OPINION: GEORGE M. MANGION | Wednesday, 13 February 2008
As an emerging economy, Malta, within an enlarged eurozone, enjoyed rapid growth in 2007. This is commendable. But are we set to withstand the spreading global credit crunch and a possible recession in the US?
The answer is given in a recent International Monetary Fund (IMF) report .
This report focuses on Europe cautioning that risks are especially high for those countries that have been funding large current account imbalances financed out with internal bank and public account borrowing.
On a positive note ,when reading the NSO reports one discovers that our current account balance is improving.
Government succeeded in correcting its imbalance which is determined mostly by the difference between exports and imports of goods and services. We are not singled out as a country with chronic current account imbalances as government plans a surplus budget by 2010.
According to IMF new members of the EU face the difficult challenge of balancing the risks of higher inflation and slower economic activity, although a possible softening of oil prices could moderate inflation pressures.
For our economy which is 100% reliant on fossil fuel a lot depends entirely on the outlook for global energy sector. Will global energy demand slow down pulling oil prices back from a record-high above $100 a barrel which it hit in early January?
There is some hope as the price of oil fell to $87 last week after a larger-than-expected build in US crude stocks and growing fears of a US recession.
The Organization of the Petroleum Exporting Countries (OPEC) could keep output at current levels at their next meeting if there is no change in the market. OPEC’s concerns about slowing global demand prompted the group to keep supply steady and some hawkish members have called for a vote to cut output at its meeting planned for 5 March.
Such policies may not help calm the waters and hopes for a rapid drop in oil prices this spring looks uncertain .
Quoting expert sources such as the Energy Information Administration,
one notes that U.S. light crude for March delivery fell $1.31 to $87.10 a barrel. Yet notwithstanding the slight but encouraging drop in oil futures, the turmoil and volatility in financial market does not seem to be a temporary phenomenon but that it would rather persist.
Economists state that the liquidity and credit crunch that started last summer would get worse rather than better over time; that such crunch reflected credit and solvency problems in the western economy, not just illiquidity.
Commentators may well question if tiny Malta can avoid feeling the chill from an impending US recession. It is not easy to ignore the global reach of such a global economic leader.
In the short term, some are confident that economic problems in the US - a further slowdown or recession - are not expected to have a significant impact on Malta.
This will rapidly change as our exports to the world’s biggest economy pick up. As members of eurozone our monetary tools are limited as they are set by ECB.
Here one can safely say that tools within monetary armoury is impotent in dealing with the problems relating to the credit crunch. Just remember the criticism about the default of Northern Rock bank in London.
The BBC said the government could decide to nationalise Northern Rock within days. British Prime Minister Gordon Brown, has been widely criticised over the demise of one of Britain’s biggest mortgage lenders.
Mr Brown blames the rapid spread of the credit crisis last year after problems with US sub-prime mortgages points to failings in global financial supervision which in his opinion must be fixed.
It is felt that given the hugh default of the Northern bank many expect that nationalisation is the most appropriate option.
Northern Rock is Britain’s biggest casualty of the global credit crunch and has borrowed around £26 billion from the Bank of England since it requested emergency funds five months ago.
This emergency borrowing did spark the first run on a British bank in over a century.
Can we blame this on unsupervised and unregulated financial system – as regulators were asleep at the wheel as evidenced by the recent Societe Generale fiasco.
The Group of Seven finance ministers and central bank chiefs took on a somewhat more conciliatory tone than they had in the days leading up to the meetings, acknowledging that they all had a vested interest in shoring up the global financial system. Some analysts feel that the frenzied bid to cut interest rates in a few weeks to avoid a recession in the US, is sending out the wrong signals. US interest rates are nearly 50% lower than they were just six months ago - down from 5.25% to 3%. And yet the market does not seem convinced that these rate cuts will be enough to avoid a recession.
The Fed has been slashing its interest rate to just three percent in an unprecedented move to reverse the slowdown .
Fears the U.S. will slide into a full-blown recession in the wake of a housing slump and the resulting credit crunch have dampened the prospects of a recovery. Demand for oil will slip and prices should come under renewed pressure in the short-term. The good news is the recovery package approved by the US senate to kick start the sluggish economy.
Once the massive interest rate cuts have worked page 9 their way through the economy one can only hope that the healing process will not be too lengthy.
Indeed back in Europe, the European Central Bank (ECB) is now announcing another massive injection of liquidity. Ironically the Bush package is similar to the idea being touted in the Nationalist party electoral manifestos to cut taxes on middle classes and give subsidies to help SMEs. The mystery still looms on where will the extra millions be found to pay for such generosity. Party spokesmen rebut criticism by saying that the extra funds will be generated from higher GDP growth.
Stoicallythe US rescue offers no less than 140 billion dollars in the form of reduced taxation and subsidies to the poorest households in an effort to boost the American economy.
It may also be relevant here to give some background explaining how the U.S crisis began due to an inflated property market.
The bubble burst because of loans given at high interest rates to property buyers without adequate colateral and dubious repayment prospect .
So is there a solution in sight to stem the tide of this global tsunami?
Cynics retort that IMF should make as its main focus the surveillance of the global economic and financial system. Refocusing its role should result in this institution to help prevent crises and not simply to manage to resolve them as in the past. In Europe we expect a tough time ahead this year unless the credit crunch is not resolved by a concerted effort of all IMF members using the best monetary tools available. Let us all pray that adter the US elections the global ecomony will stabilise or at best head for a soft landing.This does help to stem the onset of economic contagion in Europe .
As for tiny Malta we must improve our productivety status in order to buttress the relative high value of the euro compared to the dollar which as a result gives us a temporary disadvantage when we export outside the eurozone.
13 February 2008
ISSUE NO. 522