Monday, 29 December 2014

Opportunities and risks for 2015

This article was published in The Malta Independent on Sunday - 28 12 2014
My first article in this series appeared nearly 15 years ago, on 23rd January 2000. It is about time that I move off stage and allow space for new blood.So this is where I draw the line in so far as regular contributions go. 
In this my last contribution, I must pay homage to the late George Fenech of Tumas Group who passed away after a short illness on 2nd December. George, my junior by just 22 days, was one of a kind, an entrepreneur who built on what his father had founded, leading the family Group to carry out a complex project like Portomaso which is likely to remain the best ever mixed development built in Malta for quite some time. George will be missed by those who worked with him and those that work for him. So long my friend! I will never forget the 11 years we spent working together between 1986 and 1997.
Looking ahead, I see three challenges, three conceptual clashes that will somehow have to be resolved in the course of 2015. Three clashes which if, with some luck, getproperly resolved could make the world a much more pleasant place.
The first clash is between Pope Francis and the Roman Curia and hard line cardinals who are resisting the change that Pope Francis means to deliver. His Christmas speech to the Roman Curia will in due time be considered in the same way as Martin Luther King's 'I have a dream', Kennedy's 'Ich bin ein Berliner and Steve Jobs' 'follow your dreams. Do not settle'.
In the Apostolic Palace, there was very timid applause and very few smiling faces, but awe and shock there was aplenty.
Last October, in the first session of the Bishops' synod to discuss a softer approach to social family issues like divorce and homosexuality, the Pope met strong resistance from the traditionalists within the Vatican walls. His Christmas speech was a message that he intends to push on with his plans in the second and final session of the Synod in 2015. It was a strong rebuke to the Curia to get off the mountain tops and start living the true spirit of the Gospel down in the valley among the people. 
The Pope listed a catalogue of maladies that afflicts the Vatican. The first was the feeling of being "immortal, immune or indispensable. It derives from a pathology of power, from a complex of the chosen, from a narcissism that views one's own image passionately and not that of God impressed on others especially the weak and the needy".
The Pope dubbed as "existential schizophrenia those who were living double lives in which they abandoned their pastoral duties to focus on bureaucratic tasks and lose touch with reality and concrete people". Then he blasted the malady of "chatter, murmur and gossip by cowards who do not have the courage to speak directly so they speak behind people's back". He accused the defenders of the status quo as suffering from "spiritual Alzheimer's those who lost their memory of meeting the Lord and depend entirely on the present, on their passions, their whims their manias, becoming slaves of idols they built with their own hands".
The gloves are off. If this was a Christmas speech I just look forward to his Good Friday message. Those who truly believe in the message of the Gospel must pray for Pope Francis.
Another clash that will have to be resolved one way or the other in the course of 2015 is the Russia-Ukraine crisis. No sanctions or trade embargoes can move Putin from his rigid position about Russia's right to annexe Crimea and to defend the Russian ethnics in East Ukraine from what he considers as a coup engineered by the West in Kiev. On the contrary, these embargoes have helped enhance Putin's popularity in Russia's border aided by media, mostly controlled by the Kremlin, depicting Putin as the courageous warrior defending Russia from the humiliation that the West wish to inflict by extending NATO to Russia's borders.
However, the sharp drop in the price of energy and the serious devaluation of the Russian currency are much more effective in forcing Putin's hand. In his Christmas State of the Union address, Putin predicted that within two years Russia will overcome these challenges. He failed to explain how and the reality is that Putin's fortunes are in the hands of the markets. If the price of oil and the rouble keep falling, then Putin domestic popularity will come under stress. Having savoured the western way of life and freedom of choice, Russians will find it hard to support anyone who wants to take back the standard of living they got accustomed to. Sooner or later Putin will have to re-assess his ability to survive such stress and seek a face-saving compromise on Crimea and Eastern Ukraine. The West should be ready to give Putin a face saver.
The third clash that will have to be resolved during 2015 is the conceptual difference between core and periphery Europe and how to restore the euro area economy to stability and growth. The core argues that fiscal discipline and consolidation by the periphery countries are pre-conditions for economic growth.  The periphery argues that consolidation and fiscal discipline can only be effectively achieved in the context of economic growth. It is not dissimilar to the chicken and egg 'which-comes-first' dilemma.
Here again the market is working to resolve this problem in an effective and definitive manner. The drop in the value of the euro especially against the US dollar is particularly telling. The Euro is down from USD 1.40 last May to USD 1.21 at present. This is a massive 15 per cent gain in competiveness by European exporters versus their American competitors. Profits of exporting and global European companies will be largely enhanced next year through the foreign exchange effects and increased exports as they convert their competiveness into firm orders. This will provide an automatic context of growth based on export competiveness rather than counter-productive austerity. 
With luck, market-based new energy could be infused into these three long-outstanding issues leading to secular solutions that could make 2015 a memorable year. There are risks however, and these are mainly geo-politic. Islamist State is now a grave risk; it seems to have appeared from nowhere and makes the al-Qaeda terrorist threat look like a picnic in the park. Their professed intentions make Nazi war crimes look humane. Friends and foes must cast their differences aside and fight a common enemy right on our Europe's doorstep.
I thank all readers for following this column for the last 15 years and wish them a very prosperous 2015.

Monday, 15 December 2014

System error

This article was published in the Malta Independent on Sunday 14.12.2014
The budget and its ensuing debate in Parliament have passed with an extraordinarily disinterested approach. Unfortunately, the whole saga leading to ex Minister Mallia's dismissal eclipsed its importance rendering its debate a non-event.
The dismissal followed exemplary due process which set high governance standards as Prime Minister Muscat had promised. Opposition demands for summary proceedings rather than due process shows political opportunism rather than high moral political ethics. In so doing, they seem to support the Sheenan mentality of shooting first and analysing later.
Mallia paid a high price for a common judgmental error. Mallia's decision to be fired rather than resign shows his strong personal conviction about the correctness of his behaviour. While one can fault his judgement one must respect his conviction.
This saga is a typical case of human inaptitude for managing the sudden metamorphosis from a highly successful career as private professional, to a top brass political executive. Change is so stark and sudden that its successful management demands training and coaching for a due level of preparedness which unfortunately is totally missing in our political system. We have a grave system error!
Mallia's decision to give up a highly successful private career to enter the much less rewarding and much more demanding world of politics is commendable altruism. Doing so and knowing that political success would attract thirst for vendetta from his former political stables that felt betrayed and deserted demanded self-sacrifice and a thick skin. 
The sudden switch however did not permit the mental adjustment from the criminal world, where there is high onus of proof on the prosecution, even in the face of suggestive circumstantial evidence, to the political world where even incomplete circumstantial evidence influences public opinion and places on the politician the onus to prove himself innocent.
The success of a criminal defence lawyer depends on influencing the judge and jury about the absence of proof of guilt beyond reasonable doubt. In politics, the judge and jury is public opinion that can be formed irrespectively of reasonable doubt.
Had Mallia experienced a transitory period as a backbencher or in Opposition, the adaptation to executive power would have been handled better. It is no coincidence that the two former dropouts from Muscat's Cabinet were similar candidates newly elected and immediately given a Cabinet role.
We speak so much about the need of lifelong learning to maintain our workforce competitive in the face of globalization and technological challenges.  It would not be amiss if new Members of Parliament and of Cabinet are subjected to intensive induction training to make their transition less traumatic than it has been for Mallia, Farrugia and Mercieca. The transition from successful private careers to political roles needs also to be subjected to due process; otherwise we would be scaring away real talent from politics.
Back to the more normal stuff, an economy growing at above three per cent in real terms, reducing budget deficit, a primary budget surplus, falling unemployment, rising labour participation and a stable balance of payments position presents a solid framework for planning the next moves on the economic chessboard. And the budget for 2015 did just that with an array of measures aimed to eradicate social benefit fraud, reduce dependency on social benefits and encourage economic activity.
However, there was one fiscal measure that breaks serious principles of tax policy which however has received, surprisingly, very little criticism. Text books of tax policy invariably preach that as a tool to foster economic growth, tax policy should be predictable, stable and non-discriminatory.
The tax policy change to render all sales of real estate property subject to withholding tax, irrespective of the underlying profitability, or lack of it, breaks all these three attributes of an effective tax policy.
The change was anything but predictable. Property ventures are long term in nature and investment could be scared away if the applicable tax system is changed mid-stream. Any such change should have been applied only to sales of property acquired after its announcement if the virtue of tax predictability was to be protected.
It has destabilized the market. Vendors who were banking on selling under Capital Gains Tax (CGT) rules suddenly find that they may have to pay a withholding tax, varying between five per cent and 10 per cent even if no profit is made on their property deal (as is mostly the case for property bought at the peak of the market in 2006/2007).
And it discriminates between property developers. Those who sell property held for more than 12 years will see their tax bill reduced from 12 per cent to 10 per cent of the sales value. Developers who sell property acquired nearer to the market peak of seven/eight years ago and who relied on getting full or partial refund of the seven per cent CGT paid on contract, will now have to pay eight per cent of sales value on a final withholding basis even though in effect they would probably not have made any profit on the deal. For them this is not income tax or capital gains tax; it is excise duty irrespective of the profitability of the transaction.
The property sector is too important to be subjected to such shocks and instability. The convenience of collecting revenue by a simple withholding tax charge applicable universally irrespective of profitability should not overwhelm the necessity to keep taxes predictable, stable and non-discriminatory. Taxes have to be fair not just convenient.
Property deals under the new tax regimes are now exempt from all profit taxes but subjected to an excise like tax of 10 per cent, 13 per cent or 15 per cent, of which five per cent is payable by the buyer and the rest by the vendor. No other asset class receives such discriminatory treatment. This must be another system error!

Friday, 5 December 2014

US shows Europe the way

Non Farm Payroll increase for the month of November 2014 in the US reads an astonishing  321,000 , compared to expectations of 225,000, with upward revision of 44,000 jobs in the previous 2 months which were already strongly above 200k each.   Wages are rising and unemployment rate is stable below 6%.

I already explained in a previous articles why the US is performing much better than Europe.

6th Oct 2014 - Europe must learn from the US


Everybody other than Germany and core Europe allies seems to know that Europe must take a mix of these steps to get out of the deflationary spiral it is approaching:

a. Countries that have fiscal space must use it to create internal demand which sucks in imports from countries in fiscal distress.

b. Special initiative to launch an aggressive infrastructure investment programme has to be immediately undertaken if necessary financed by more flexibility in fiscal discipline.

c. ECB must support the economy by aggressive non-conventional monetary easing measures.

d. Countries in distress must continue with their painful economic restructuring in order to regain competitiveness.

Unfortunately Europe seems lost in semantic arguments between core and peripheral countries.   The former maintain that fiscal consolidation is a precondition for economic growth ( meaning  that problems countries can only solve their problems by first becoming mirror images of Germany) whereas the latter insist that restructuring without growth is practically impossible and risk threatening the democratic pillars of society.

But not all is lost. 

Whilst country leaders are stuck in useless arguments and as the ECB lacks the necessary consensus to do the monetary easing push that is clearly necessary, the market is working its way to solve Europe's problems in the most effective manner.

The fall in the Euro against the dollar and the fall in the price of oil will be the most effective medicine to cure European competitiveness.   There is room for optimism not just on the US economy, which is already flying, but also on Europe's economy which in 2015 will benefit from a double boost of falling Euro and falling oil.

And this would be in spite of not because of its political leaders.

Tuesday, 2 December 2014

George follows Lino - oh what a sad loss!



Tumas Group chairman George Fenech: "Various opportunities will arise from the current situation and investors will be spoilt for choice if they are able to grasp them - and if they have been wise." Photo: Jason Borg.Somewhere in February 1986 Lino Spiteri introduced me to Tumas
and George Fenech.    He asked me to act as their financial consultant in the deal they were negotiating to buy the Company which owned the real estate where the Malta Hilton then stood in St Julians and to negotiate a managment agreement with Hilton to continue their operations in Malta.    Hilton had already decided to pull out and without their agreement to stay,  banks would not agree to finance the acquisiton.   Representing the seller was the late Dr Mario Felice.

Stay Hilton did, the deal was sealed and in time the old Malta Hilton gave way to the Portomaso project which remains the topmost and best real estate and hotel project in Malta.

Tumas Fenech passed away in February 1999 without having the opportunity to see the opening of Portomaso named after him which was opened a year later.    Mario Felice went to the Lord at the dawn of 2011.   Lino Spiteri left us last 14th November which also happened to be the 34th anniversy of my father's death.   And today George left us too.    Can you blame me feeling alone?

George was just 3 weeks younger than me.    For 11 years between 1986 and 1996 we were body and soul to each other, so different yet so complimentary.   George had the vision and the taste for what makes good business I had the discipline to distinguish between what is financially sound and what is just visuals without economic substance.

Together we produced a lot.    But George was walking the talk with his family's fortunes whereas  I was just advising.  Without George's courage and vision Malta would not have made the quality leap in luxury accommodation and high hotel standards that have benefitted so many so much.

George, you will not be around to execute the projects you were so keen to invest in and execute.   But you have done more than what normal people do in ten life times.   Till we meet again my friend I cherish the memories.

So long George!!  May you rest in peace and continue guarding over your family from high above.



Monday, 1 December 2014

Building bridges

This article was published in The Malta Independent on Sunday - 30th November 2014

There are many bridges that we need to build but a good number of them are not the concrete and steel type. We need bridges to a consensual approach for national problems which stretch beyond a single legislature and a bridge to more maturity in the way of doing politics.
But first let us get out of the way the most talked-about concrete and steel bridge. Following the publication of studies made by Chinese consultants showing concepts of the most technically feasible bridge connection which avoids fixed support on Comino, as well as financial estimates thereof, there was general consensus that this solution was both environmentally offensive and economically unfeasible.
One must not prejudge the feasibility of similar studies yet to be concluded on a sub-sea tunnel connection, which would certainly be less visually offensive but would, I very much suspect, be equally economically unfeasible. At this stage I would re-state what I wrote in this column on 11 August 2013:
"Even if such a connection were to be financially and economically feasible, I doubt whether it would address the basic problem that is making Gozo's economy unsustainable. Would young people who cannot find work in Gozo continue to live there because they can commute more quickly and easily with a fixed connection than with the ferry service? I doubt that very much, and the lure of relocating closer to where they work will remain - with a bridge as much as without it.
"And if Gozo becomes as accessible as Mellie─ža, causing occasional visitors to lose the experience of the ferry crossing, would Gozo retain its attraction for day visitors and home tourism?
"Gozo needs a bridge but not one made of concrete and steel. It needs an economy that can sustain a much bigger population so that increased job opportunities in Gozo would make relocating to Malta a real option not an economic necessity. With a population density slightly more than one-third that of Malta, there is ample scope for a 50 per cent increase in the Gozo population from 31,000 to, say, 47,000 and still have a population density half that of Malta. With sensible planning, Gozo can absorb this population increase and retain the greenery and scenery nature endowed it with.
"Any investment in unthinkable millions to build a fixed link will egoistically benefit the current Gozo commuters but will prejudice the attractions of Gozo itself as much as it will belittle opportunities for those who aspire to see Gozo reaching economic sustainability by building on its attractions and uniqueness rather than becoming just another place in the Maltese Islands."
Gozo has just had its most successful tourist season ever. The Gozo Channel Company is reportedly operating back in the black. Strong data services connection is attracting to Gozo IT and back-office services that do not require physical transport services, and an interesting medical-tourism project with strong international investment is reportedly in the making. An environmentally friendly green urban air strip seems possible with very moderate investment and this would link Gozo directly with tourist sources from nearby regions, most especially Sicily and southern Italy.
These are the things that Gozo needs to give the real choice that Gozitans deserve - namely to find job opportunities in Gozo rather than be forced to commute or relocate to Malta. For those who need to commute regularly, the feasibility of a fast morning and evening ferry service directly to Valletta must continue to be explored.
Bridges to political maturity are, however, more urgent and important. Political pressure for a Minister to resign before a panel of three retired senior judges conclude their investigations into whether or not the Minister concerned participated in an attempted cover-up of the shooting by the Minister's driver seems to suffer from the same syndrome that has landed the driver in trouble, ie shoot first and analyse later.
Persisting with the argument that Malta's economy could be on the path to demanding an economic bailout is irresponsible, even if it were true - which it is obviously not. An economy growing above three per cent in real terms, with a falling fiscal deficit, reduced unemployment and a stable balance of payments position cannot by any stretch of the imagination be a candidate for a bailout.
The only criterion where we fall way out of Maastricht rules is the debt level to GDP which is still at around 70 per cent of GDP. However, on this issue we are in good company with other countries considered strong, like Germany, and it is an issue the economic relevance of which is increasingly being doubted in economic circles. What is relevant in the current environment of exceptionally low interest rates is more the ratio of debt servicing to GDP rates than debt to GDP, meaning that at low interest rates, economies can successfully maintain a higher level of debt, especially if this goes to finance productive infrastructure.
Political maturity is required to reach consensus on other serious issues, especially those with long-term consequences spanning several legislatures. Is our health services model sustainable for the long term as an ever-increasingly aging population continues to make an exponential increase in demand for health services? Can the model of political parties running their own commercial activities co-exist with legislation to control the financing of political parties? Is our fiscal model for attracting international business sustainable, considering EU Commission initiatives to control tax competition using state aid rules? How can we attract real honest talent to politics if we maintain the current parliamentary and ministerial pay structures?
These are issues that can only be resolved if both sides of the political fence, beyond their daily spats to grab the headlines, produce a line-up of mature people who can discuss issues with a long-term perspective, bearing in mind that resolution of these issues will not only work for the party in government but also for the party in opposition who, by the time such issues take effect, could have well benefited from the democratic rotation of executive power.
In this context it is appropriate to finish with homage to the late Lino Spiteri who passed away two weeks ago. Lino was a model of political maturity. His loyalty to Labour was unquestionable but his mind was his own. The memory of Lino Spiteri should spur serious politicians on both sides of the political divide to pursue politics in his style and to put the nation's long-term interests before the immediate gains or losses of their popularity.