Vince Farrugia | Sunday, 18 January 2009

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A wake-up call

“It’s not bold enough”: that was my first comment on Budget 2008. I lived through three recessions and was active in all in one capacity or another. I live daily with business people and I know for sure that we’re not doing enough to meet the growing economic menace.
“Exceptional times call for exceptional measures. The jobs and wellbeing of our citizens are at stake... If we do not act now, we risk a vicious recessionary cycle”: that’s Jose Manuel Barosso, the EU Commission President.
Here, government continues to insist only on the Capital Budget presented in November. The few stimulus proposals in Budget 2008, drafted when hardly anyone here had woken up to what 2009 has in store for us, are simply not good enough.
I instigated GRTU to hold a National Business Conference on 16 December 2009 precisely to bring home to the public sector decision makers and private business owners the realities that will face business and the Maltese economy in 2009. The Prime Minister, the Minister for Finance and the Chairman of Malta Enterprise gave us their views. The new Leader of the Opposition was sick so Gavin Gulia, Economic Spokesman, came from the PL. Economists Gordon Cordina and Edward Scicluna gave excellent economic analyses. Individual business owners gave their views directly and through the GRTU Annual State of Businesses Survey. This week I attended an important Malta Enterprise meeting of experts to discuss what needs to be done to meet the evolving negative situation. Contingency plans do not exist as far as I know but Malta Enterprise is waking up to the threat.
I’m not convinced the Authorities are yet aware. Being unaware is a terrible state. How can you act decisively if you’re unaware of the realities? I wish not to believe that this is the situation. It’s not a question of not saying so that we do not scare people. That’s what many keep telling me. But this is the opposite of what everybody else that matters elsewhere is doing. No administrator of economic affairs in his senses wants business not to be aware of the realities. How can business and industry plan ahead if they fail to grasp the realities? Business cannot do it on its own. The crisis that beholds us is too big for individual businesses to master successfully on their own. Decisive government action, and very extensive and costly intervention, is needed.
We practically know the dimensions of what will hit us and we know that we hardly have any control. This is like a tsunami. You know it’s coming. You can only take action to protect yourself, but you can’t really stop it. Our main business, whether it’s tourism, Freeport, cruise-liner business, financial services, manufacturing exports, gaming, international business... they are all decided elsewhere. Our economy’s drivers are in the economies that are already suffering from recession. The rest of our businesses – shops, bars, restaurants, workshop, transport, agriculture, etc – have what we call a derived demand. The real new money comes from what we sell abroad. Locally the economy is big, of course, but once the money flows from abroad dwindle there’s very little else we can do.
The large public sector, of course, continues to dominate. From Prime Minister down to the least messenger and watchman in the public sector will continue to get their pay. They always get their money. And that money will continue to be spent on goods and services so many will not be hit. And government will continue to spend, of course. Who cares since taxes will keep flowing to the exchequer and government will continue to borrow?
But the economy is not that simple. It doesn’t function simply because those in steady public sector employment continue to believe that as long as everything is well with them, then everything else is fine. It’s incredible that there are so many who still propagate this fallacy.
The Maltese economy has over the last 10 years grown at an average rate of 1.9% compared to the average economic growth rate of 2% in the other leading 15 European member states. We’re not closing the gap between us and the leading EU countries – on the contrary, we are not catching up. Worst still when there is a recession in the EU 15, economists like Gordon Cordina reckon that Malta will be hit three times harder. The statistics of the last decade prove this point. Of course it counts also when a boom exists. But now it’s recession that dominates. So we expect a triple negative impact on our small open economy. And business cycle fluctuations in Malta are increasingly tuned to those in the major 15 European Union members.
We could have moved out of this trap but in spite of all the glib talk in recent years, the Maltese economy has restructured itself pretty poorly towards economic activities that are relatively immune from the cyclical fluctuations elsewhere. We are pretty much an economy that is dependent on what happens elsewhere, especially in the EU.
Edward Scicluna reckons that a 2% annual fall in all export-oriented industries, including tourism, translates into over 1,000 full-time equivalent job losses in the economy as a direct impact and an additional 500 full-time job equivalent in the rest of the economy with tourism, transportation and recreational and similar services most affected.
Can we build the necessary retention walls to avoid the worse? Of course we can. The best is to strengthen and support existing enterprises. We cannot just let the construction sector fall under, for example. We cannot let industry that is normally strong and competitive go under simply because in the short term they don’t have enough orders. We cannot let hotels close down, as is already happening, simply because their cost structure makes it impossible for them to compete for the dwindling tourist market open to us. It’s a vicious circle: you let one sector go under and it will pull the others down.
That’s how a recession feeds on itself; you stop one sector falling, hold the other, retain the third and you’re out of it as soon as the markets on which Malta depend start moving again. Let factories, hotels, construction companies, SME’s go under, and then you won’t get them back. It’s easier to sustain what you have than build from scratch.
And government cannot expect the banks to do it for them. On the contrary, banks give you an umbrella when it’s not raining and takes it back from you as soon as it starts raining. They are doing it now already. What was easy money yesterday is now very hard to get. Government needs to step in and give enterprise the guarantees that banks are asking for, to get the extended credit facilities they need to bridge over the negative phase.
Things are not going to improve without government intervention. Burn your ideologies and act now. That’s my advice. Go out and identify what is holding our export-oriented enterprises, including hotels, from getting that important order. Lessen the bureaucracy. Re-draft your tax pretensions. Give small and medium enterprises more breathing space to pay their VAT, their Income Tax and their electricity and water bills.
Most businesses have a cash flow problem. If no action is taken, unemployment will grow rapidly.
If we do not act now the pain will be long and unbearable. I wish I could scream louder...

Vince Farrugia is Director General of GRTU - the Chamber for SMEs.

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