17 May 2006

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Business Today

Steady as she goes

Official statistics depicting an economic recovery have been torn to shreds by politicians, economists and leading business organisations. The turnaround has not yet filtered down the ranks. But Parliamentary Secretary TONIO FENECH is not disheartened.
He believes it is a Maltese characteristic to downcast and interpret things in a negative way making us sceptical when the situation returns a positive result.
Fenech is not over-confident but he insists that the signs of an economic turnaround are already showing. He argues that exports have been on the increase since the middle of last year and have maintained their upward trajectory during the first quarter of this year.
Government is meeting its fiscal targets and is set to announce a series of tax reform proposals in June to kick start a wider discussion on what taxes and by how much government can forfeit.

There is little to suggest Malta will be winning back its competitiveness in the next few years. Given this scenario, does it worry you that we risk experiencing minimal economic growth like Portugal and Italy for the next few years prior to adopting the Euro, which will not be enough to ensure a decent standard of living for all of us?
I do not think we run that risk. If competitiveness means being competitive in that which we have become accustomed to do then it is true that we have a problem because it is competitiveness that is constantly being eroded.
Both Portugal and Italy, especially the former, are experiencing problems because their economy depends on sectors that have generally become uncompetitive in the European context, such as textiles. Malta’s dependence on textiles has been drastically reduced and today it is no longer the main driver of the sector.
If we try to achieve competitiveness in traditional sectors we will run the risk of losing out.
Being competitive does not necessarily mean producing the cheapest product but producing a new product that somebody else cannot match. And our economy has shown signs of change.
Pharmaceuticals, ICT and the semi-conductor industry are but a few of the sectors where Malta is competitive.
There are other sectors, which are still important to the economy, that need to pass through a transformation process. This is precisely what we are talking about when we harp on the need for structural changes in our economy.
We need to have a dynamic economy that allows us to transfer resources, both capital and human, to the more productive sectors. This does not happen without pain and this week was a classic example. We heard of the closure of Central Cigarettes because the operation has become uncompetitive in Malta but at the same time De La Rue announced it will be investing in a new factory to produce biometric passports.
I am convinced that we can experience economic growth that is higher than what we have experienced until now and the signs of change are already visible.

While in manufacturing it is easy to speak of a shift towards a higher value added base, tourism posits a different problem. Being a major contributor to our economy, how can we win back competitiveness in tourism?
We have a major challenge. We need to decide what can make us more competitive than others. If we still consider price as the major competitive advantage, I don’t see much of a future since our direct competitors in North Africa can beat us anytime.
The sun and sea product we used to offer in the past may not be enough to attract more tourists on its own. While we have to improve that product by creating new beaches and improving others, we need to address the new tourist patterns.
This country has a hidden asset in its heritage and history. We are not promoting this aspect enough but even the product itself is not developed. Tourists want to see a historical site that is interpreted, with information aides and other guides. We need to create an experience around our heritage and this is one area where we will be investing EU funds.
But growth in tourism will eventually take off when all stakeholders in this country pull the same rope rather than pass the buck trying to blame everybody else for the drop in tourists.
You are talking of a longer term view to regain competitiveness but people in tourism and industry also talk of short term problems that are eroding competitiveness so much so that in January last year government was still trying to achieve a social pact. Are the aims of the social pact, including the restoration of competitiveness in the short term, superseded by what you have described as an economic turnaround?
The social pact is always a tool that can help. Ireland had a social pact when it was in deep crisis but today when they are enjoying better times they still agree on one because they recognise it as a useful tool to achieve stability and protect the country’s competitiveness.
The biggest distinction between Malta and Ireland is that the Irish were practically forced into a social pact when as a result of a crisis, poverty started increasing. Their expectations were low. But in Malta we tried introducing a social pact when expectations were high.
I am against re-opening discussions on a social pact every year or two. I believe it is a question of maturity. But then again, in order to achieve the widest consensus possible the solution prospected at the time was a very dilute pact. It did not contain the hard measures everybody was saying were needed.

What would be a radical measure required in the short term?
Magical bullets that solve problems instantly do not exist. But when we were discussing the issue of increasing the productive working hours, we ended up talking about a couple of holidays. We have to be concerned about protecting employees and not their job.
But there are cultural barriers that need to be surmounted.

You argue that the statistics of the NSO are correct since they are certified by Brussels. But the NSO had to revise downwards the growth figure for 2004 from positive to negative, in its latest review of the economy. What happened?
The fundamental reason for the revision was methodological. It wasn’t a question of having compiled the wrong figures. The statistics until then did not include a particular set of figures for a specific component related to financial intermediaries. The reason for leaving out this component was sanctioned by Eurostat. At the time the EU was discussing its budget allocation and Eurostat decided to freeze all methodologies so that there would be a level playing field.
It was only after the budget discussions were closed that we could include this component as part of our statistics and as a result it brought down our GDP. The mistake was probably the NSO’s in that it did not publish the statistics as compiled before and after to enable a comparison but we do not interfere with the NSO’s work.
According to the new methodology we experienced negative growth in 2004 particularly because of that sole component which then registered positive growth in 2005.
All the other components however, remained constant and were not revised. The growth figure of 2.5 per cent for 2005 is correct and certified by Eurostat.

When the NSO published its growth figures you had said that economists could not speak of a real drop in exports and tourism expenditure of 3.5 per cent since the NSO did not publish deflators to make the analysis possible. The Commission’s spring forecast has confirmed a drop in exports of just under four per cent. Does it worry you that the productive sectors are not performing well?
GDP statistics show that we went well in all sectors apart from manufacturing, where we experienced minimal growth and tourism. We cannot escape the fact that the country does have problems in both these sectors.
But in manufacturing we are experiencing a turnaround. In 2005 exports were particularly bad in the first half of the year. Eventually exports picked up and to a great extent off-set the negative situation during the first six months. We are still benefiting from that pick-up since the export figures for the first quarter of 2006 have shown an improvement over last year’s.
In manufacturing I am not as concerned since even the perception survey carried out by the NSO indicates high expectations for 2006.
As for tourism, the first three months of the year are always the worst months and as usual they are a source of pessimism in the industry. To top it all we then discuss the problems in the open which leads to a situation whereby hoteliers will be at the mercy of tour operators.

But the spring forecast says that growth in 2006 and 2007 will be almost exclusively fuelled by domestic demand, something, economists deem unsatisfactory for sustainable longer term growth. Is this of concern to you?
The spring report has confirmed government’s own assessment of the economy for this year. We spoke of 1.7 per cent growth for 2006 which is slightly less than what we projected last year. But I must say that we are conservative in our projections and assessments.
When we arrived at the 1.7 per cent figure we did not yet have the precise growth figures for 2005, which in themselves exceeded our expectations and to top it all the first indications for the first quarter show a better than expected performance.
Growth is not simply being generated internally since exports have improved during the first three months.
After all the Commission’s forecast remains an assessment, an estimate based on the evaluation of data at hand. Sometimes, not all the data is available. In economics it is only retrospectively that one can judge whether targets have been met or not.
I do believe the economy is performing well. Unemployment is stable and has dropped. Investment has increased and activity is happening.

Cabinet decided that dual pricing should start on 1 January 2007. Suddenly you are softening that hard stance by saying that it will be introduced by not later than July 2007. Did cabinet make a rushed decision? What is going to happen on 1 January 2007?
Government wants to see dual display, which is different from dual pricing, come into force by 1 January 2007. That position has not changed. But there were a number of considerations attached to that decision. One basic consideration was that to be able to introduce dual display we had to resolve the issue of bank charges.
Some have argued against 1 January 2007 for the reason that the central parity rate will not yet be confirmed. It is a minor consideration since there is very little indication the rate of exchange will need to be adjusted. We’ve not moved it for years and we will not move it in the last few months before the changeover when we need the greatest stability of all. Government is confident the central parity rate will be maintained.
Bank charges are another issue altogether because there are obviously profit considerations to be made. The commercial banks argue that unless the exchange rate is locked definitely, even if marginal, there still is a risk associated for which they would need to charge a premium along with charges for the transaction to be carried out.
Government is talking with the banks to have them remove charges the day dual display is introduced for the simple reason that it makes little sense for a price to appear in Euro in the shop window, which does not reflect the price at the till.
Let’s be clear about one thing; this will not have an impact on Maltese customers because they will still be paying in Maltese Lira. But we recognise the growing number of shops that accept payment in Euro especially in tourist areas.
We can only implement dual display when we reach an agreement with the banks. We want dual display to create awareness. We want education not confusion.

But government will remain dependent on the commercial banks’ goodwill, which obviously have no interest to forfeit charges at the earliest possible…
Government is pressing its case and we would obviously like to reach the decision with consensus rather than imposition. Miring the debate in controversy will only create confusion in people’s minds. I remain confident that we will have dual display on 1 January 2007, even if we still have some work to do with the banks.

Rising inflation could threaten Euro adoption. You had mentioned price orders to stem inflation coming from cartels. Was it a threat in the wilderness or is government really committed to introduce them if need be?
Government has a number of tools in its possession including price orders. Let us take medicines. There is already a measure of control by capping profit at 20 per cent. But this might not be enough to benefit the consumer since the importer can choose to buy an expensive medicine and make a higher profit.
What is happening is that importers may have an interest to ignore cheaper generic medicines and instead go for the more expensive stuff because the profit is higher.
Government analysed a number of sectors and is concerned about medicines and everyday food stuffs.
In the case of medicines there is also EU regulation that needs to be respected but the problem of registration is not as big as the Chamber of Commerce is making it out to be.
We have kept the price of registration as minimum as possible and the Medicines Authority is flexible to a certain extent.
We are working on the problem but there are still some issues to be dealt with before I can make any official announcements. Government believes that there is space for the market to play in the case of medicines. If the market does not play then we will be constrained to use the tools at our disposal. After all government has a responsibility towards consumers as well. Price orders are not our preferred option and they have never been a policy of this government. But government has this arm and if the situation does not change it will use it.

Malta’s concession on a special tax for Maltese-registered foreign companies will expire in 2010. What will be the scenario then?
During the negotiating period in the run up to EU membership concerns were raised over the tax status we used to grant to foreign trading companies. Today, these companies do not exist on their own since they have been integrated within the main legislation like all other companies. We agreed with the State aid board on a roll out of certain measures deemed uncompetitive but they also agreed to our proposals on how to offer certain tax advantages.
These issues are being thrashed out and when we publish the report compiled by the tax reform commission, an important part of that reform will speak about the tax system for companies and the benefits we as a country could offer.

Is government still committed to give a tax cut in the next budget and will it be targeted towards individuals or companies?
The tax reform commission is looking at various aspects. Apart from analysing the tax structure for companies it is also looking into how to make work pay better, even to encourage more women to enter the labour market. We are not simply looking at how the tax bands can be adjusted but also how best to shift taxation from labour and income onto other things. By the end of June this document will be ready.

But will there be a tax cut in the budget for 2007?
The results are showing us that we are meeting our targets and the growth in government revenue is sufficient to meet our commitments. Whatever we do, we have to do without having a detrimental impact on the convergence criteria and within the context of spiralling oil prices.
If oil prices continue increasing can we simply shift the burden on the consumer or should government consider increasing its contribution to Enemalta? Should government forfeit the Lm6 million in airport passenger taxes or should it give an income tax cut?
These are the considerations we have to make and the pre-budget document will give an indication of where we intend going. But it will also help create a discussion on what people are expecting us to do.

Tonio Fenech was interviewed by Kurt Sansone

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