Thursday, 27 September 2012

When substance is short spin goes long

This all started with a report by Caritas earlier this year where they reported research that families on minimum wage are suffering poverty and suggested a substantial increase in the minimum wage to help them break out of the poverty trap.

I had expressed disagreement with this suggestion arguing that such a measures would be counter-productive.   See the articles Unintended Consequences published on this blog on 19th March 2012 through the link below:

19-03-2012 Unintended Consequences

Joseph Muscat argued on these same lines.  Those who really want to help minimum wage earners can do so in two ways.  Offer them real opportunities for skill enrichment so that they can qualify for better jobs, and where this is totally unfeasible then consider introducing the concept of a living wage.   But increasing the minimum wage beyond its current annual cost of living mechanism would be a sure way how to out-price such workers out of the market sinking them further into real and psychological poverty.

The PN spinners have turned this to proclaim that Labour are proposing a total freeze on the minimum wage.  If this is so than the minimum wage has been frozen under all PN administrations since 1987 as it has never been increased at all beyond the annual COLA adjustments.

When substance goes short spin goes long... and probably we have seen nothing yet!!

Sunday, 23 September 2012

Busuttil breaks what served us well

This Article was published in The Malta Inependent on Sunday - on 23 September 2012
There is no doubt about it. Both main parties have got themselves fully geared for a political campaign this past week.

Why endanger a consensus
that's working?

The Prime Minister’s denial of autumn elections seem unconvincing as in the end mathematics is a science that leaves no room for interpretation. Without a majority in Parliament and with Franco Debono having nothing else to lose, the Prime Minister knows that risking a vote in Parliament on the 2013 budget could only serve to make a bad position worse.

Further proof of the proximity of an election is the action being taken by the government party to sharpen the candidate line-up. Most prominent among these is the candidature of Dr Simon Busuttil MEP, who is considered by many to be a very likely contestant for the PN’s leadership if the current incumbent steps down following defeat.

It would take a performance at the polls disastrous enough to discredit not only the current Cabinet but the whole party administration machinery to allow space for anyone outside the inner circle to have any chance of success in bidding for leadership of the PN in Opposition.

In promoting Busuttil to the front line, the PN is executing a strategy aimed to regain the trust of voters who deserted. PN voters who, disgruntled with the old faces, are willing to vote for change. As the Prime Minister desperately emphasised at the mass meeting last Thursday, the PN can organically deliver all the change voters need. The PN hopes that in Busuttil dissatisfied PN voters would see enough of the change they desire to continue backing their party to stay in government.

Consequently, it is crucially important for Busuttil to act statesmanlike and to define himself as a credible agent of organic change within the party, where the core values persist but the arrogance accumulated over long years of uninterrupted tenure gets washed away and replaced by youth and vigour.

Yet Busuttil blundered big time in his first media encounter following his official announcement that he would stand for election. The first gaffe was not modest at all at a time when the modesty and humility of new blood should have been his hallmark to deliver a striking contrast to the arrogance of the has-beens. Asked about his apparent anointment to party leadership to succeed Lawrence Gonzi, there was only one answer that Busuttil should have given; an outright denial and that any talk of succeeding to Gonzi was out of place.

Yet Busuttil only protested against his being labelled as the anointed one and did not in any way negate his ambitions for party leadership. He inexplicably argued that he would have stood a better chance for leadership if he did not contest the election. Inexplicable, because while it is true that the PL leader has taken this route to become Leader of the Opposition, there is no doubt that a strong electoral showing would make Busuttil’s bid for eventual leadership much more credible. Joseph Muscat’s route to the top was harder without a seat in Parliament, and his achievement is an exception dictated by the opportunity of three successive electoral defeats rather than a model road map.

Still more serious is the second gaffe. The assertion that if Joseph Muscat is elected and delivers what he is promising, then Malta would have to seek an EU bailout within 12 or, at the most, 24 months.

Any suggestion by anyone in high places that there is any possibility of the country being forced to seek bailout rescue is serious stuff. Even if it were true, it is not something that should be said lightly. It could make investors pause and consumers turn cautious. It could become a self-fulfilling prophecy, causing small problems to turn serious and complicated. It could lead to dilution of the strong home bias of Maltese investors who may stop subscribing to government borrowing needs and start preferring to export their savings instead.

The light-handed manner in which Busuttil made such an unverified and highly damaging assertion is nothing short of atrocious. Firstly, the only specific pledge that Joseph Muscat has made is that he will make it a point to reduce the burden of utility bills for households and enterprise and to fund such reduction from efficiency gains in the generation and distribution of water and electricity. Muscat has so far refused to quantify such reduction and has been severely criticised by the PN for remaining so vague about his promises. Evidently, Muscat knows the risks of quantifying such reductions before being able to quantify the costs of energy procurement. Who knows what the price of oil will be after the next election and who knows what hedging commitments will be inherited from the current administration?

Muscat has been emphatic that the promises he is making will have to be funded from economic growth not from parallel taxation or additional borrowing. So how Busuttil could deduce that under Labour the country would have to seek an EU bailout possibly within 12 months is simply incredible.

But there is more to it than that. Even if, hypothetically, Labour would be forced to additional borrowing in order to maintain its pledges, this would still be a million miles away from being forced to seek an EU bailout. Countries who had to seek an EU bailout were those for whom the normal financial markets were unwilling to extend credit at sustainable interest rates. Thankfully, the thrift culture of our households remains strong enough that demand for government stocks at very moderate rates, even for long durations, has been consistently robust. Our banks remain overly liquid with a loan to deposit ratio of around 70 per cent and the far greater majority of government funding is all internal.

It is not only the size of the debt that renders it unsustainable or otherwise. Sustainability also depends on the rate at which government can borrow, the duration for which it can borrow and the source from where it can borrow. Spain has a very respectable national debt to GDP ratio by international standards, even lower than ours and lower than Germany’s. But because Spanish households are in debt up to their ears and Spanish banks have no liquidity to lend, as their balance sheets have been burnt by property lending turned bad, Spain has to borrow from foreign banks at high rates and for a relatively short duration, making frequent rollover of its debt stock an unpalatable experience which adds to macro-economic uncertainty. Per contra, Japan has one of the highest debts to GDP ratios in the world but it can still borrow without difficulty at very cheap rates for long durations as its debt is almost totally subscribed by Japanese savers.

If as a country, not simply as a government, we are net lenders to the outside world how could anyone who aspires to be an eventual Prime Minister even dare suggest that without him at the helm the country will be forced to seek bailout from foreign lenders we do not require to borrow from?

This sounds to me as undiluted political arrogance that has forced erstwhile PN sympathizers to seek refuge in other quarters. It reinforces the distasteful image that Busuttil’s presence was meant to soften.

Busuttil’s gaffes can be attributed to lack of experience of the national political scene but it could also be attributed to something much more disquieting. Is Busuttil suggesting that if Labour wins the next election and he takes over the PN party leadership, he will follow a political style of total obstructionism to the extent of scaremongering and dissuading local savers from subscribing to government bond issues?

One of the successes of the economy is the development of the financial sector. Labour’s consensual approach to all legislation and initiatives has contributed enormously to such success as foreign investors are assured of continuity whoever gets elected. I personally was appointed to the board of governors of the predecessor of the present MFSA by the Fenech Adami administration between 1992 and 1996, when John Dalli as Finance Minister and Lino Spiteri as shadow minister were in continuous consultations about the financial architecture that transformed the former offshore regime to a more internationally saleable onshore structure.

Someone once told me that PN governments tend to do better than Labour governments only because PN governments benefit from a more loyal Opposition!

Monday, 17 September 2012

A false start for Simon

In confirming his intention to contest the general elections on the PN ticket Simon Busuttil (SB) has slipped twice.  This does not augur well for his bringing about change to  the PN's dismal standings in current polls.

Firstly and rather immodestly, SB did not outrightly deny that he has party leadership ambitions but merely dismissed the claim that he is the anointed one.  

His thesis that if he had party leadership ambitions it would have been better to join the parliamentary group after the elections makes little sense,  unless he thinks that he can imitate Joseph Muscat in contesting leadership without having a parliamentary seat.   Not having a parliamentary seat was a disadvantage for Joseph Muscat and it would be infinitely easier for SB to contest PN leadership with credentials of a solid performance at the polls in the the general elections.

But more serious is the claim made by SB that

"the country would be knocking on Europe’s doors for a bailout within a year or two if Joseph Muscat lives up to his promises"
This is undiluted political scaremongering typical of the PN's DNA that they have a God given right to govern this country no matter how well or badly they perform.  It is typical arrogance that we know best and the others are children of a lesser God.

Firstly the PN have been demanding PL to be  specific about their policies in government as so far the only specific promise made by Joseph Muscat is to reduce utility rates without actually explaining the quantum involved.   So how can SB deduce that with Labour's promises we would be asking the EU for a bailout within a year or two?

Secondly those who ask for a bailout are countries who finance their borrowing internationally.   In Malta thanks to the people's strong culture of thrift, all financing is internally generated and gracefully the economy is liquid enough for our banks and households to have spare liquidity to invest in foreign securities.    As I often explain to my followers I am not so concerned about the sustainability of our national debt because though we have a high public sector debt this is more than made up by private sector savings so that as a country we are net lenders not net borrowers. 

So how can we be forced to demand a bailout, unless SB means to taunt a democratic mandate and from the Opposition as the new Leader of the PN would organise a policy of obstructionism asking the PN followers to draw their deposits from local banks to invest away from our shores in order to force the Malta government to seek a bailout.

SB had better explain what he meant and how he came to the conclusion that Labour would be forced to seek bailouts, as otherwise he has painted himself as a serious threat to democracy, which does not augur well at all.

Sunday, 16 September 2012

Student stipends: a social service or an investment in education?

When I was 17 I entered 6th form, at the time ( 1968/69) located at the Evans Buildings in Valletta which currently houses, amongst other things, I.D. Card and Passport units.    Six months later, though doing well in my studies for A-level in Physics, Pure and Applied Maths, I quit to take up a job as a clerk with Barclays Bank DCO.

I did not quite choose the job.  It rather chose me and took me out of my desperation at 6th form where  socially I was out of breadth with the rest of the team mostly composed of children whose parents were, unlike mine, pretty well-off.    Without pocket money and struggling to have my family support to buy the basic essentials for my studies, even though tuition was free, I had to take the first job that came my way.

Thankfully I was lucky in that it was a job where I could study and advance my career in banking and financial services even while studying.  Looking back at my 44 years working experience, just on the eve if reaching pension age, I really cannot but be thankful for the opportunities that came my way.

This came to mind when yesterday I was invited to address a KSU organised seminar for university students about the sustainability of student stipends.   It is refreshing that KSU seems to be recovering some of the spirit of 1968 when university students were the conscience of society and rather than discuss the lack of parking facilities at university they used to discuss and protest about social issues,   like poverty, expensive housing and mass emigration.    I congratulated KSU for being audacious in discussing an issue which many students consider a right rather than a privilege.

The main points of my contribution were:

  • -Are stipends a  social service or an investment in education of future generations?  The question of sustainability depends on this distinction.  If they are considered a social service than they are unsustainable in that there are more deserving sectors of society for such handouts.  If they are an investment then they are sustainable as the stipends bill amounts to not more than 0.35% of the GDP.

  • My personal view on this matter has evolved over the last decade and from considering them as an unsustainable social service,  experience has shown they are a worth while investment leaving returns in youth employment and economic growth as well as attraction of private sector investments in new economic niches, like  pharma industries, gaming, financial services, back office operations, through the availability of a young intelligent qualified workforce.

  • So for me the question is not whether they are sustainable but whether there is a better way how we can get a better return for our investment, how we can get a bigger bang for our buck.

  • This requires a comprehensive overview of our tertiary education models and cannot be restricted to just whether stipends should stay or go.

  • Such an overview would have to address two keys issues.  Firstly what resources and investment the University needs to exploit its international potential, in order to build an international brand which attracts on a larger scale fee paying foreign students so that the University can diversify its sources of revenue away from strict fiscal allocations by central government.   Secondly how can such increased resources be used to make our academic teaching more relevant to student careers after they go into the real world.  

  • My experience with graduates that work in our organisation is that they find that 70% of the academic learning is irrelevant for the real world experience and it would be far more effective if we build bigger linkages between industry and university to ensure that they can maximise their learning experience.   One way how this could be achieved is through vocational apprenticeships where the student attends university 2/3 days a week during the day and attend work during the other 2/3 days when they will also have university lessons after work.   In this way the work and the university experience can be made to re-inforce one another and rather than stipends students would command a commensurate apprenticeship salary.   Fiscal incentive to students and employers would be given for those who embark on this model.  

  • Fiscal incentives after studying in replacement of stipends are a non-starter.  Students need income whilst studying.  After studying they should repay society through paying whatever taxes are due on what they earn through their studies.  For this purpose I suggested that in the last year before graduation students should receive fiscal morality lessons emphasising their debt to society which needs to be repaid by being fiscally correct citizens declaring all their earnings according to law.  Perhaps they should be given a proforma invoice with the total cost of their tertiary education which would be hanged on the wall alongside the degree certificate to remind them of their obligation to society.

I enjoyed it.

Tuesday, 11 September 2012

11 years after 9/11

New World Trade Center
Memories are shorter than most people think.

Today we commemorate the victims of 9/11.  Today we pledge never to forget.

Today we remember the heroes of United Flight 93 that crashed the plane in a deserted field in Pennsylvania to avoid the terrorists from reaching their target in Washington D.C.   We remember the 343 valiant firemen and paramedics who lost their lives trying to rescue others. The 1717 families who never got any remains of the victims to bury their loved ones.

However memories are shorter than 11 years.  How else can one otherwise explain the new buildings being erected on the site of the WTC?   Can't imagine that employees working in these towers, taller than the original twins, can work at ease as they look outside  onto the fountains at the footprints of Towers One and Two.

Monday, 10 September 2012

Values before votes


This articles was published in the The Malta Independent on Sunday  9th September 2012

Last Wednesday we breezed through, quite unobtrusively, the fourteenth anniversary of the 1998 elections that brought the PN back to government after a short break of 22 months in opposition following two terms between 1987 and 1996.   

That election of 5th September 1998 had brought to a premature end the solid mandate Alfred Sant had won for Labour in 1996 and  brought to power the present PN government for three consecutive terms which seem to be drawing to an end as we approach elections.
The Prime Minister discretely celebrated this anniversary when he gave an impressive speech to the EPP political group stressing that in politics values must come before votes.   The problem, as Obama is finding out as he struggles for re-election in the US presidential campaign, is that great speeches without concrete action don’t impress, they don’t deliver the bacon, they keep the electorate asking where the beef is.

In 1998 Alfred Sant gave the most tangible demonstration that for serious politicians who see their role as a mission to improve the lives of their people, values must come before votes.   When it was clear that his majority in parliament was conditional and unstable, he put aside all calculations of risks to his own political career and restored the mandate to the people.

It is hard to reconcile Lawrence Gonzi’s assertion of values before votes with his action when faced with a similar or worse situation of parliamentary instability.   Rather than adopt Alfred Sant’s gentlemanly way out and restore the mandate to the people, he actually mocked Alfred Sant for taking such route and in fact and in deed is still doing whatever it takes to hang on to power even though shorn of a parliamentary majority.   Can anyone honestly believe that in so doing the Prime Minister is putting values before votes?    To me and to whoever has eyes to see it appears that for the PN, votes and power come before everything else, even before the interest of the country and the parliamentary stability needed to safeguard it.

The Prime Minister remains in denial of what is obvious to all.   Not only he has no parliamentary majority but he cannot even rely on the vote of all the 34 MP’s that put government on the same count as the Opposition in parliament.

It would seem inevitable that circumstances will soon eject government out of its denial suite.  Parliament is due to be recalled on 1st October and without a majority and rebel MP calling votes of confidence and controversial private motions, government will find it inevitable to go for elections this fall, probably in the first half of November before presenting a Budget for 2013, or at least without voting on it after its presentation.

Equally in denial is the Minister of Finance.  This week he had Moody’s pulling his ears for strong evidence that government finances are suffering serious fiscal slippage during 2012, a typical performance in an election year when governments throw fiscal caution to the wind and try to spend their way to re-election.   

Moody’s warning is well placed and supported by NSO data for government finances for the seven months to July 2012.   The deficit, rather than narrowing compared to the same period of 2011 ( so as to even out seasonality in the flow of government revenue) widened by 40% from Euro 238 million to Euro 333 million.     The Prime Minister and the Minister of Finance assurances that the performance in the last five months will recover lost ground so that government will hit the projected deficit of 2.3% of the GDP seem to have impressed no one, certainly not Moody’s.   Indeed the Minister of Finance seem to have not even convinced himself.  Soon after Moody’s report he changed his tune somewhat, saying though we might not hit the 2.3% deficit we will certainly stay within 3%.

To stay within 3% of the GDP the end-of-year deficit has to reduce to about EUR 195 million meaning that in the last five months of 2012 the government will have to register a surplus of some EUR 140 million.   Is this realistic?

It is true that government revenue flows are much stronger in the last five months not least because this period captures two instalments of provisional tax payments in August and in December where the bulk of the annual tax payments fall due.  But taking the performance of the last three years 2009 -2011 the average surplus  for the  August to December period amounted to EUR 45 million.

So even to hit the shifting target of 3% of the GDP ( which in itself involves a deficit increase of EUR 45 million over the original projection in the 2012 Budget Estimate) it would require that this year during the five months August to December government will  generate a surplus more than three times higher the average surplus for the same period in the last three years.   This leaves me with no doubt that the Minister is either living in denial or that knowing that he will not be presenting a budget before the election it is safe to take risks with assertions that will only be tested after he is gone.

The only way that the Minister can come anywhere close to the revised 3% deficit figure is by leaving a tray full of unpaid invoices for his successor.

For me the deficit was never below three percent and will not be for quite some time.   Enemalta remains a serious deficit hole.    Up to last year Enemalta was hiding the government deficit by transferring the shortfall on its books which was then borrowed commercially against government guarantee.   This year Enemalta has run out of its borrowing capacity even with government guarantees and all.  The tide is turning.  Enemalta does not even have enough liquidity to pay the excise duty and government is having to extend  temporary loans or grants to keep it afloat.   This explains a good part of deterioration in government financing this year which before was being buried in Enemalta’s books  and is now resurfacing on central government accounts.

Enemalta is a wholly owned state enterprise.   It capacity to raise revenues by charging higher utility rates is very limited by the political implications involved.   It has a massive capex budget yet to finance and banks have turned on the screws on its borrowing.

Measuring government deficit and debt without consolidating Enemalta’s position gives a very incomplete picture.   Whoever gets elected will face the Enemalta problem in the urgent tray.   A blue print for a long term plan on how to restore Enemalta to health can be found in my contribution in this series of 11th March 2012 titled ‘A dockyard in the making’.  In solving Enemalta’s problem, values need to come before votes.  This is unusual in the run up to an election.


Thursday, 6 September 2012

He's starting to get it!


At last! He's starting to get it!   He's starting to understand plain English!   Possibly it is because he has no alternative - TINA - There Is No Alternative - as Margaret Thatcher used to say.

Finally the Budget Minister admits that he will be unable to meet the year end target.   And this just a few days after both himself and the Prime Minister assured us they will still hit the end of year target in spite of the official government finance figures for the first 7 months of 2012 showing a fiscal position suffering very material slippage, 40% worse than last year.
Suddenly a backtrack and admission  that Moody's are right, there is fiscal slippage, the end of year deficit will be worse than last year, but we are told still below 3% of GDP.

To stay within 3% the Minister needs luck and "skill".  I put skill in inverted commas as it refers to the skill to cook the books by shifting expenditure to next year and allocating revenues after the year end to this year.  Luck in the sense that the international economic scenario keeps improving rather than having any tail risk event which would blow away any expected growth.

But reflect a bit on what is reported in the Times article:

The Government has repeatedly helped prop up the ailing energy corporation within EU state aid parameters, and that is likely to continue. Enemalta has so far withheld excise payments it owes the Government to ensure liquidity, explaining much of the €15.8 million shortfall in the government’s excise duty revenue in the first seven months.
At the beginning of the year the Government injected €25 million into Enemalta to keep utility bills static as the firm’s oil costs rose.
If you reflect hard enough you will realise that the budgetary improvement reported in previous years leading us to have a below 3% deficit in 2011 is illusory.   For as long as Enemalta had debt capacity, even if against the sovereign guarantee, government shifted the debt onto Enemalta's books as government milked the Corporation with excise duty, VAT and removal of subsidy to inflate its revenues. Now that Enemalta has exhausted its debt capacity and has exhausted any political manoeuvring space to raise its end consumer prices, the tide is turning again.

Government is having to absorb on its own books the financing Enemalta needs to keep afloat.

So, as I have been repeating these last few years, analysing the government budgetary figures without taking Enemalta's financial position in the consolidation ( Enemalta is wholly owned by the Malta Government and government is directly and indirectly responsible for its debt either through guarantees or through the Act of Statute) gives a very incomplete picture.

Now let me make another suggestion.  Government has financed the City Gate project outside the mainstream budget.  To do so it has sold the project to a 70% owned subsidiary company( Malita Investments - 30% private sector shareholding) for a fixed sum of EUR 80 million.  Any cost overruns will have to be borne by Malta Government.    Any bet that these cost overruns will be in high double digits percentage higher than the base figure is quite safe.   The Minister will leave his successor a lot of unpaid invoices in his pending tray.

Wednesday, 5 September 2012

Don't they understand plain English?

The opening paragraph in today's Times reporting Moody's sovereign credit report on Malta reads as follows:

Moody's rating agency this evening affirmed Malta's A3 rating and negative outlook. It praised the government for fiscal consolidation, particularly for bringing the deficit below 3% at the end of last year but warned of slippage later this year.
But it seems that the Ministry of Finance don't understand plain and simple English. In their statement following Moody's report they say:

"Such a statement contradicts the Opposition’s repeated statements over the past month where the Opposition Leader and spokespersons branded Malta’s financial position as negative, claiming that it had worsened over the past months. Government’s rebuttals and explanations have now been confirmed by Moody’s independent audit of our country’s finances,"
So I went back to read the full Moody's Press statement just in case the Times had misreported them when saying that Moody's had warned of fiscal slippage later this year.   Moody's in fact stated:

Nevertheless, Moody’s notes the continued presence of significant macroeconomic and fiscal downside risks. Further plans for fiscal consolidation target a deficit of 2.2% of GDP in 2012 and 1.8% in 2013.The consolidation strategy is mostly underpinned by additional revenue raising measures, and appears to be optimistic given the weaker economic environment at home and abroad, additional expenditure related to the restructuring of Air Malta, utility subsidies and the current stage of the political cycle, with the deficit traditionally widening in pre-election periods. Given these factors and a susceptibility to stop-and-go policies, Moody’s believes that there remains a risk of fiscal slippage in 2012.

Should instability due to the euro area debt crisis hamper macroeconomic performance, negative debt dynamics could persist beyond 2013 despite a narrowing of the deficit. Such ongoing dynamics could lead to a significant further deterioration in the sovereign's key credit metrics and as such underpin Moody’s decision to maintain a negative outlook.
Moody's is agreeing with the Opposition's recent criticism that the NSO public finance figures for the first 7 months of 2012 show a deterioration of EUR 95 million on the fiscal deficit for the same period of last year equivalent to 39.9% adverse movement.    Government has assured that it will still meet the end of year targets  through compensatory positive variances in the last 5 months but that remains a gratuitous assertion.  Both Moody's and the Opposition are absolutely right in expressing concern on the fiscal slippage that is happening in 2012, as normally happens in an election year.

So I have to conclude that at the Ministry of Finance they don't understand plain and simple English when they say that Moody's statement contradicts the Opposition’s repeated statements claiming that the fiscal deficit had worsened over the past months and that government’s rebuttals and explanations have now been confirmed by Moody’s independent audit of our country’s finances.

May be they should read NSO Press Release with the July 2012 fiscal figures as per link hereunder.

NSO Release re July 2012 government finance