Dubai Standstill Rocks the World

29^th November 2009

The Malta Independent on Sunday

Alfred Mifsud

Late last Wednesday, the European financial markets had wrapped up for the day as they normally do every weekday evening. The US markets were still open, but with Thanksgiving the next day, and many operators bridging the holiday to the weekend, the market was practically dead.

In the capital markets of the Middle East, operators had also wrapped up for the start of the weeklong holiday of Eid-al-Adha. The mood was bullish, because just that morning, Dubai has announced it had raised finance amounting to $5 billion from two Abu Dhabi banks, in addition to the $10 billion raised in February from the Federal Central Bank of the UAE, which is dominated by Abu Dhabi.

The Emirate of Dubai was considered the most exposed to the international financial crisis, as it was highly leveraged (over-borrowed. in laymen’s terms) and the credit crunch put in doubt its ability to meet its obligations, due to the difficulty of rolling-over its debts in an illiquid market. On its own standing, Dubai would probably never have been able to raise the funding in the first place but it was not standing on its own. It is the second largest of seven Emirates which together form the United Arab Emirates (UAE) – a political federation of autonomous states that operate their fiscal policies independently.

In reality, Dubai is a poor nephew with a rich uncle in the form of Abu Dhabi, the extremely resourceful and cash-rich main Emirate of the UAE. The markets always assumed that, over-borrowed as it was, Dubai remained a fair risk, as the rich uncle would always come to its rescue. Rich in oil and conservative in outlook, Abu Dhabi viewed Dubai’s penchant for frolic and folly with distaste and occasional envy. Nothing else explains how the two Emirates compete to the point of folly in operating separate airlines (Emirates and Etihad) rather than joining forces to gain economies of scale. Nothing else explains how Dubai could afford the tallest building in the world, oddly shaped hotels in the middle of the harbour, luxury residential palm-shaped projects on land reclaimed from the sea, golf courses in the middle of the desert, ice rinks in scorching heat and investments in relics like the QE II cruise liner and the Circle de Soleil troupe.

Then, late on Wednesday, when turkeys were being stuffed for roasting in the US and Middle East financial operators had already left for an extended holiday, Dubai issued a statement that rocked the financial world. They told the world that uncle Abu Dhabi was tired of bailing them out and consequently they were forced to request the creditors of one of the main holding companies, Dubai World, to standstill (postpone repayments falling due) for the next six months until they could persuade their rich uncle to cough up the money in order to keep the nephew on the straight and narrow without bringing the whole family into disrepute.

With liquidity from the US market out of the equation due to Thanksgiving, and markets in the Middle East shut for Eid-al-Adha, European markets had a very rough Thursday and shed three per cent in one of the worst days since the bottom of the financial crisis was reached last March.

It still has to be seen whether this is a localised problem, which could be sorted out when the rich uncle thinks he has spanked the naughty nephew enough to teach him a lesson and has obtained enough financial concession (maybe ownership of Emirates could be part of the equation?) to make a bail-out worthwhile, or whether this could lead to contagion that spreads to other over-borrowed creditors, including EU members Latvia and Hungary and eurozone member Greece.

Is this the precursor of similar problems, such as the sovereign debt of Greece – where doubts are creeping in over whether it can keep its exploding fiscal deficit under control? The financial market has already begun demanding much wider spreads in return for continuing to finance Greece’s external borrowing. Being a member of the eurozone, Greece’s uncle would be Germany who, in order to keep the euro monetary system together, will have to come to the rescue of the naughty Greek nephew. What price Greece would have to pay to procure such a bail out? Would Germany insist on taking direct control of Greece’s fiscal policies? Would this be done bilaterally, through the European Central Bank or may be through a sponsored rescue by the IMF?

We are not disinterested bystanders in all of this. We have an interest in the sustainability of the euro monetary system, which is now our own currency. We have an interest in the financial sustainability of Dubai.

In its spending spree when credit was easy, Dubai – through one of its state-sponsored enterprises – bought out our own Maltacom and signed an agreement for the development of SmartCity. Maltacom’s purchase is fully funded and the rebranded organisation GO is, in fact, participating in and helping to finance other Dubai ventures in Greece. So it should not be at risk.

SmartCity, however, is not yet funded. The feasibility of procuring its funding and the viability of the project in a changed economic scenario are, at best, in doubt. Although our government has, in the past, put great reliance on the SmartCity project to take up the construction slack created by the cooling down of the property market and the termination of other major infrastructure projects, suddenly there is complete silence. Not even a paragraph in the last budget speech was dedicated to up-dating us on the state of SmartCity.

Executive turnover at the highest level of the project team, and snail’s pace progress of the development on the ground, forces any reasonable observer to conclude that the project is at best being slowed down and at worst being considered for outright postponement.

We have to be realists. If Dubai has problems in servicing its existing debts, is it reasonable to expect that it can finance new investment in an overseas country that is not yet funded?

Government has to defend the country’s long-term interests and seek clarity from the promoters about their intentions for the SmartCity project. In the end, this project was considered as a major chip in the future growth of our economy and we cannot continue to lead by hope: hope does not create jobs.

These developments come with a strong moral. Government should kick the habit of celebrating new projects at the point of their announcement. We have just had a similar experience where, in the Prime Minister’s reply to the Leader of the Opposition’s criticism of the budget, he simply washed away all disparagement on the basis that the investment in an aviation maintenance project – ‘coincidentally’ announced on that every same day – showed that the country was still capable of attracting high value-added international foreign direct investment and, by inference, export-led economic growth will soon return.

Let’s rejoice that such investment is being planned. Let’s keep hope that that SmartCity can be realised by the Dubai promoters, or other investors who may be interested in taking over. But let’s build our economic plans with our feet firmly on the ground and only celebrate actual execution and commercial operational success, as is the case with Lufthansa Technik. Premature celebrations purely to score political points have a tendency of biting back when reality hits home.

 

Going Against the Grain

Going Against the Grain

27^th November 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

I admire people who take a stand which separates them from the mainstream, provided they do so out of conviction not convenience.

In the investment world such people are called contrarians. Investor par excellence Warren Buffett makes his largest investments at times of crisis. He takes a back seat when everyone else is exuberant. His famous quote is to be fearful when all around are bullish and bullish when all around are fearful.

In economic terms contrarians are generally referred to as prophets of doom. Among the few economists who came close to forecasting the financial crisis there is Nassim Nicholas Taleb who in his book The Black Swan had forewarned that the mathematical thinking which has dominated economic teaching in the freshwater universities (universities around the Chicago area near the lake freshwater) were rubbishing real economics which has to take account of people’s feelings and expectations. The feelings of fear and greed change over time and cannot be adequately captured by statistical models. Such mood shifts had inevitably to produce a black swan which does not sit within the bell shape curve of mathematical probabilities. The black swan of 2007/2009 proved he was right and the mainstream of rocket science economic mathematicians were wrong when they considered such an event as unlikely as the end of the world.

Nouriel Roubini has been tagged as Dr Doom, even though he protests he should be called Dr Realist, because he had been warning about the financial collapse when banks were still partying and jacking up their leverage, oblivion to the risks ignored by their faulty mathematical models.

Where I part company with contrarians is when they act irresponsibly and continue to be eternal optimists in the face of unquestionable adversity.

During these difficult economic times the general posture is one of survival with consumers and entrepreneurs cutting back on non-essential consumption and postponing investments. While this makes sense at the micro level, if adopted widely the cumulative lack of consumption and investment will throw the economy into reverse gear resulting in a recession which if prolonged could develop into a depression.

So governments have stepped in to fill the spending gap to sustain economic activity. They do this both through higher spending, mostly by launching productive infrastructural investments or by reducing taxes to leave more spending power in the hands of consumers hoping they would spend it rather than save it. In so doing governments are like pushing a car whose engine would not start. They push it by incurring higher deficits, temporarily, to give the car momentum to start on its gear and then hoping to recover the deficit once the economic engine starts firing on its own steam.

So I am full of admiration for such projects as refurbishing the new Palace Square. I know people much more qualified than me have expressed reservation about the modern feel being given to the old square but partly because I don’t feel qualified enough and partly because I prefer to see the real thing before commenting, I brush such reservations aside and applaud the implementation of such projects at these recessionary times.

Where I get knocked out by our contrarians is when I read that a celebration is being organised for the re-opening of Palace Square that will be choreographed by Jochen Schweizer, who was responsible for the celebrations marking the restoration of the Bradenburg Gate and the opening of the Petronas Towers in Malaysia and the Rockfeller Center in New York. We have been further informed that a detailed programme of the celebration events will be mailed to each household and advertised in the media. On TV news it was stated that the budget for the celebration events is ‘somewhat’ smaller than the budget for the hard spend on the project. If this is not misplaced optimism when cautiousness is needed, than I don’t know what it is.

For goodness sake why do we have to make things so out of proportion? We are talking about a refurbishment and redesign of a city square not a multi billion project. Does it make sense to spend such out of proportion budgets on soft celebrations rather than on lasting hard projects? Or is this a mere attempt to build some feel good factor to mitigate the pain of the recession and to cushion the blow once the revised utility rates get announced?

Another one who went against the trend this week is Minister John Dalli who has accepted the Cabinet’s nomination for EU Commissioner. While many nationalist MPs are in silent, and not so silent, revolt for being kept out of a Cabinet post, Minister Dalli is moving out of Cabinet to take residence in Brussels. The next election will be the first one since 1987 he will not be contesting.

It would be wrong however to conclude Dalli is closing the door upon a return to local politics. We have had many instances of Commissioners who give up their post to take a new role in domestic politics if circumstances change. The latest sample is Lord Peter Mandelson who gave up his EU Commissioner of Trade appointment to take a high level Ministerial role in Gordon Brown’s cabinet where de facto he is considered as the second in command.

It is difficult to escape the conclusion that the Prime Minister’s motivation was more an upstairs kick than to reward Brussels with our best brains. But the move suits Dalli too. If the PN loses the next election he will not carry any guilt and would have the credentials to challenge for leadership of the PN once Gonzi probably decides he has had enough of politics or the other way round. If the PN wins, obviously Dalli will phase himself into retirement at age 66 after a five year stint as EU Commissioner.

What I will be watching out as we approach the next general elections is whether Gonzi will take steps to anoint his successor to block Dalli’s potential return and ensure that his move to Brussels is a one way trip out of Maltese politics. Interesting times await.

Wealth or Debt

Wealth or Debt?

20^th November 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

“Government decided to establish the National Investment Fund to serve as a means of long-term investment for our country. This Fund aims to create new sources of revenue for Government in order to decrease Government’s dependence on direct and indirect tax revenue from our people.

This Fund will be an institution that is directed on purely commercial lines from a team of professional people. The Fund will have a committee to draft the fund’s investment policy and its financial aims.

The intention is for the Fund to work in three main areas:

1. The management and direction of Government commercial property with the aim of maximising the State’s revenue from this property;

2. To hold investments in stocks and shares, both local and foreign, and with no controlling interest; and

3. To invest in national projects or projects of a strategic nature for the country, like the ones connected to the regeneration of Valletta.”

The setting up of the National Investment Fund (NIF) announced in the above short extract from the Budget Speech for 2010 has not attracted the attention it deserves. Indeed this is possibly so because the announcement was very scant on details and even in its brevity it tends to be contradictory.

Take the first paragraph. If the Fund is to have a long-term time horizon the government can hardly expect it to provide new sources of revenue to reduce its dependence on taxation. Also the announcement that the Fund will have a committee to draft the Fund’s investment policy and financial aims seems to conflict with its being directed on pure commercial lines.

Hopefully its directors will not simply draft the investment policy and objectives but also take active responsibility for the choice and management of the investments undertaken and that its decisions will be autonomous and independent from political influence of government appointing them. Some security of tenure for such directors needs to be built into the structure to ensure that their autonomy is effective in practice not just in theory.

We have seen this before. In the ‘bad old’ Mintoff days we had a Posterity Fund. It was created when Mintoff wanted to create a budget deficit following loss of earnings from the closure of the military base so as to make a case with foreign governments seeking a financial contribution to ease the pain of financial loss through the closure of the base. So charges started being made to the consolidated fund to create a Posterity Fund, which as the name implies was meant to undertake long term investments for the benefit of future generations.

As it so happened when the recession of the first half of the 1980s hit us these funds had to be lent out to ailing para-statal corporations with very scant prospects for recovery, including our shipyards, so that eventually the incoming nationalist administration of 1987 closed the Posterity Fund and transferred all the claims to central government.

Many countries, particularly those resource based like Norway, Russia, Opec members and China have since adopted the idea of creating what are technically referred to as SWF’s – Sovereign Wealth Funds. Acknowledging that resources are not limitless, SWF’s are created to safeguard the welfare of future generations who have an interest in the resources being exploited by the current generation. Consequently part of the revenues from current exploitation of natural resources are set apart in a separate fund which conducts the sort of investments as intended for our own new NIF conception. It is particularly symptomatic of its economic success, that Singapore, in spite of not being a resource based economy, has accumulated two very significant SWF’s which are major participants in the international private equity arena.

Our NIF will not be a SWF. We just don’t have the funds to put into it. Government is still nursing a chronic budget deficit and a high national debt level and basically the State simply does not have liquid funds to put aside for the creation of a SWF. So how exactly will our NIF be structured?

A critical reading of the brief announcement indicates that rather than a Wealth Fund this is expected to be a Debt fund. In the absence of an endowment in liquid form from the government, the NIF can only achieve objectives 2 and 3 above by raising debt possibly by using the security of the real estate which will be endowed to it under objective 1.

However objective 1. only speaks of ‘management and direction’ of government’s commercial property and does not include transfer of ownership. So there is doubtful possibility of using this government’s property to raise capital funding.

To get an idea of where the government is proposing to procure funding for the NIF one has to go back to the following extract from the 2006-2102 pre-budget document attractively stamped all over with ‘A Better Quality of Life’ branding.

“Government is looking at the possibility of moving forward the idea of securitisation of property. This entails the formation of a public company owning government property with an invitation to the public to invest in it leaving its management in private hands. The aim is to commercially exploit to the full a major government asset without the need to sell that asset but rather to create an investment vehicle open to the public.”

I had commented on this in an article in this series dated 19 August 2005 titled Selling Castille:

“This might look like a complicated financial structure but in reality it is quite simple. Through cool securitisation, the government could sell Castille to a government-owned public company which raises bonds from public subscription to pay the funds to the government. The government will then lease back Castille from the public company to give it cash flows to pay interest to bond holders and agree either to buy back the property at the end of the loan or to roll over the lease for a further period if the public financing vehicle rolls over the maturing bonds into new bonds.”

The idea has been brought back to life even though the international financial crisis has given securitisation a bad name. The subject however will not be Castille as I had half-jokingly said but will be the Valletta Regeneration Project including the City Gate project for which no funds have been directly voted in Budget 2010.

To my simple mind we are not creating a National Investment Fund. We are creating a vehicle to finance capital expenditure outside the budget and thus allow room for manoeuvre for government to achieve budget sanity in the medium term without cutting back on real investment. This sounds technically logical but in reality it is just swings and roundabouts.

What is not logical is the Minister’s statement in the Budget that for the NIF “the project will be regarded as an investment which will be leased to the Maltese State over a number of years. This means that this project’s funding will not be a burden on the taxes of the people of Malta and Gozo.” Sorry Minister, the Fund belongs to the people and all burdens and rights of the Fund belong to the people. Shifting loans and assets from one pocket to the other does not create wealth, just the same way Mintoff’s Posterity Fund did not.   

Unintended Consequences

Unintended Consequences

15^th November 2009

The Malta Independent on Sunday

Alfred Mifsud

Minister Tonio Fenech’s second budget marks a stark contrast with his first, which was rendered irrelevant before he even read it in parliament this time last year. Never can I recall a budget that goes way off the mark as much as the budget for 2009.

It was framed on the false hypothesis for economic growth slightly below the normal trend line, when in fact all indications were that 2009 would be a year of negative growth caused by the recession resulting from the international financial crisis. Once this main hypothesis proved false, all else went way off the mark with a resulting deficit two-and-a-half times that projected, even though the government did not have to intervene to recapitalise our banking system and even though no specific stimulus measures were provided.

Perhaps I should say that the large deficit resulted because no stimulus measures were provided for in the 2009 budget, against the general advice of the economic corps and of the EU itself. As the economy floundered, the government tax take was hit at a time when it was forced into higher recurrent expenditure, as social triggers were released by rising unemployment, forced subsidies and rescue funding to imperilled industries.

The budget for 2010 seems thankfully different. It is framed in full recognition of the unfavourable economic scenario surrounding us and assumes that for next year we will only start recovering in the second half, leading to an overall growth of one per cent, which merely claws back half the negative growth (how oddly American this term “negative growth” is – would not the pure English term “contraction” fit better? The Americans have a knack for such funny terms – like “reverse split” when they mean “consolidation”) being registered in 2009.

Next year’s budget has clearly been a bottom-up exercise, adopting a wide array of suggestions made by the social partners represented at the MCESD table. These partners have generally expressed positive sentiments about the general orientation of the budget, as they felt an element of ownership in its structuring. Such positive sentiments are surprising, given that the pack is still missing the joker. When the utility rates for 2010 are announced, we will have to see how many of these positive sentiments will survive, but so far Minister Fenech has learnt from past mistakes and taken the social partners on board by playing the card of shared ownership of ideas.

Yet for all this positivism, there are two measures about which I express reservations, as they are likely to have unintended harmful consequences.

The first is the opportunity missed to reform the COLA mechanism, which is seriously prejudicing our international competitiveness – producing a combined legally enforced wage increase of e12.33 per week during the two recessionary years 2009/2010, when international industry is merely in survival mode through savage cost-cutting.

I can understand, though not necessarily agree with, the argument that COLA has worked well in the past, as it brought industrial relations harmony and has been a useful tool for creative destruction. Creative destruction is the term used to explain how certain outdated industries that cannot afford higher wages are forced to close so that new more value-adding competitive industries that can afford higher wages take their place. I don’t agree with it because creative destruction also occurs in countries – far outnumbering those that have COLA type mechanisms – that do not enforce cost-of-living adjustment wage increases across the board, except through minimum wage provisions.

However, keeping this tool of creative destruction working, at higher speed as it so happens, even during recessionary years, is playing with fire. In recessionary times, investments are scaled back and it is hard to attract new value-adding enterprises to replace those that wither away. So in recessionary years, safeguarding existing jobs has priority over creating new ones that are nowhere in sight.

This was the right economic environment to force the social partners to restructure the COLA mechanism. At the very least, the government should have offered to carry part of the COLA burden as a one-off measure, on condition that the social partners agree that, in future, the COLA increases will only apply to the minimum wage and to workers who are not covered by collective agreements. Transient provisions for existing collective agreements could have been negotiated up to their expiry.

This was a missed opportunity which could have unintended consequences in forcing the destruction of economic units before we can re-achieve an economic environment that permits the creation of new ones. Only an unlikely V-shaped recovery could now avoid a further spike in unemployment.

Another good measure that could have negative unintended consequences is the extension from five to seven years for the years 2010 and 2011 of the mechanism that removes the option to pay normal capital gains tax (CGT) on property sales and instead enforces a 12 per cent of sales value final withholding tax, irrespective of the actual profit element of the property sale in question.

The extension of the time limit from five to seven years meets the clamour of property developers who, in the face of a dead property market, are having to carry unsold inventory far longer than planned. Without such an extension, they would have been forced to dump property prices in order to avoid being caught by the 12 per cent withholding tax mechanism on sales that effectively leave them little or no profit, if not an outright loss, given the high acquisition prices of the peak years and the carrying costs of unsold inventory. A sharp fall in property prices could be very destabilising, even to our financial sector, given the banking sector’s exposure to the property market.

However, restricting this extension to the years 2010 and 2011 seems illogical and risks unintended consequences even greater than the ones the measure sought to prevent. The seven year extended period will mean that property sales for units acquired in 2004 will benefit from the CGT option till 2011. Come 2012, we flip back to the five-year rule, which means that, overnight, sales of property bought in 2005 and 2006 lose the CGT option. Now 2005 and 2006 was the peak of the property market, which began to crack late in 2007. Many of the properties bought at peak prices in 2005 and 2006 are unsold inventory today or, given the time lag of the building industry, are still in the development pipeline.

Given the size of the unsold inventory level, and the fact that recovery can only be very gradual, the government is being overly-optimistic in assuming that the property market could return to normality in the next two years. For the time being it would have been more prudent to allow the seven years option period for an indefinite time, to avoid unintended consequences.  

Undecided Between Hope and Despair

Undecided Between Hope and Despair

13^th November 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

Beyond its first impact, the Budget for 2010 presented in parliament this week is increasing within me the ambivalent feeling between hope and despair.

The hope comes from a string of relatively small but highly positive programmes which government launched in order to promote growth, employment, investment and innovation particularly in the SME sector with special emphasis on the industries of the future, IT, digital communications, and environmental services.

The Budget makes a much welcome increased contribution for marketing our tourism products and investments to upgrade our public places, historical heritage, and public transport. It promises to continue assisting manufacturing enterprises facing transient recession induced difficulties to nurse them back to health by promoting increased job creating investments. It devotes more resources to child care facilities, a crucial ingredient in the mix to motivate higher female participation in the work force.

But this hope comes with a high dose of despair from three different sources:

• The embedded inability to spend the capital budget as planned even in a recession year where economic logic should have spurred to over-spend the investment budget not to hold it back. This coupled with an equally embedded practice to overspend on recurrent expenditure by nothing less than e101 million during 2009.

• The lack of courage to take bold remedial measures on sources of long-term damage to the economy. I am referring particular to lack of progress in the pension reform, inertia to dismantle the COLA mechanism which is now seriously compromising our international competitiveness, and continued denial about lack of sustainability of universal entitlement to free health services.

• The total irrelevance of the 2009 Budget presented this time last year at the peak of the financial turmoil when in spite of clear evidence of the grave economic woes confronting us government presented a Budget which was totally inappropriate for the challenges awaiting.

Let me start with the last point. Minister Fenech will probably forever hold notoriety for presenting the most irrelevant budget in history. This time last year he had forecast he would finish the year 2008 with a deficit of e200 million. He finished it with e33 million more missing the target by 16.5% even though he was merely forecasting eight weeks forward.

This time last year he had planned to finish 2009 with a deficit of e99 million. We know now it will be two and half times as much at e258 million. He had planned a balanced budget by 2011 whereas now we are merely hoping for a deficit under 3% by 2012. He forecast real economic growth at 2.4% for 2009 whereas now we know we are registering an economic contraction of 2%.

Now I can sympathise with an argument that the financial crisis and the ensuing recession have nullified most financial plans. But that applies for plans made before September 2008 when the Lehman Brothers’ earthquake hit the financial world. The Budget was presented on 3 November 2008 when we were already in the eye of the storm.

There is no doubt that last year’s budget was a totally irrelevant and waste of time exercise. On 21 November 2008 in an article in this series titled ‘Stop doodling’, I had written:

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.

As it happened government had no plan B but still incurred a higher deficit without giving the economy any stimulus. The worst of both worlds! Many of these measures in the Budget 2010 should have been adopted last year for the medicine to work in time to avoid the economic disaster we had in 2009 which could well extend into 2010.

Again on 15 May 2009 in an article titled ‘Redoing the budget’ I had stated:

My opinion is that rather than a mini-budget, government should present to parliament a fresh budget for 2009 based on current realities even if it does not consider it necessary to take any new measures. The Budget for 2009 presented last November is dead in the water and the projected deficit of e98 million for 2009 is totally unrealistic. Given current realities the final deficit is likely to finish between double and treble the level projected in the Budget for 2009.

Government is again seriously making a grave under-estimation when earmarking just two-and-a-half million euro for temporary assistance to viable industries that need help to get through the recession. Awarding Cola increases of e12.23 per week for recession years 2009 and 2010 is forcing our exporting industries and tourism to compete with a steel ball tied to their legs, especially when they are already hard-pressed with a Euro rate of exchange which has hardened against most other currencies except the Japanese Yen. Government inertia in refusing to carry part of the Cola burden in a package deal which would have scrapped the Cola mechanism for organisations where employees have in place a collective agreement, is a major sin of omission.

Expecting the creep in health service cost to remain sustainable in the face of increasing longevity is defying the laws of economic gravity. Delaying taking preventive measures is a guarantee that down the line the system will inevitably implode.

Will the positive measures be enough to return the economy to growth path in 2010? We can only be optimistic if we believe that the international recession will recover in V shaped mode and if we show great determination to execute the Budget 2010 measures aggressively and urgently.    

Bagit li Huwa Skars mill-Kredibilita

Bagit li Huwa Skars mill-Kredibilita

11 ta’ Novembru 2009

L-Orizzont

Alfred Mifsud

L-ekonomist Alfred Mifsud qal li l-Baġit għall-2010 huwa skars mill-kredibilitā. Hu qal li l-Ministru Tonio Fenech għandu rekord tal-aktar Baġit li mar żmerċ. Fakkar kif sena ilu qalilna li l-ekonomija Mal­tija se tikber bi 2.4% f'termini reali fl-2009, iżda s'issa nafu li minflok, din se tiċkien bi 2%.

Sena ilu, żied jgħid Alfred Mifsud, il-Ministru Fenech qalilna li d-defiċit għas-sena 2008 li kien fadlilha inqas minn xahrejn biex tispiċċa kellu jkun ta' €200 miljun.

Minflok spiċċa €233 miljun, li jfisser li għal perjodu ta' tmin ġimgħat neqsin żgarra b'16.5%.

Fakkar ukoll li Fenech sena ilu qalilna li d-defiċit għas-sena 2009 kellu jkun ta' €99 miljun, iżda issa nafu li se jkun ta' €258 miljun, aktar mid-doppju u nofs. Dan min­kejja li n-nefqa kapitali se tkun €44 miljun inqas minn dak li kien ippjanat.

"Sena ilu Tonio Fenech qalilna li sas-sena 2011 id-defiċit kellu jispiċċa għal kollox u minflok ikollna 'budget surplus', iżda issa nafu li se nistennew sas-sena 2012 biex id-defiċit jinżel għal taħt it-3% tal-Prodott Gross Doestiku (PGD)."

F'kumment lil l-orizzont dwar id-diskors tal-Baġit, l-ekonomist Alfred Mifsud qal li "huwa minnu li d-dinja għaddiet minn kriżi finanzjarja li ħassret ħafna mill-previżjonijiet li kienu saru, iżda din mhix ġustifikazzjoni għall-iżgarr kbir li ġarrabna fl-2009 imqabbel mal-Baġit li ġie ppreżentat sena ilu, għax sena ilu konna diġā fil-qalba tal-kriżi u kien jidher ċar li riċessjoni internazzjonali kienet inevitabbli.

"Ili nikteb li l-Baġit tas-sena l-oħra kien ibbażat fuq il-ħolm u kont bassart li d-defiċit reali kien se jkun darbtejn jew tliet darbiet aktar milli dak ipproġettat. Ma mortx żmerċ!" żied jgħid Mifsud.

Hu qal li meta wieħed jiġi biex jeżamina l-Baġit għas-sena 2010 "ma tantx nistgħu noqogħdu fuq iċ-ċifri għax ir-rekord tal-Ministru jurina li ma tantx għandu kredibilitā biex jipproġetta l-andament ekonomiku b'mod reali. Apparti minn hekk, issa saret normali li ħafna inizjattivi jissemmew biex ikollna diskors twil u fil-prattika, speċjalment f'dak li huwa infieq kapitali li tant huwa bżonnjuż biex joħroġna mir-riċessjoni, iżda dak li jkun ipproġettat ma jitwettaqx."

Mifsud żied jgħid li ħafna mill-miżuri tajbin li fih il-Baġit għas-sena 2010 kienu jkunu ferm adattati kieku ttieħdu s-sena l-oħra għax konna nkunu ħadna l-medi­ċina li toħroġna qabel mir-riċessjoni, iżda issa li waqajna lura se nbatu biex nirkupraw.

"Lanqas ma nifhem kif il-Gvern ħabbar il-kumpens għaż-żieda tal-kontijiet tad-dawl u l-ilma bla ma ħabbar kemm se jogħlew dawn il-kontijiet. Din l-inċertezza ma tgħinx, la biex isiru l-investimenti li joħorġuna mir-riċessjoni u lanqas biex il-familji tagħna jkunu jafu x'jistgħu jonfqu u x'jeħtieġ li jwarrbu. L-iskuża li r-regolatur ma riedx li l-Enemalta tippubblika l-proposti tar-rati qabel ma japprovahom huwa ma tikkonvinċix. L-Enemalta għand­ha d-dover tinforma lill-pubbliku x'qiegħda tipproponi u r-regolatur għandu jkollu l-fibra u l-awtonomija biex japprova biss dak li jidhirlu xieraq, irrispettivament jekk ġiex ippubblikat jew inżamm sigriet."

Mifsud jissokta jgħid ukoll li l-argument tal-Gvern li la ż-żejt għola minn barra bilfors ikollu jgħaddi dan l-għoli lill-konsumatur jagħmel sens sa ċertu punt. Qal li sussidji għat-tul jafu jkunu kontraproduċenti għax ma jippermettux li jsir l-aġġustament tal-konsum biex tissaħħaħ l-effiċjenza fl-użu tal-enerġija. Iżda l-Gvern ma jistax ikun pustier bejn il-konsumatur u s-swieq internazzjonali.

"X'żamm lill-Gvern u l-Enemal­ta milli jagħmlu 'hedging' għat-tul meta l-prezz taż-żejt niżel għal $40 fl-ewwel kwart ta' din is-sena? Xi jżomm lill-Gvern milli jagħmel 'price smoothening' biex ma jagħtix skossi lill-ekonomija u niġġudikaw il-prezz taż-żejt fuq perjodu twil fejn meta jorħos ħafna nġemmgħu biex nagħmlu 'cushion' għal meta jogħla ħafna," tenna l-ekonomist.

"Taħt Gvern Laburista tas-snin 80 il-'price smoothening' kien isir mhux biss fl-enerġija, iżda wkoll fil-qmugħ u l-provvisti essenzjali oħrajn."

Mifsud wera simpatija mal-argumenti tal-azjendi li qegħ­din jilmentaw li żieda fil-COLA ta' €5.82 fil-ġimgħa għas-sena 2010 qiegħda tippre­ġudika l-kompe­tittivitā tagħna f'dinja mgħattna mir-riċessjoni.

Hu temm jgħid li wasal iż-żmien li din is-sistema peri­ko­­luża tindifen għall-inqas fejn jeżisti ftehim kollettiv u l-pagi tal-ħaddiema koperti minn ftehim kollettiv ikun stabbilit b'negozjati bejn l-unjin u l-prinċipal wara li jittieħdu passi biex jiġi żgurat li ż-żidiet ikunu relatati ma' żidiet fil-produttivitā.

 

 

 

The Wall and the Roundabouts

The Wall and the Roundabout

6^th November 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

Next Monday the world will commemorate the fall of the Berlin Wall. On 9 November 1989 Communism in Eastern Europe crumbled to the extent that it no longer had the energy to enforce the separation of the Eastern soviet satellites from the western democracies and in particular it had no longer the will to enforce the separation of Berlin.

Twenty eight years after it was constructed to remove the allure of crossing over to enjoy the economic prosperity and personal freedom on the democratic Western side of the Berlin controlled by the then West German government with the help of NATO allies, the Wall was torn down with bare hands of the population seeking re-unification and freedom.

During a revolutionary wave sweeping across Eastern Europe which had started with the Solidarnosc movement in Poland, the East German government announced on 9 November, 1989, after several weeks of civil unrest, that all East German citizens could visit West Germany and West Berlin. Crowds of East Germans climbed onto and crossed the Wall, joined by West Germans on the other side in a celebratory atmosphere. Over the following few weeks, parts of the Wall were chipped away by a euphoric public and by souvenir hunters; industrial equipment was later used to remove almost all of the rest. The fall of the Berlin Wall paved the way for the re-unification of Germany which was formally concluded on 3 October, 1990.

A seminal moment in the years preceding the fall of the Wall was US President Reagan’s unforgetable speech at the Brandenburg Gate on 12 June, 1987. While commemorating the 750th anniversary of the founding of the city of Berlin, Reagan challenged Soviet Premier Mikhail Gorbachev to liberate the Soviet bloc nations, saying:

“We welcome change and openness; for we believe that freedom and security go together, that the advance of human liberty can only strengthen the cause of world peace. There is one sign the Soviets can make that would be unmistakable, that would advance dramatically the cause of freedom and peace. General Secretary Gorbachev, if you seek peace, if you seek prosperity for the Soviet Union and Eastern Europe, if you seek liberalisation, come here to this gate. Mr Gorbachev, open this gate. Mr Gorbachev, tear down this wall!”
As it happens he could just as well have told Mr Gorbachev to dismantle communism. Because the Berlin Wall in particular and the iron curtain in general symbolised the existential need for communism to deny personal liberties in order to maintain the State as the body and soul of the whole nation.

During the Wall’s existence a disputed figure of about 200 persons were killed while attempting to cross it.

What about the roundabout? The Berlin Wall could not survive more than 28 years even though it was erected and guarded with the military might of a super-power that for a period during the Cold War was suspected as capable of overcoming the West through its military machine and nuclear capability. However the Kappara roundabout, better referred to as the one near the no longer existing tank tal-gass has survived longer, much longer.

In this regard this week we had a damascene conversion and a revelation of biblical proportions. We were told that the government is shelving the project for a by-pass at Ghadira Bay and instead will use the EU funds to construct a multi-level traffic junction at this crucial intersection which wastes so much time, fuel and energy and causes so much aggravation to commuters every morning and every evening.

I don’t know by what stretch of imagination government has ever considered that the Ghadira Bay by-pass should have higher priority than the necessary infrastructural investment necessary to ease traffic in crucial intersections. I am not just referring to the Kappara one; we need as well urgent solutions to the l-Iklin, Marsa/Santa Lucija, and Msida intersections among others.

We are one of the most under-invested countries in so far as road networks are concerned and government should have used these recessionary times to launch a massive programme for upgrading our major traffic intersections.

We have probably got used to such low standards that we got to accept even the sub-standard as normal. Only this explains that we have not been showing the same determination that East Europeans have shown to overcome communism and tear down the iron curtain; the same determination that East Berliners have shown to overcome their insulation through tearing down of the infamous Berlin Wall.

Our walls and iron curtain are the roundabouts that waste so much of our time and put our nervous system a notch higher than it ought to be every morning and every evening. High time government gives us what we need, stops dreaming about mega projects which do not improve our everyday life and focuses its energies on upgrading our road network which by all measures can hardly be considered even third world standard.

Dr Gonzi tear down these roundabouts! They have far outlived the Berlin Wall and that’s not a record to be proud of.  

Too Big to Fail

Too Big to Fail

1^st November 2009

The Malta Independent on Sunday

Alfred Mifsud

Now that the international financial crisis appears to have stabilised after massive interventions by governments, monetary authorities and regulators, focus is shifting from mere survival to re-designing the financial system to ensure that what happened will never happen again.

In this context the whole argument revolves on how to tackle the “too big to fail” moral hazard risk.

If failure of one of the smaller financial institutions like Lehman Brothers proved big enough for the whole financial system to seize up, then the new regulatory regime has to be designed to ensure that no single institution, no matter how big, should pose such a grave systemic risk.

The present system of moral hazard is untenable. It is scandalous that significantly important financial institutions are allowed to pass on to their shareholders and their bonus rich employees the benefit of the profitable years in the knowledge that if they hit a rock the taxpayers will bail them out, as they are too important to be allowed to fail without bringing down the whole financial system.

There is therefore broad agreement that in the new regulatory regime no financial institution will be allowed to be, or become, too big to fail. After all, failure lies at the core of market based systems and we cannot safely have a properly functioning privately owned market based financial system if the possibility of failure is excluded and the taxpayer can be relied on to underwrite losses to save the system from imploding, as happened in 2008/2009

Where there exists a substantial difference of opinion is over how the “too big to fail” institutions can be forced to downsize and thus stop being a systemic risk if allowed to fail.

There is one school of thought, championed by the governor of the Bank of England Mervyn King, which argues that the problem has to be addressed in a direct manner. Institutions categorised as being systemically important simply have to be forced to get smaller by separating their traditional deposit taking and financial intermediation role from their investment banking operations.

This would largely be a return to the Glass Steagall Act of 1933 introduced in the US following the Great Depression, which effectively prohibited commercial banking (deposit taking and commercial lending that was considered as a utility provision critically important for economic growth through the supply of credit and therefore prohibited from undertaking risky speculative dealing in market instruments for their own treasuries) from teaming up with investment banking, which effectively gets involved not only in executing third party deals but operate their own large treasuries taking risky positions in trades for their own account. Mervyn King has reiterated that casino operations have no place to co-exist within banking organisations providing credit utility services.

Another school of thought considers such an approach impractical, as it is unlikely to find international application and would merely involve regulatory arbitrage with large banking organisations merely shifting to a softer regulatory regime. In such a case, London, which is where Mervyn King has his throne, being the largest international financial centre, would be a net loser. This explains why King is not exactly the darling of the British Chancellor of the Exchequer Alistair Darling.

The school of Alistair Darling argues that it would be difficult and indeed unreasonable to force such a direct division. To be effective, such a division would have to mandate that investment banks be wholly financed outside the commercial banking system so as not to retain any indirect exposure by the latter to the former, and this is quite impossible. Furthermore, it is quite imaginable that if such strict separation were enforced, commercial banking per se would gradually wither away as depositors would switch their deposit funding on low rates to higher income funding on the markets offered by the investment banks. This would effectively downgrade the critical financial intermediation role of the commercial banking system.

The Darling school of thought wants to address the “too big to fail” anomaly by introducing more rigorous capital requirements for banks, which apart from conducting pure commercial banking operations also operate investment banking operations, as all large international banks currently do. So their argument goes that the bigger the bank, and the bigger the risks undertaken by such big banks, the bigger the capital requirements demanded. Effectively, this would act as a market-based disincentive to keep large investment banking operations within the same structure of commercial banking. In time, banks would realise that it would be more profitable to conduct such investment banking operations in hedge fund types of structures, which are entirely funded by investors capital, with strict limits on leverage, and which can pay as much bonuses as they want to their star performers, as their operation would not involve the taxpayer in any expense or subsidy, or even in implicit guarantees.

Building on this concept, the US House of Representatives banking committee is proposing that any future bail out funded by taxpayers would have to be funded directly by taxing the surviving banks. There is an argument whether such funding should come a priori by building reserves in good times, as is done with the operation of the deposit insurance schemes, or should be triggered by events a posteriori. Many argue that the latter would be quite difficult, as the triggering event would render surviving banking institutions too weak to carry the burden of additional taxation.

This financial crisis has produced new catchwords and phrases that will remain embedded in the language. We have now passed from “toxic assets” to “too big to fail”.

It is inevitable that the banking sector has to pay the price of much heavier regulation once it has proved itself untrustworthy to operate in a light touch regulatory environment that relies on self-regulation. Banks have involved the taxpayer in heavy losses and shamed their regulators and monetary authorities who had defended their freedom as leading to better risk distribution and financial efficiency. Events have proved that the reality was totally different.

Banks that survived are not helping their own case by resorting so quickly to scandalous employee bonuses distribution without taking into consideration that their own survival is due to explicit or implicit taxpayer guarantees, and that the huge profits they are registering after the huge losses of the crisis are only due to the exceptionally low interest environment that monetary authorities had to engineer to facilitate the recovery. Such short-term reasoning by greedy bankers will only mean more and stricter regulation for the longer term.

How to resolve the “too big to fail” hazard remains under discussion. But it has to be resolved as otherwise, after solving and emerging from this financial crisis, we are only sowing the moral hazard seeds for the next one, which will be bigger and more devastating. The taxpayer is unlikely to be willing or able to help out again.