19 January 2005

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Devaluation talk, media spin scares investor funds away from Islands
By Matthew Vella
“Devaluation can be dangerous talk,” one stockbroker tells The Malta Financial and Business Times following Prime Minister and Finance Minister Lawrence Gonzi’s remark at a PN club meeting last Sunday on having the unions thrash out Alfred Sant’s currency depreciation proposal. The issue was a bone of contention between the two sides of the House in the run-up to last year’s budget.
According to sources within the financial services sector, public exchanges over devaluation or depreciation of the Maltese lira have had an impact amongst certain investors, who have chosen to shift their fund investments into foreign-currency denominated funds.
This newspaper can confirm that at least two major financial services firms have noticed a decisive shift of funds from of Malta, by large-bracket investors, wary of public exchanges between political parties over the disputed value of the Maltese Lira.
“An impact was certainly felt when there were public exchanges on the issue between Sant and Gonzi in Parliament,” one stockbroker told this newspaper. “When comparing the figures issued by the Malta Financial and Services Authority on the fund sizes of companies, showing how they have grown or shrunk, we could see that the euro-denominated funds had experienced considerable growth.”
The Times and The Malta Independent on Monday both reported Lawrence Gonzi’s comment delivered the day before at a PN club meeting in Ghajnsielem, Gozo, where he asked the unions who protested against the government’s decision to reduce public holidays to speak their mind over the proposal by Labour party leader Alfred Sant to gradually depreciate the Maltese Lira by 10 per cent over two years.
The Prime Minister’s spokesperson Alan Camilleri told this newspaper there were no plans for such a discussion to take place between the unions and the government, saying that the PM’s comment was part of his speech’s wide context.
Sant’s depreciation proposal was eagerly pounced upon by the Nationalist camp, immediately turning the devaluation issue into a political battlefield. According to Sant, depreciation can make Malta more competitive by making the Lira cheaper to purchase with foreign currency, in turn making exports and tourism cheaper. Gonzi however believes a ten per cent depreciation would increase the price of imports to the extent of a yearly average increase of Lm767 in the cost of living for the Maltese family.
The debate brought much criticism from several economists, with former MCESD chairman Edward Scicluna saying it was “sickening” to see the sensitive economic subject becoming “politicised, trivialised, and over-dramatised. It would be pathetic if we were to turn Labourites into pro-devaluationists and Nationalists as contras.”
Even former Labour Finance Minister Lino Spiteri has been disparaging about Sant’s proposal, saying the Labour leader had framed the prescription “in an unrealistic supposition – that such depreciation would not have inflationary consequences.”
The Maltese Lira was devalued back in 1992 under Nationalist stewardship, a response to the realignment of sterling and of some competitor Mediterranean currencies following the crisis in the European Monetary System. The gain in competitiveness did not last long. From 1.6 per cent in 1992, inflation in Malta increased to around four per cent in 1993 and stayed there through 1995.
Stockbrokers speaking to The Malta Financial and Business Times said the general public was not generally aware of the potential effects of the devaluation of the Maltese Lira, although there was a considerable automatic response to public claims that the national currency is losing value.
One stockbroker said that people showed interest when they hear about devaluation. “They look towards the euro since they know it will one day be our currency. The general impact usually comes from what the media reports, especially when the proposal was spoken about in Parliament and when it was brought up during an edition of Xarabank. The Gonzi statement may have been only a quote, but people do ask about the consequences of devaluation.”

 



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