What will happen to the Maltese Economy?

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We’re witnessing history in real-time with a world going into economic crisis. The idea of helicopter money, previously derided by the liberal technicians and academics is now mainstream politics. The global-economy is literally closing down as governments across the world try to contain the pandemic. Central banks are pumping endless supply of money into the financial system assuming all this liquidity will someday stick and stabilise the system. The Maltese government issued a liquidity mechanism providing new credit to commercial companies backed by government guarantees, tax deferrals and social payments such as quarantine leave subsidy to employers.

What’s going to happen?

No one knows. Eventually the pandemic will be contained and things will normalise but things won’t be the same again. Those who sell you the idea that things will be the same as they were before have absolutely no idea what they are talking about. The economic, monetary and financial implications of the current events are wide-ranging

What could happen?

There are various outcomes and scenarios which may probably happen. First of all, we have to assume that we are in uncharted waters. Although past historical experiences can have a lot of similarities to what we are experiencing today such as Spanish Flu and plague epidemics, debasement of currencies and increasing deflation, what we experience today has it own distinctive and particular features such as rapid economic shutdown accompanied with rapid stock market crash and despite monetary stimulus from the Federal Reserve and the European Central Bank.

One of the probable outcomes with regards to Malta is that property prices will go down significantly – this will be great for young couples who couldn’t afford to buy in the last couple of years when property prices sky-rocketed. It will also be good for renters. There is also another important aspect to this situation. How many building companies are over-leveraged and what is the exposure of the banks in case the building industry collapses? This, I think may be one of the risks ahead.

The other probable outcome is that jobs will not be as plentiful as previously and wages would go down as well. Before the pandemic broke out, the Maltese economy was by-far much more robust than it was in 2013, but we still don’t know the extent of the economic damage being done. Anecdotal evidence from foreign companies and foreign investors in Malta is very negative and they are trusted much more than the local business-class which has a strong tradition of rent-seeking and notorious for buying out both political parties with donations (disclaimer, there are also many good people in the same business-class as well, but facts can’t be denied). Anecdotal evidence from personnel of gaming companies may be different. I was once told by an igaming professional that 2008 was actually good for them since people gambled more during the crisis. Obviously, the tourism industry is devastated, as is retail, publishing and printing. Medical companies seem to be doing well. Any feedback with left in the comments are welcome.

What is happening?

There are many questions and arguments being made about government’s liquidity scheme. Some are arguing that the scheme ultimately benefits local banks. Maltese companies are claiming that the liquidity provided for new credit won’t be enough and need direct helicopter money. Social activists are arguing that helicopter money should be given directly to everyone to subsidise purchases of necessities: rent, food and other necessary expenses.

On the other hand, some argue that if the Maltese government is using the National Social Development Fund to guarantee bank loans when Maltese banks are still lending with rates of 3% and above, why doesn’t the government simply use the money from the said Fund to buy Bank of Valletta outright and issue the loans right away without having to build a complex leveraged-financial instrument? Maltese banks have given us big interest-rates compared to interest rates given in other European countries and as of now, nobody wants to own them any way.

What should happen?

Everyone wants money and people have to go on living even if the economy is shutdown. What is clear to everyone now is that the State has a very important role to protect society as a whole but especially to defend the vulnerable. The idea that Central Bankers can simply print more money to save the financial system is getting quickly outdated. Political leaders across the globe seem to be mostly incompetent in their handling of the crisis, starting from Trump who failed to recognise the gravity of the situation, to EU commissioner Ursual Von der Leyden who is completely clueless without any ideas to stem the potential ramifications of what is coming for the Euro-zone.

Clearly, the world is going into reset, but we lack strong and convincing political direction. It’s been quite a while since the world was in such a crossroads. Liberal technicians and academics have clearly failed us and their solutions will be suspicious given their track-record. There is also a very important factor which will determine the outcome of the reset. Generally, in history we see that when people were collectively experiencing a severe crisis, social solidarity increased – we’ve seen this taking place during the Second World War. It was only after the Second World War that the idea of socialism was then taken very seriously and universal health care was set up, the social and economic charter, strong pensions and minimum wage, social mobility, the right and possibility to own your own domicile, but also to do business in a free market without rent-seeking and the kleptocracy of oligarchs. Such a balanced outcome would have to be found yet again. I am rather skeptical on whether the Maltese government and the Labour Party right now is really interested in coming up with deep social and economic change, including the reforms we need to curb rent-seeking.

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