Monthly Archives: January 2019

Malta’s economy and its underlying problems from a fundamental viewpoint

valletta wikiLabour is riding a wave of economic growth, but what lies behind this economic success and what is in store for Maltas economy in the future? What is happening on the ground and what do the numbers really tell us?

From 2013 to 2017, Maltas GDP grew by an average of 6.8 per cent per year, an impressive sum considering the slow growth taking place in the EU across these years and the ensuing global economic and political challenges. Labour, aided by low-oil prices, has managed to create a very open, flexible and thriving business market. Numbers dont lie and indeed it is true that at face value the economy is doing well. However, behind the numbers showing rapid economic growth, there are also other numbers that show deeply-embedded structural problems which could easily lead into social crisis.

Prime-Minister Joseph Muscat has successfully implemented a third-way, centrist and post-fordist economic model by theoretically bringing an economic compromise between the interests of one economic class and the others. The main principles of this economic model are industrial peace, a welfare system that provides the essential layers of protection to the vulnerable sections of society, and a free market that is freely accessible to all businesses and individuals.

Muscat has implemented his vision in practice in a multi-pronged manner with the underlying principle of prioritising an increase in expenditure through the market. Income tax has been progressively reduced, except for the highest-income bracket, inducing in turn higher expenditure levels in the economy. Red-tape and bureaucracy for businesses have been reduced to a great extent, while building regulations have been reduced exponentially, thus allowing a construction boom that seems to have no end in sight. More foreign companies and workers have relocated to Malta and have significantly contributed to the the increase of governments taxation revenue by 32 per cent in 2016 compared to its 2013 level. Economic growth was registered mostly in the services sector, but the construction industry – which now compromises 4 per cent of GDP – and the real-estate industry – comprising of 5 per cent of GDP – also grew substantially. In 2017 alone 8,513 apartments were built as opposed to the 2062 apartments built in 2013. The gaming industry, which currently comprises 12 per cent of GDP at around 1.2 billion in nominal terms, registered sustained growth along the years along with the tourism at 6.1 per cent of GDP and retail and catering at 21 per cent of GDP. Agriculture and industrial production in electronic components and pharmaceuticals have kept their long-term decline.

Expenditure in the welfare state has increased considerably with recurrent expenditure on health and education in 2019 to amount at an average of 59 per cent higher than 2013 levels. The education system has been revamped and the health sector has been improved drastically cutting waiting lists across all its services. Free childcare was also introduced and energy prices have been lowered compared to pre-2013 levels. Government has also exponentially increased its spending on culture and the arts. Unemploymenr rate in 2018 stood at 3.8 per cent.

Structural changes in the energy sector also heavily affected the economy and these should be noted. Enemalta, which was entering bankruptcy territory in 2013, had been bailed out with a Chinese investment in exchange for a minority stake in the company, while a new gas-powered plant was built to diversify energy supply, and contribute to long-term security and lower prices. The gas deal was also overshadowed in a corruption scandal in which ex-Minister of Energy Konrad Mizzi and Prime Ministers Chief of Staff Keith Schembri were alleged to take kickbacks via 17 Black, a company owned by Tumas Group CEO and Electrogas Director Yorgen Fenech (Electrogas is the consortium which owns and supplies the gas-fired plant in Delimara). The allegations have been recently backed up by exposing emails by Nexia BT (the accountants of Mizzi and Schembri who opened shell-companies in Panama for them) that state that Mizzi and Schembri were to receive a million euros each from 17 Black.

The gas corruption scandal has overshadowed a significant structural adjustment to the economy that helped boost growth. Government has no longer restricted large capital projects to particular Maltese oligarchs. Labour has opened up government procurement and has reduced systematic preferential treatment to a number of Maltese oligarchs. Systemic preferential treatment has also been wavered when it comes to permits and government deals. This is also the reason why Muscat keeps receiving strong support from a middle-class base, which traditionally had been PN, and why he is perceived to have opened the economy to all. This doesnt mean that Labour is not using its power of incumbency to provide preferential treatment to some of its supporters. Nepotism and preferential treatment do not appear to have been eradicated. What Muscat has changed was the rigid structural system of preferential treatment to particular oligarchs through government bureaucracy and State structures. At the same time, Muscat is trying to ensure to appease most of the big businesses by allowing them to expand their projects and giving them even more land deals, while at the same time allowing smaller competitors to access to government deals and procurement. Muscat has perfectly projected himself as a leader who allows open and accessible business to all: to oligarchs and small-businesses alike.

The structural government system of preferential treatment under PN had allowed for the growth of local oligarchs at the expense of public property and assets, and it was part of a broader raison dêtre in how the economy was run, by basically sustaining a debt-ridden government by selling off state assets. Muscat also ended the State fire-sale policy , but the 30-year concession to St. Luke’s, Karen Grech, and Gozo Hospital to a private company by then Minister of Health, Konrad Mizzi, had opened the government to accusations it intended to privatise the health sector. Mizzi’s successor as health minister, Chris Fearne, has as of now refused to entertain the idea of further private concessions in the health sector and instead focused on ramping up the budget of public health. It must yet be seen what Fearne’s long-term plans for the health-sector are, but his recent meetings with local magnate Żaren Vassallo may also indicate that Fearne may plan further public-private partnerships in the health sector. On the other hand, Konrad Mizzi, who is now Minister of Tourism, has as of now refused to sell the national airline and is making efforts to salvage it after years of malpractice under PN governments. Government has also purchased 49 per cent of Lombard Bank and increased its share-holding in Bank of Valletta with capital raised from passport sales, practically going against the the fire-sale trend of public-assets unless one would consider Konrad Mizzi’s foray into the health sector.

When Labour entered office in 2013, it inherited a heavily indebted State-energy company and a heavily indebted government with a stagnant economy. The layers of security to Maltas debt are multifaceted, but the main layer of defence is the fact that public debt is held through bonds, most of which are locally owned. A strong home ownership rate along with a cheap housing market had also enabled people to survive the recession of 2009, while local banks were not exposed to risk and had ample assets at their disposal. Labour has managed to begin reducing the deficit, while the debt to GDP ratio has decreased significantly from 68.7 in 2013 to 50.8 in 2017. This decrease is owed to the strong increase in governments recurrent revenue, but, as of now, government also has the comfort of sponsoring large chunks of capital projects – especially infrastructural projects with money made from passport sales. Government debt in 2013 was calculated at 5 billion and in September 2017 debt was calculated at 5.8 billion. Government revenue and expenditure in 2013 was 3 billion and 3.2 billion respectively, and in 2017 was 4.3 billion and 4.1 billion respectively producing enough a surplus to start repaying debt (different data sets may give different figures, but are all consistent with a significant surplus).

The numbers of the economy tell a story of a strong and growing economy, although one would do well to still worry about debt levels. Austerity policies would not solve the public debt problem, and they would in turn create a social crisis. Government needs to ensure that the economy keeps growing so as to sustain its increasing revenue levels, but this could only be done if economic forces produce consistent growth levels. In textbook economics, a sustained economic growth without slumps is the exception rather than the rule, and thus government should seek to minimise its risks by diversification while simultaneously emphasising and prioritising economic growth, which is sustained by productive forces rather than speculative forces (that are more prone to risk). Currently, the government is ignoring the social and economic risks that come by with growth through speculative forces. One should also not ignore the potential economic problems brought by potential corruption practices and government-lead private-public deals which give low public returns, thus auditing and transparent practices are also important for material ends.

Government has been wise enough to build a symbiotic relationship with the gaming industry, through an efficient legal regime that enables it to operate efficiently and competitively. Government has also tried to build a symbiotic relationship with the construction and real-estate industries, which have had their profits increase exponentially at a large social and environmental cost, and minimal economic return compared to other industries. And as the construction industry is going in overdrive, one would naturally assume the property prices would be also increasing. Here we find the seeds of an incoming social crisis. Wages in Malta have increased by an average of 20 per cent in five years. From an average wage of 1,600 in 2013, the average wage today has risen to 1,800. The minimum wage has risen from 648 in 2013 to 747 in 2018, but the value of property, compared to its 2013 level, has increased by 100 per cent in most areas, with some areas even increasing at higher levels. According to NSO statistics, by 2016 in order to purchase a property in the cheapest areas, one had to be on an income of at least 20,000 – even higher than the national average.

Government has so far refused to consider the option of price controls in the rental market, but it has begun preparations for the construction of social housing units and aims to introduce a basic regulatory framework in the rental market. Ideally, social-housing should go to those who are mostly in need, prioritising first on pensioners, retirees, disabled, victims of abuse and single parents in the low-income brackets, but social housing units may not even be sufficient to cater for all of the low-income bracket. Even the average wage by itself is not enough to purchase a property, hence condemning single people with an average wage to remain in the rental market. Although property prices may not increase as much as they did between 2014 and 2017, the ever-increasing demand to property in Malta and the lack of land ensures that property prices may very well keep increasing. Moreover, if the economy intends to keep growing in the services and tourism industries, a sustained increase in foreign workers and property buyers attracted through the said industries will only contribute to higher demand in property. At the same time, government has to ensure that the value of property doesn’t compromise the competitiveness of foreign businesses in Malta. The price of property was, for example, one of the factors which had incentivised many companies and hedge funds to move from London to Malta.

The main factor that has so far averted a housing crisis is the very high home-ownership of 78 per cent, but at current inflation levels there is a long-term limit to how much the children of home-owning parents will be able to use their parentscapital to become home-owners as well. In the long-term, the current discrepancy between the average wage and the property value will contribute to a situation where tomorrows families will be, in average, less rich than their peers in real terms. On the other hand, the lowest-income bracket group has been hit severely adding severe pressure on homeless shelters and charitable institutions. If the construction and real-estate industries is allowed to work unregulated, the housing crisis will only unfold gradually with ever decreasing rates of home-ownership in the long term. If Maltese people lost their possibility to own a home, social mobility would decrease, which would in turn enable for a higher gap between social classes. Further in the long term, the housing crisis would also be bad to the economy, given that the economic dividend of money spent in goods and services is higher in real value than the profit dividend in money spent in rent. In the short term, Labour should also raise the minimum wage so as to help those who have been hit in the hardest manner.

Clearly, there is a market-dysfunction in which the construction and real-estate industries are growing at a significant social and economic cost. If government is to implement controls in the rental market and intervene in the housing market in a multi-pronged manner, the rate of profit in the real-estate and construction industries may decrease in the short-term, but it may also keep it competitive in the long-term. Such a course of action is inevitable if we are see to a reversal in the decline of the home-ownership rate. The fact that government has refused to stop the multiple pending applications for fuel pumps in outside-development zones shows the difficult stage the situation has reached. There is nothing that can justify such a rampant form of development with meagre short-term profits. A case in point is the low public dividend in exchange of DB’ Group and Corinthia’s land deals of Pembroke and St Julians respectively.

Back in the 1970s, when Malta had socialism and double-digit GDP growth rates, Labour solved a housing crisis that was much more extensive than todays. Labour built many social-housing units aimed for the most vulnerable and lower-income brackets, but it also built many housing units that were then sold at an affordable price to average-wage earners. In this way, Labour ensured that everyone could have a house by simultaneously managing to stabilise market prices. Unless current government starts regulating property speculation through price control or by building an extensive number of affordable housing, housing affordability will remain on the downside both in the short term and the long term.

Government should drop its obsession with the hazardous construction and real estate industries and instead start seeking foreign capital investment that is actually productive. Manufacturing, IT and hi-tech industries are growing in Eastern Europe. Croatia is home to a local company that produces electric cars. While companies in Canada are reaping multi-million dollars in revenue for the cultivation of marijuana, we still fail to see the economic and environmental potential of Malta having a fully-fledged marijuana cultivation industry. We have not yet even begun seriously considering to getting into the renewable energy sector. Productive capital investment will not come from local sources. In Malta, the industrial capitalist is an exception rather than the rule. Yet, if high-tech production industries are making a comeback in Eastern Europe, there is no reason why we shouldnt be attracting such kind of foreign capital to Malta.

Government has done well by reverting previous austerity policies and increasing the contribution to the welfare state, but it is also clear that a large section of the population, composed of low-income earners and pensioners are at serious risk of poverty. Further discussion on Malta’s economic model is needed to ensure that we have an economic plan that works for all and not just for the few. After all, Labour should dictate its economic policy in line with its traditional principles of social justice. One main principle that should lie at the heart of Labours economic policy is that economic growth should be an end to social and economic emancipation and not strictly an end to private profits. If Labour keeps the balance right, it can legitimately claim to be left-wing.

Statistics sourced from Central Bank of Malta, National Statistics Office and Ministry of Finance.