefinitely for as long as their health permits. As work will be much more brain intensive requiring little or no physical effort and offering flexibility on the location where employee services have to be imparted (most employees will be able to work from their own home without having to attend the office regularly) working until death could well be the norm fifty years down the road. It will not be punitive. It may well be fun and the only way to keep up a comfortable lifestyle for forty or fifty years beyond current retirement age.

An average life in triple digits will bring a metamorphosis of change in the lifestyle of all age groups. Youth will be extended well in the thirties so it is quite probable that ‘youngsters’ will settle into marriage much later in life than is the current practice so that parenthood in the forties could well become the norm.

Enjoying a much longer youth will generate explosive demand for the things that youths normally consume with particular emphasis on entertainment, travel, personal hygiene and fashion clothing. Brand building will continue to be paramount given youth’s preference for recognition through brands.

Reaching parenthood beyond age forty will obviously mean that families will continue to get smaller with one child becoming the rule and two children more and more the exception. This will help to keep population in check at current levels as the extension in longevity will be compensated by slower inputs from reduced births. This will make currently frowned upon immigration an economic necessity in order to have the enough labour resources for the jobs needed to sustain the high economic development necessary to sustain our standard of living aspirations.

What is not clear is from where the immigrants would be coming from. I expect that Africa will undergo a huge economic revolution in the next fifty years. It is ripe for development, rich as it is in natural resources in a world which is continually demanding more and more from nature. If this were to happen the flow of African immigration could stop or indeed reverse as has been the experience with immigration from Eastern European countries since they were integrated into the EU. Could it be that our guest workers of 2058, rather that economic immigrants seeking to avoid war and hunger in their native country, would be lifestyle immigrants who seek a better life in a small Mediterranean island rather than in a sombre and soulless European metropolis?

Smaller families demand smaller homes and the current trend of switching from villas to apartments will continue unabated and the 90 sq metre apartment will become the norm as property prices and environmental need to control urban sprawl will force our successors to continue to develop vertically. So whilst the sector could presently be undergoing a plateau of no growth or outright retraction, caused by overdevelopment leading to temporary oversupply, the long term trend for higher real estate values remains intact.

How would we be earning our living fifty years hence? If we have to remain competitive and sustain an ever improving living standard we have to continue moving up the technology scale performing brain intensive, high value added activities. Consequently I would say that manufacturing would be largely wiped out and instead we would be competitive in research and development activities supporting manufacturing which would be generally executed in Africa which would be the cheapest location and close to availability of raw materials.

Our strategic location will make our logistics services very competitive and very much in demand where our Freeport services will continue to grow with additional services which will encompass most of the southern harbour extending beyond B’Bugia into Marsaxlokk and Marsaskala.

Tourism and leisure services will remain our mainstay. It will be different tourism though. If we invest wisely in the MALTA brand without expecting instant results but consistently building our long term image we could become an all year round location. Cruise tourism will become much more important forcing us to extend the whole Grand and Marsamxett harbours to support cruise liner visits. The development of populous Asia will create a much higher flow of Chinese, Indian, and what have you Asian tourists to visit the old continent and quite a few of them will tour the Mediterranean via a cruise holiday. Our objective should remain that of acting as head station for the cruise line operators making it easier for cruise passengers to extend their stay amongst us before or after the cruise.

To achieve our tourist potential we will need much more quality accommodation which becomes economically feasible given the all year nature of the tourism we will be attracting. I think we will see outer Valletta and Floriana as particularly suitable for the next concentration of quality hotels given the superb scenery they get over our two city harbours. Boutique hotels in Valletta and the three cities will also flourish mainly owner managed by members of the owner family.

ICT and financial services will replace manufacturing and government services as the other two main pillars of our economy. Our ability to tap into niches by adapting flexibly to the needs of international investors will give us the momentum to attract big names in the ICT and financial world to do international business from our island especially as we can act as their base for penetrating the growing African economies.

Education will develop into an important industry on its own even serving international clientele. We will extend our success in the teaching of English to other areas. Lifelong working needs continuous retraining to ensure workers keep abreast of wave after wave of technological development which will continue to hit us more frequently with shorter intervals.

What are the risks to this scenario? Being an optimist I see the risks as unavoidable hiccups to overcome on the 50 year journey but which will not deflect the general trend towards a prosperous destination. Certainly there will be geopolitical problems and threats of terrorism but I fell that economic interdependence will make it unlikely that the world could see major international hostilities as experienced in the troubled first half of the 20th century.

I see that Russia, squeezed as it is by the USA on one side and a more powerful and assertive China on the other side, and extremely dependent as it is on energy exports which render it gravely exposed to technological breakthroughs for energy alternatives, will gradually realize that its future is better served by integration within the European dream which will thus extend to Urals and beyond, integrating all former soviet republics and Balkan countries right up the Turkish borders of Iraq into a much looser EU where members will have flexibility to opt in and out of certain arrangements outside the basic compulsiveness of the single market.

The world will be multipolar with the US , Europe and China sharing world political power and vying for influence in the African continent which will become the basic theme of the 21st century. The time for Africa has come and the impetus will start from the FIFA World Cup in South Africa in 2010 which will be followed up by hosting of other international mass exposure activities in the following decades.

India could also be tempted to export their influence westwards to establish their influence in a Middle East which will however be void of the strategic importance it currently has if it loses its oil export dominance.

So many things could change over 50 years. I would probably not need to tap this onto my PC if I were to live till then. We will probably have computers that can read the mind and robots that can run our households. But one thing will not change. The need to eat drink and enjoy leisure will remain. So let’s take the next fifty years day by day with a good meal, a fine glass of wine and enjoyment all the way.



Friday, 7 November 2008

Yes we Can - No we Cannot

7th November 2008

The Malta Independent - Friday Wisdom

President elect Barack Obama’s battle cry for his successful election as the 44th President of the United States was ‘Yes we can’.

It has been indeed an incredible achievement for an Afro-American to win presidency with a landslide. His ascendency from obscurity to the highest post in the short space of four years is stuff dreams are made of.

It was in the Democratic National Convention in July 2004 where John Kerry was mandated to challenge (unsuccessfully as it eventually turned out) George W Bush for the presidential elections of November 2004 that Obama was introduced to America and to the world.

Beating the challenge of favourite Hilary Clinton for the party nomination was a feat that was unimaginable just 12 months ago. Raising an incredible amount of internet based ‘democratic’ contributions to fund his sparkling election campaign and energising youths to participate and vote in elections they would generally disregard, have been basic ingredients which led to ultimate success.

Luck lent a hand too. The financial turmoil which escalated in the last 2 months of the campaign would have given a great advantage to anyone contesting a representative from the incumbent party occupying the White House. Obama capitalised on this luck by appearing as steadier than John McCain who seemed to sway his position on a daily basis. McCain started by saying that the fundamentals of the US economy are strong, when clearly they are not, and finished by criticising colleague President Bush for not doing enough to help homeowners losing their property through foreclosure. He cooked up confusing instant recipes for such help on the trot.

‘Yes we can’ impressed the US electorate and indeed the international public opinion, who would have elected Obama with a higher margin if they had a vote, that he is a transformational leader, one in a generation, who can bring a new approach to resolve old problems and to restore America’s economic ship and geo-political weight by seeking engagement and co-operation rather by venturing on lone ill-thought adventures which characterised W’s presidency.

Early this year (The Malta Independent on Sunday 13 January 2008 – The Mark of a New Generation) I had opined:

“He is the only candidate who shows a preference for persuasion before guns and offers dialogue to America’s enemies almost in biblical spirit where the Son of God was willing to speak to sinners because it is the sick that need the doctor.

Free from support ties of the establishment and gaining substantial funding with minimum reliance on corporate handouts, Obama seems to carry more credibility in his claim to give America a social soul starting with universal health care. Obama is shaping up for America into something like what Tony Blair was for Britain but without the Iraq baggage which tarnished Blair’s legacy.

It is far too early to hold out any reasonable hope that Obama can build enough momentum to seize the Democratic Party nomination from the hands of Hillary Clinton, who seemed to have it already wrapped up before the start of the primaries. But if Obama can pull a feat of gigantic proportions and become the next President of the United States, we can certainly speak of 2008 as a year when the new generation takes over the running of this world from the baby boomers who did not live up to their promise to free the world from war and to make society more just and honest.”

Against all odds Obama has showed the world that truly “Yes we can”.

What a contrast this was to the message coming out from the Budget for 2009 presented in parliament last Monday. If there is a tag line worth attaching to this Budget it is “No we cannot”.

Can we raise politics to a new level and start preparing budgets based on what the economy truly needs rather than on political calculations in the interest of the party in government? No we cannot. To generate a false sense of feel good factor for the upcoming elections government pumped up the economy last year when prudence would have suggested moderation. It deliberately underpriced utility bills hiding that the appointment with reality was merely being postponed till after the elections.

Now that an international recession of worrying proportions is well on the horizon and prudent economic management would suggest fiscal and monetary loosening, government is constrained to rein in last year’s excesses.

Can we start passing back to the consumers, reductions in the international price of energy which is leading to dramatic falls in prices of fuel at the pump in other countries? No we cannot. On the contrary, we increase the price of petrol and diesel purportedly to fund green eco initiatives announced in the budget. I could understand not reducing prices to channel savings from lower energy prices to such purposes but outrightly increasing prices when international energy prices are half what they were last July is just incomprehensible.

Can we properly explain why we cannot reduce utility rates which were increased 30% last July when energy prices were double what they are today? No we cannot. On the contrary, we raise utility rates again ahead of the budget supposedly to abort a subsidy of e55 million which is imaginary and which is nothing but an excuse to hide cost overruns related to other recurrent expenditure largesse to get re-elected.

Can we explain the logic of why we paid e56 million to induce able bodied at the Shipyards to accept early retirement and are now constrained to increase taxes when in fact we should be loosening them to protect the economy from the coming external shocks? No we cannot.

Can we explain why the Public Transport Reform is being again postponed to 2010 and this after having suffered a crippling strike to liberalise hearse transport which in reality needs regulation not liberalisation and are instead keeping for yet another year regulation over other forms of public transport which desperately need to be liberalised? No we cannot.

Can we explain why rather than dismantling bureaucracy we are compounding it? No we cannot. New cars registered in 2008 can switch to the new system of lower registration tax but only recoup their overpayment by offsetting future annual road licenses. If we overpaid cash, we should be refunded cash rather than create complicated and expensive time consuming bureaucracy.

Can we explain why the Budget does not even mention how the much heralded Pension Reform is to continue being rolled out through fiscal incentives for the creation of private pension schemes? No we cannot.

The Americans sing Yes we Can to the most improbable and difficult things. We lament No We Cannot even to the most obvious and sensible.