Malta and the global economic recession  the impact on investment and employment and preparing to reset the economy

By Joseph F.X. Zahra
9th September 2009
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No one can deny the challenging times we are living in  all over the globe economies are facing the effects of the financial meltdown and an economic crisis the beginning of which is marked on the 15th September 2008, the day Lehman Brothers filed for bankruptcy. Economic crises are the result of years of economic transformation, investor euphoria and mistaken policies. The likes of this economic recession the world had not seen since the Great Depression. Like an unexpected explosion, the crisis took several by surprise and the casualties were heavy. Economic activity slowed down sharply, unemployment figures shot up and continue to grow and consumer confidence drastically diminished throughout a globalised economy. Shockwaves were also experienced in developing countries, like China and India, where economic growth slumped. Against this scenario, it was only a matter of time for the effects to reach our shores. However, before presenting these effects on the Maltese economy, it is pertinent to highlight Maltas economic position before the crisis hit home.

Before the September 2008 global financial meltdown, our economy was at a historic moment  Malta had just joined the euro area, reflecting the results of the measures that were taken at fiscal consolidation with the explicit target to meet the Maastricht criteria. Throughout 2008 and because of a weak last quarter to the year, the countrys real GDP growth was that of 2.4%, when economic growth since 2005 always hovered around 3.5%. Foreign direct investment at the end of 2008 amounted to ¬ 663m, while the number of gainfully occupied grew by 4,382 full time workers and 4,713 workers part-time between January 2007 and December 2008.This was in keeping with the string of positive economic growth levels and other indicators of preceding years.

The run came to a halt during the last quarter of 2008 with the first contraction of GDP, followed by negative growth in the first and second quarters of 2009, with a real terms contraction in GDP of 3.3 per cent during the second quarter. In the euro area real GDP contracted by nearly 5% on a year earlier. The fall in GDP primarily reflected the first impact of the global recession on our real economy, and in particular on the export oriented manufacturing sector, registration of lower investment and tourist arrivals. Inbound tourists between January and July 2009 declined by nearly 13% over the corresponding period in 2008.

An increase of over 2,000 was registered in the gainfully occupied population during the first quarter of 2009, predominantly in the part-time sectors, while the registered unemployment amounted to 4.7% of the labor force. In July 2009, there was an increase of 1,563 unemployed persons over the corresponding period last year.
The fiscal deficit for the first quarter was that of 3.7%, and public debt to GDP ratio of 66%. Both figures imply that there has been now a divergence from the Maastricht criteria, a phenomenon which is not restricted to Malta, but which is being experienced by all euro zone countries as a direct outcome of the global situation.

The fiscal deficit is expected to widen to 4.8% by the end of this year. Growth contraction of around one per cent is expected for 2009. This will still be considered however as one of the most modest falls among EU members in 2009.

Compared to other countries Malta has been scratched by the recession but not badly hurt. Other competing economies such as Ireland, Spain, the Baltic States and Cyprus have suffered more severely. There are a number of reasons that can explain this resilience on Maltas part:

First and foremost, Malta did not suffer a financial crisis. Let us not forget that this world recession was triggered by a serious banking and financial crisis created by excessive product innovation, overconfidence in the market, as well as distracted regulatory regimes. The Maltese banks had little exposure to structured finance. The prudence and conservatism of the Maltese banking sector and the seriousness of the regulators have shielded the economy from closures and downsizing or direct Government intervention in the financial sector as has happened in other countries.

Secondly, the fact that Malta forms part of the euro area, has secured the stability of our currency and prevented Government from taking drastic decisions such as that of devaluation as has happened in Iceland where the financial sector collapsed and so did the economy. There are numerous benefits derived from euro membership, including the benefit of the execution of a prudent European Central Bank monetary policy, particularly the sustaining of a low interest rate scenario. Germany and France, the EU and euros major economies are evidently benefitting from this disciplined regime and are already registering signs of sustainable recovery.

Third, we had during this last year a positive result from the testing of Maltas diversified economy. The over reliance on tourism and manufacturing of the last three decades is over, with a financial and business services sector which has grown to a proportion that can protect unemployment and economic growth from the negative impact of an economic slowdown. While certain areas of manufacturing suffered, others maintained their momentum. Alternative industries to the traditional sectors of textiles, furniture and chip manufacturing have continued to consolidate or grow especially in the pharmaceuticals, IT, business services and on-line gaming. Services companies remain interested in Malta, setting up business here. The flow of registration of companies continued throughout the global crisis.

A targeted approach by the Maltese Government to tackle emergent problems in the manufacturing sector has also given positive results. A Task Force led by the Minister of Finance has targeted problem areas with flexible solutions but subject to credible medium and long term business plans ideally including research and innovation programmes, learning and development projects and plans for consolidation or expansion. The results of this approach speak for themselves. Trelleborg Sealing Solutions decided to invest ¬ 2 million euro in its Malta plant and the creation of 85 new jobs by next year. Methode Electronics is considering investing a further ¬ 6 million on new production lines, employing an additional 100 workers. It is estimated that over 1,500 jobs were safeguarded by this targeted measure.

The main point that needs to be addressed here is what opportunities can Malta reap from a recovery in global demand? How can it strengthen its competitive edge? How can convert the so called resetting of the world economy into a benefit to Maltas investment and employment scenarios?

What needs to be stressed here is that definitely this is not a call for Government intervention or active participation. For all intents and purposes, Government in Malta is still too big and too powerful. Government and politics in general have to be re-dimensioned within the context of a small but a rapidly modernizing economy. Government, after listening to what the socio-economic partners have to say, should play a directional role, as a facilitator to business to grow and to society to have the necessary safeguards that ensure an improved quality of life to all. This demands a more open minded and outward looking mind-set for the business sector which is less dependent on Government induced demand, and which with an assertive voice promotes its success stories to encourage more young people in their entrepreneurial aspirations and to venture into business activity. Likewise the labor unions need to realize that they can only safeguard the interests of their members by having the economy become more flexible, adaptable and competitive. Rigidity in thinking such as that on the Cost-of-Living- Adjustment (COLA) mechanism can only back-fire in the medium term as Maltas competitiveness deteriorates.
It is therefore very positive that Government has set 2015 as a year targeting excellence in a number of socio-economic spheres including education, information technology, innovation and enterprise. There is no place for being average in the world we live in. We have to strive towards improved decision-making, behavior and action. Competing in todays global economy necessitates a drive towards excellence in all we think, say and do. What is lacking in this journey towards 2015 is a series of objectives, milestones, goals and targets for each excellence sphere. Essentially, can we quantify what we mean by excellence in innovation, in education? What is expected from the social partners to state that we are progressing towards a state of excellence? How can we know where we stand if the parameters and goals are not articulated or defined? Do we have a road-map?

To the words competitiveness and excellence which are being intermittently used today, I will add a key-word, value-added. Perhaps what we should aim at is a value-added economy which concentrates on margins above costs to ensure net gain and profitability. It is not a matter of how much Government is spending on health and education, but what matters is the net return of this investment in society, in the improvements in quality of life.
This is why we need to look at our education sector. So far it is coping with the requirements of society and business. Government has responded perfectly well to the demands of industry in various spheres including aircraft maintenance and information technology. The MCAST is proving successful. But the challenges on this route are hard and varied. It is a fact that we need to lure a larger section of youngsters into further and higher education. Malta still has a high proportion of early school leavers in the EU, 40% in 2008 compared to 14% in Europe. Much more needs to be invested in this direction  the University of Malta needs to modernize and update its corporate governance system, it needs to strengthen its autonomy and independence, it needs to invest more in academic and applied research. Government must have this upmost on its priorities. Academic and vocational institutes and colleges are to be attracted to Malta within a robust licensing and quality assurance infrastructure. This is direct investment in Maltas only resource that makes us competitive  people.

It is a fact that 2009 has been characterized by the execution of targeted but robust measures to safeguard and secure existing investment particularly in the manufacturing sector. However, there is a real need for a more focused and targeted investment promotion strategy that will strive to attract even more foreign direct investment. Malta had a string of successes throughout its industrial development history, but we have never prioritized this drive up to its limits. We need a much leaner and smaller Malta Enterprise which focuses more aggressively on targeted sectors. The success in attracting pharmaceutical industry can be replicated in other areas. My vision for Malta Enterprise is an organisation that first researches the most mobile investment opportunities today and in the coming future; that consists of a small number of professional relationship officers who are in establishing and developing relationships with prospective investors, and who are backed by a still small team of back-office persons who will sail investors through the seas of bureaucracy and red-tape.

And let us not forget Maltese investors. Much has been done to strengthen the Maltese business fabric. The list is endless. More can be done. I would like to focus here on the prospect of launching schemes for entrepreneurs to start their business. A scheme which is similar to the auto-entrepreneur model launched by the French Government this year that lures both young graduates and surplus Government employees to start their new business, cutting through administrative red-tape and lightening tax burdens. The Maltese business sector has to set its thinking on exporting its services and taking full advantage of the EU single passporting. It can only look at the domestic market as a launching pad, a pilot project before exploiting the opportunities overseas.

I cannot conclude this list of opportunities by not mentioning the compulsory restructuring of our welfare state. The recent report by the Today Public Policy Institute (TPPI) highlights the weaknesses of the present system and the serious repercussions of retaining the status quo. A value added economy is not a free for all economy, with a welfare system that attracts more people to it even if these can more than afford not using its services. We have created a welfare dependent society with a high propensity to over use the system if not misuse and abuse it. The point made in the Sustainability report by TPPI is that we need o rewire ourselves towards self- determinism and not state system reliance. More than a safety net, we need a trampoline.

My last comment is on Government expenditure. Government has decided to depart from previously announced targets for its finances for 2009 by increased spending of 1.7%, most of which is going by way of fiscal measures to stimulate the economy during a period of sluggishness. Government is taking the opportunity to direct this expenditure towards roads reconstruction and other essential infrastructural projects. This could also be the time to escalate works on heritage related preservation and conservation work which is so necessary to improve the standards of this island for both Maltese citizens and tourists. This is a direct way by which we can improve the Malta product which is still far from being up to the standards that most visitors expect.

It is clear now that there are signs that the global recession is easing, and led by consumer growth in China and Asia, the economies of the West are again hopeful that the green shoots in the USA, Germany and France will indeed transform into a healthy recovery. Malta as an open economy depends on the tempo and moods of the global economy, and even as early as the first quarter this year, business confidence in the manufacturing sector improved. We have however to come to terms with the fact that the laggard impact on the labor market as industry restructures in face of market conditions. The sensitivity to this phenomenon should remain as a priority focus of everyone.