from the Malta Independent..

Opinion By George M. Mangion

09 June 2013

Malta has an open market economy, so it goes without saying that it must continue to maintain the right competitive edge to meet the demands of the global market. It does not have any natural resource wealth, energy reserves or heavy industry: the country depends entirely on imports to meet its requirements of basic products, energy needs and industrial products, as well as consumer goods.

Malta’s strategic location in the centre of the Mediterranean, as well as its excellent harbours and modern Freeport, make it an ideal business location – as can be verified from ancient records which show that, as far back as the ancient Phoenicians in the first millennium BC, it served as a hub for trade and maritime business. In spite of being the smallest country in the Europe Union, it has established itself by investing heavily in harbours to compete as one of the most important logistical centres in the Mediterranean. A modern infrastructure and advanced port facilities for cargo ships as well as a busy cruise liner hub generate jobs and add growth to the GDP.

The island republic also prides itself on having the world’s largest shipping register and shipping lines that connect to 165 harbours on every continent. But none of this could have materialised, had previous governments not invested heavily in the building of a Freeport that is now being extended even further, while plans are afoot to reach an ambitious three million TEU transhipment quota in the near future .

As the Mediterranean’s third largest transhipment port, the Freeport represents a strategic platform for the shipping lines that have chosen it as their Mediterranean hub port – located as it is at the crossroads of some of the world’s greatest shipping routes and in the heart of the Europe/Maghreb/Middle East triangle.

Naturally, there are other contributing economic factors that have helped us maintain a respectable 6.5 per cent unemployment figure and these include a successful portfolio of high-value manufacturing units, the tourism industry and the financial services sector. Manufacturing of high value added products has seen the textile industry (mainly based on cut-make-trim) replaced by new sectors such as pharmaceuticals, micro-chip assembly and the aircraft repair. Major imports are electrical and electronic components, machinery, mineral fuels and oils, pharmaceuticals and medicinals, plastics, software and food products.

But it is not a rose garden as, unfortunately, the property market has been in the doldrums for quite a few years, so the PL government has acted promptly to remove the anomalies in incentive legislation aimed at attracting foreign buyers. Another step to revive the industry was a reduction in Mepa’s charges and the replacement of the ill-fated High Net Worth individual scheme with an improved global residence programme intended to attract more foreign investors to buy quality homes.

This week, Mepa renewed a permit for the development of the Metropolis Plaza in Gżira, which will feature the tallest building on the island. This project has been stalled for four years due to a lack of funds which saw a giant hole excavated in the centre of Gzira which in the winter provided a suitable habitat for tadpoles and other creatures. Now, a majestic €60 million mixed-use lifestyle development named Metropolis Plaza will include three high-rise buildings consisting of 13, 27 and 33 floors. It is to be expected that the stagnant construction industry will enjoy a boost and more jobs will be created – possibly with the land reclamation projects and the development of a vast maritime hub in Marsa. More good news comes from the tourism sector, which enjoyed a 12.3 per cent increase in tourist arrivals in the first quarter of 2013, compared to the same period in 2012, and an 8 per cent increase in nights spent in hotels and a 4.2 per cent increase in tourist expenditure.

Passenger traffic between January and May this year registered an impressive increase of nine per cent over last year. It is a consequence of this additional business that aircraft movements increased by 5.3 per cent, compared to the same period in 2012, with an increase in seat capacity of a respectable 7.2 per cent.

More positive news is on its way, since the government has said that a five per cent increase in seat capacity is expected between November and March 2014, traditionally the quietest period in the tourism industry.

Finance Minister Edward Scicluna remarked that the potential for further growth is waiting to be tapped but, without seeming to blow his own trumpet, he conceded that a lot has been delivered during the government’s 100-day honeymoon period. Professor Scicluna, who previously served as an MEP in Brussels for the Labour Party, believes there is much more to do but everyone agrees that the main target is to convert an ageing and inefficient oil-fired electricity generating plant to a modern plant run on more environmentally friendly gas.

Already, more than 19 international companies have applied for selection as accredited investors in a bid to commission and build such an ambitious project. These include the Chinese government, multinational giants such as Shell and companies from Turkey, India, Spain, Switzerland, Italy, France and Australia, as well as a Malta-based consortium.

This bestows a seal of international approval on the Labour government (specifically to Dr Conrad Mizzi, the young Energy Minister) who has been heavily criticised by the Opposition who say that the project will become another white elephant (as Smart City, the White Rocks Complex, Arriva and other ambitious dreams floated in the past). The government has been making headway with a strong wind in its sails, as estimates point to the GDP for the first quarter increasing in nominal terms by 3.7 per cent compared to the corresponding quarter last year.

In real terms, GDP went up by 1.6 per cent (2012 -0.8 per cent growth). Evil tongues may argue that this growth is partly due to a one-off element since, prior to election, the PN had signed new collective agreements with the medical profession and the entire civil service – a €33 million increase in compensation to employees and a paradox, as most Mediterranean countries are doing the opposite, ie, reducing public expenditure. In its defence, the PN replies that salary increases contribute to job creation, contrary to what the PL had been saying when it was in Opposition.

But it is not all doom and gloom as Malta reached the highest GDP growth in Q1 compared to the results of most EU members as published by Eurostat. Sadly, GDP fell by 0.2 per cent in the euro area (EA17) and by 0.1 per cent in the EU27 during the first quarter of 2013, compared with the previous quarter. The European Central Bank (ECB) has in turn predicted a deeper than expected slump in the eurozone economy as its president, Mario Draghi, said the institution had discussed negative interest rates in a bid to kick-start growth. The ECB said the economy of the euro’s 17 members will shrink by 0.6 per cent this year compared with the previous forecast of a 0.5 per cent decline. However, the ECB was more optimistic about 2014, inching up its growth forecast from 1 per cent to 1.1 per cent.

Comparing Malta to the champion runner in the GDP race, we note how German industrial output and trade activity rose sharply in April but the Bundesbank cut its growth forecast for this year, saying Europe’s largest economy would slow down again after a second-quarter surge. It is reducing its 2013 growth forecast by 0.1 percentage points to 0.3 per cent and its estimate for 2014 growth to 1.5 per cent from 1.9 per cent. This growth pattern compares favourably with Malta’s own projected GDP growth of 1.6 per cent for 2013 linked to lowering the deficit to GDP down 2.7 per cent. It is obviously important that Germany recovers fast, as it is one of our main export clients, but predictions for this year are not stellar, although its business morale improved far more than expected in May, rebounding after two months of falls and suggesting Europe’s largest economy is slowly picking up speed after a sluggish first quarter.

It is important to remember that Germany is traditionally an export-driven economy which has had to rely more on domestic demand to prop up growth as foreign trade looks likely to act as a brake this year, given that much of the eurozone, where it sends 40 per cent of its exports, is lingering in recession. The unpalatable fact is that production was halted due to a two per cent fall in exports to the Euro currency bloc. It is a pity that Germany’s recovery does not look strong enough to help lift its eurozone neighbours out of recession.

In a nutshell, one can argue that the German economy may be out of casualty – but a return to fuller health still needs a lot more care and attention, given the political uncertainty surrounding the September national election.

To conclude: Malta’s future recovery depends on a proactive government which must abide by its election promises to work hand-in-hand with the private sector. Many agree that the new administration has hit the road running in order to make up for time lost during the over-stretched election campaign and, given time, it is keen to put into action various schemes and financial incentives that were contemplated in the 2012/3 budget. To start with: last month saw a bevy of incentive-based legal notices aimed at kick starting the economy and encouraging family business in their succession problems. PKF organised a London conference last month on energy that had the support of a proactive Transport Minister Joe Mizzi, who is seriously reviving the neglected oil and gas exploration activities in our untapped offshore acreage. This is very commendable and if the omens in the sky are favourable by the end of its legislature this administration can lead us to the promised land of milk and honey.

The writer is a partner with PKF an audit and business advisory firm.

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