IMF's 7% overly optimistic: Chamber, economists predict harsh 2020

A day after the International Monetary Fund’s economic forecast predicted a 2.8% contraction in Malta’s economy in 2020 due to the impact of COVID-19, doubts have been cast over the “overly optimistic” assessment.

The IMF said that Malta’s economy would shrink by 2.8%, representing a negative shift of over 7 percentage points from 2019, with the government highlighting that this would mean the country would suffer the least impact in the entire EU.

Malta Chamber of Commerce president David Xuereb, however, told BusinessToday that the IMF's forecast was being deemed "understated" based on the continuous feedback from its members.

"The Malta Chamber understands that this forecast, as worked out by the IMF, is based on a timeframe of economic effects that are brought about by the COVID-19 pandemic which is significantly shorter than any estimate which the Chamber is deeming realistic at this stage," Xuereb said.

"The percentage forecast is low, even by simply considering the relatively high contribution of tourism to the Maltese economy and the plausible possibility that this will be completely shut down for at least one third of the year."

In a similar vein, economist Philip von Brockdorff told this newspaper that the IMF assumed that Malta's economy would recover in the second half of 2020, which he said was "most unlikely."

Von Brockdorff said that the tourism sector, which accounted for a massive 17% of the country's Gross Value Added, would be affected by the coronavirus beyond 2020.

"Malta’s dependency on tourism is significant, so the effects on this sector will have a major bearing," he said, as he underscored that anything which harmed the related ecosystem would also impact this sector.

"Any impact on the tourism sector has to take into account indirect effects, such as those on flights, accommodation and restaurants," he emphasised.

Von Brockdorff said it was uncertain how quickly low-cost airlines would recommence their flights to Malta, and that flight tickets would also likely rise. "The cost of a flight will go up, so this will have an effect on demand for tickets and consequently on tourism," he said.

Considering all the issues which came into play, von Brockdorff said that a 7% negative shift in 2020 was "overly optimistic" and that a drop of around 12% – which would represent a 4.8% GDP contraction – was more realistic.

The economist underlined that it was at this point very difficult to offer an accurate forecast due to the uncertainty as to how the situation surrounding COVID-19 would develop.

"It's so uncertain that it's guesswork at the moment," he said, as he remarked that even the IMF had acknowledged that it was being conservative.

"The positive angle of this is that in the absence of the government aid package, the effect would be much more felt. The government is compensating for some of the drop in GVA," von Brockdorff added.

Outcome dependent on factors outside Malta's control – Gordon Cordina

Economist Gordon Cordina told BusinessToday that the ultimate impact of the coronavirus on the economy would be strongly dependent on factors outside Malta's control.

"My chief concern is the state in which our partner trading economies will be finding themselves over the next months and years as they struggle with this pandemic. Until they return to normality, we cannot start discussing a business-as-usual situation for Malta," he said.

The IMF forecast, Cordina said, was taking into consideration the strong economic performance of first two months of 2020 and appeared to be predicting a relatively short resolution to the coronavirus situation locally.

"It also takes into account the typically nimble and adaptable business setups in Malta, and, very importantly, the support programmes set up by government to ensure their readiness to make the best of an eventual recovery," he stressed

"If Malta were to perform according to the IMF forecast, it would have done well indeed. This is of course partly dependent on our actions and measures in the health and economic sectors, which can be implemented and sustained thanks to the substantial war chest of savings and headroom for government to borrow."

Cordina added that the key priorities at this stage were to meet the health authorities’ requirements, to sustain businesses which would be needed to drive growth post-pandemic, and to retain the flexibility necessary to meet impending challenges which might arise.

A much bigger impact on businesses than IMF predicts – Claudio Grech

Asked for the his reaction, Nationalist Party MP and economy spokesperson Claudio Grech said that the outcome of the COVID-19 crisis was "unknowable at this juncture" but that the PN believed the economic impact on businesses would be "much bigger" than the 2.8% contraction being predicted.

"We are witnessing the steady wipe-out of a wide range of businesses, largely due to the fact that government is being selective in the way it is supporting businesses through the COVID-19 aid schemes. This will have long-term ramifications on our economy, particularly because thousands of jobs could be lost in a relatively short period of time, with the social and economic cost being extremely onerous," Grech said.

For this reason, the Opposition had been urging the government to extend its aid to all those enterprises, irrespective of their size, to assist them to – as a minimum – retain their workforce in employment, allowing them to be in a position to start up and recover faster in a post-crisis scenario, he said.

Grech also said that the tourism and related industries were of particular concern, primarily due to the fact that they themselves had a very strong impact on a large number of other industries.

The economy's main weak point, however, was a result of the government's own model of growth through increased population

"However, the origins of the main challenge the economy will face is found in the flawed economic model espoused by the government over the last years, which was largely built on the attraction of labour arbitrage. This fuelled local demand and consumption, hitting a brick wall in the very first days of the crisis when foreign employees were unceremoniously told by the very same government, that assiduously lured them to Malta, to pack up and leave," Grech said.

The PN MP also touched upon other challenges Malta was facing in the form of pressures to revamp its anti-money laundering framework.

"As if the COVID-19 challenge was not enough, as the IMF report itself duly notes, Malta is also facing enormous regulatory risks in relation to the country’s financial integrity. The anti-money laundering deficiencies pointed out in the Moneyval 2019 report have now put into jeopardy the economic sectors which can keep the economy functioning in the absence of a buoyant tourism sector. If government persists in its inaction, we may end up with a COVID9 crisis on one hand and an erosion of our value-added industries (most notably financial services and gaming) on the other."

Grech pointed out that the economy would now need to adjust to a new normal, "whatever that may be."

He said that such an adjustment "will cause direct and collateral damage along the way, especially in the context of an evidently fragile industry with no new value-added sectors having been developed over the last years. These are the stark realities that businesses will face on the ground and which we are expected to provide solutions for. "

"That being said, I believe that what we now need to learn from these mistakes and push a common front to focus upon a strong crisis exit and recovery programme which we should use as a platform to reinvent our next-generation economy: one which is not built on volume and cheap labour acquisition but one which promotes Malta as a liveable place in which vibrant value-added sectors can thrive,” Grech said.