Friday, 30 January 2009

What Recession

30th January 2009

The Malta Independent - Friday Wisdom

Reading the weekend papers left me undecided whether to laugh or cry. On one hand we had the optimists telling us that our economy is defying economic logic because instead of being bowled over by the big recession tsunami, we are one of the few countries still expected to register some marginal growth in 2009 even though this will be well below the 2.5 per cent envisaged when the Budget for 2009 was presented last November.

We had the Prime Minister reportedly saying in an interview with Frankfurter Allgemeine Zeitung that “fortunately, the financial crisis hasn’t hit us yet. Our banks have always had plenty of liquidity and are not cross-linked with the international banks affected”. Yet mysteriously and in contradiction he told the same newspaper that “Without the euro, Malta would probably be doing much worse than Iceland today: we would be bankrupt.” Can somebody explain how we would be bankrupt if we have no exposure to international borrowing the same way Iceland and its banks had? Can somebody explain how Ireland, in spite of it being a founder euro member, is being bowled over by the recession and has practically had to nationalise its banking system to keep it floating?

Let me say it again loud and clear. I agree that the decision to join the euro and to do so as quickly as possible was the right one. Prosit! But saying that without the euro we would be bankrupt is a non sequitur, it denigrates home grown economic stability, and it is a useless exercise in giving or taking credit where none is due. On top of that, stating that without the euro we would be bankrupt, is not a very good way to persuade investors about our intrinsic financial stability, especially when there are growing doubts about sustainability of the euro system itself if the credit status of some constituent countries continues to deteriorate as they get crushed by the recession.

In the midst of all this self praise and congratulatory overdose we had some terrible news relating to the future of ST Microelectronics, the largest private sector employer, the largest exporter and Malta’s flagship in the technology sector. It is rumoured that ST are seriously reconsidering relocating part or the whole of their manufacturing operations to lower cost territories and possibly to dollar based economies given that ST conducts the bulk of its sales in USD.

This news came just two days before ST announced a loss in the fourth quarter 2008 when the market was expecting a profit given that competitors Texas Instruments had a positive fourth quarter. In fact ST’s parent announced job cuts and cost cuts to stay competitive although they gave no details of where jobs will be cut and whether the cost cuts will come from relocations affecting their Malta outfit. (This article was submitted before yesterday’s announcement by ST regarding redundancies.)

I think the most illuminating point in the midst of these conflicting signals came from the editorial of The Malta Independent on Sunday who quizzed whether our outperforming our main trading partners in terms of relative economic growth prospected for 2009 is “either because we are so small that storms, like the meteorological one last week that was forecast as a ‘near-cyclone’, just pass us by. Or else the tsunami waves will reach us later, after they have reached just about everybody else. Or else, somehow – because we are not exactly known for this – we have somehow got it right, whereas others just did not.”

In short, we are more capable, more lucky or just more stupid that we cannot see that the economic tsunami will hit us with a time lag.

I think we are a bit of all three.

We are more lucky because we inherited from our forefathers a strong thrift culture which renders our economy liquid enough to finance its own development without recourse to external borrowing. The success of a private sector real estate related bond issue which was over-subscribed by the public in a matter of hours would not have been possible in the present circumstances in any other economy which is not as liquid as ours, or at least the issue would have had to be priced much more aggressively than it was the case here.

We are more stupid because we are wasting energy complimenting ourselves that we are better than the others without taking protective measures to safeguard against the tsunami which unless a miracle happens will hit us with force in the summer months. We have a situation where the property market has gone flat. We have a situation where some of our foremost manufacturing outlets, ST included, may have to downsize or re-locate in part or in whole. We have a situation where our tourist figures had a sharp trend reversal as from last October.

Take tourism. There is no doubt we are having a bad winter season especially compared to last winter, which was one of the best in the last decade. However, bad winter tourist seasons are not catastrophic. Rates and occupancies are low in any case. The real test will be whether the peak season, from April to October, where our hotels normally charge peak rates and enjoy topnotch occupancy ratios, will be as good as last year or will experience a drop in both rates and occupancies.

Even a mere 10 per cent reduction in occupancy and 10 per cent reduction in room rates will drop revenue by nearly 20 per cent which could well wipe away the bottom line surplus for the whole year. Given the high multiplier effect of tourism, summer would be the time to judge whether we are being affected or not by the worldwide economic recession.

We are also a bit more capable. Our smallness gives us resilience to take measures quickly and more flexibly. We have immense ability to adjust consumption to current realities and to do so quickly. Given that consumption is mostly imported rather than home produced, such consumption adjustment will not further depress the macro-economic realities as happens in large economies such as the US and the UK.

It is undue optimism to assume that we will fare better than others during the recession of 2009. Unfortunately this depends on factors beyond our sphere of influence. We should not just trust our luck and passively rely on our unquestioned resilience. We should hope for the best but prepare for the worst.


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