News | Sunday, 04 January 2009

PRINT THIS ARTICLE

Welcome to the credit crunch

Hope may have been Obama’s keyword for his electoral victory. But things are not looking as hopeful for the world economy, or for Malta

Drop those champagne flutes – 2008 was not a year to toast, and 2009 may well hold disaster instead of joy and hope. Last year was certainly one to teach us that you can never be aware of the big implosion ahead. If this financial crisis was never expected, what then can we expect of this year?
Hope may as well be the keyword for 2009, a silver lining for this big bad cloud of zero growth, zero interest rate policies, doomed funds, unemployment and recession.
The hope is that the recession will not be as protracted as previously believed, and that we might be cruising steadily towards the end. Optimists might consider the second half of 2009 as the start of a possible upturn for the global economy. They have been buoyed by the governments and central banks cutting interest rate policies, setting up reinforced capital bases, and propping up ailing and ruined financial institutions.
The first of these moves were those by the US Federal Reserve to pump trillions of dollars into the financial system, coupled with tax cuts and a prospective Obama-backed injection of some $1 trillion into the US economy.
The European Central Bank was slower to react, perhaps not expecting the need for such acute surgery as the credit crunch reached Europe. By the end of the year, it cut interest rates three times in a bid to allay the overwhelming force of recession. Countries like Japan moved close to the zero-interest rate mark. Sweden and the UK slashed rates at breakneck speed and cut VAT ahead of the Christmas shopping season.
In theory, this scale of government intervention has meant that 2009 will not be as bad as it could possibly have been. The collapse of major financial institutions, and the recession that followed the slowdown in world demand and production meant this was the worst recession since the Great Depression.
But it might take years for the world economy to recover the trust and stability it will need; at least, there was a massive international response to stem the downfall, with interest rates being slashed to pump in more money into peoples’ pockets.

Global slowdown
But how far can this optimism take us to a true turnaround of events? Economists still claim that the current recession will actually last for more than 2009, accompanied by high unemployment rates, and falling house prices internationally.
On one hand, banks will be fighting rising bad debts, which will translate into less capital moving out in loans – while on the other, governments will be calling upon banks to fully transfer interest rates cuts and extend their lending facilities in a bid to see more cash flow into consumers and businesses. Taking it to the extreme, 2008 will not be the last time people will hear about the nationalisation of banks. As financial expert Alfred Mifsud wrote this week, the world will keep on hovering above zero-interest rates.
The Maltese might be looking at things differently. You will find differing opinions on whether the recession is actually being “felt”. The real perception is that a slowdown in demand is at hand, at least as evidenced from media reports on Christmas shopping and spending on festivities, and perception surveys by business associations such as the GRTU. A case in point where the effect of the global slowdown is being felt is that of the employees at the Trelleborg, Methode, or Packprint and Multipackaging firms, who were faced with a reduced, 30-hour week.
While many expected some form of reprieve from the cuts in ECB interest rates, it might take ages before the cash injection will truly spark off a reversal in the slowdown in demand.
But without the banks passing on the full reductions in interest rates to borrowers and businesses, many argue the ECB cuts could have little effect on consumer spending.
One of the reasons for this coyness is banking profits. Banks make their profits on the difference between the mortgage and savings interests rates. As interest rates get slashed, these profit margins only get smaller. Banks will only earn the rebuke of the man on the street if they don’t pass on the full cuts to consumers in such tough times.
The darker reality is that banks use the rate cuts from the ECB for their own lending, so that they can then lend that same money to customers at higher rates, and turn a profit.
As MaltaToday’s financial columnist Mark Lamb explained, banks were slow to pass on the full rate cuts because they want to hold on to the money, and because it makes their accounts looks good. The retained cash is used to absorb losses they incurred on bonds in failed banks – for example, the Lehman crash.
“Until banks lend to each other and pass the benefits of low interest rates onto their customers, credit markets will remain blocked and a sustained recovery in the real economy is unlikely,” Lamb warned.
Unless banks are pressured to comply with the full interest rate cuts (as they have been called upon to, by both the minister of finance and the governor of the Central Bank), the money cycle may take longer to get going.

The Maltese horizon
Malta faces a host of challenges ahead. Since 2006, it has been facing a slower growth in exports, and now it has encountered a negative year-on-year growth in exports. Coupled with our high dependence on imports, the widening balance of payments will have serious implications for the Maltese economy as clearly elucidated by economist Edward Scicluna during the GRTU business seminar held in December.
With a 2% annual fall in all export-oriented industries, such as tourism, this would translate into losses of over 1,000 full-time jobs directly in tourism, and some 500 in indirectly-related jobs.
“What we are feeling today is only distantly related to the global recession,” Scicluna says over the worsening feeling on the national economy. “It is mostly psychological.”
The worrying fact about the credit crunch is that we don’t know where it will take the Maltese economy.
“We have no idea how it will affect us or how deep this effect will truly be. I would say the worst is yet to come in 2009 and it will hit us mostly round about the second or third quarter. It will be bad news after bad news, with hotels reporting low or no levels of occupancy, or even shedding workers. And in terms of export-oriented industries we can expect to see more three- or four-day weeks.”
Philip Fenech, the GRTU’s president for the tourism, leisure and hospitality division says the tourism industry and the government will have to “roll up its sleeves” if it wants to secure just over 1 million tourists this year.
“With global consumption levels down, and 2008 ending with a contraction in tourism figures for Malta, it is time to stop bickering and find solutions to our challenge. We can’t lay low. The MTA has already started by securing new routes. We need to have more airlines and routes if we want to maintain load factors. And the MTA is also starting with targeted advertising on these new markets.”
But Fenech also warns that in times of slowdown, Malta’s players are going to have to look at restructuring their prices if they want to be competitive.
“IATA is predicting a decline in tourism consumption – the only countries to enjoy sustainable levels will be those with better quality and prices. With British tourists now being told to go to non-eurozone countries because of the currency, Malta will have to face lower levels of this core market. Turkey, Egypt and Mexico have already gained from this factor alone. Better pricing and diversification will be needed if we have to compete with other destinations.”
The only silver lining for Malta is that it’s not after the lion’s share of the world tourism market. “What we need to try and achieve is securing just over 1 million tourists. For other countries, getting 8 million tourists is a harder job. Being a small country has its advantages too.”

Any comments?
If you wish your comments to be published in our Letters pages please click button below.
Please write a contact number and a postal address where you may be contacted.