Issue link: https://maltatoday.uberflip.com/i/1510350
8 OPINION 26.10.2023 High interest rates and energy prices George Mangion George Mangion is a senior partner at PKF, an audit and consultancy firm, and has over 25 years' experience in accounting, taxation, financial and consultancy services. His efforts have made PKF instrumental in establishing many companies in Malta and established PKF as a leading professional financial service provider on the Island B anks usually lend for longer terms than they borrow so part of this extra profit comes from the difference between long-term and short-term interest rates (i.e. the slope of the yield curve). If the yield curve is normal, all else equal, a higher slope that the world is now facing means a larger margin for dealers and higher profits for the banking system. Does this mean that in debt-strick- en countries like Greece and Italy, it is prudent to impose a super profits tax on banks? All is fair as governments are pressed with increasing demands from voters to help them face higher cost of living worries. With a local budget in the offing by end of Octo- ber, unions are voicing their wishes for an untaxed Cola weekly increase. It is understandable that the gov- ernment with its own bloated work force cannot but wish to claw back in taxes part of the Cola refund. Other worries include the soaring rate of foodstuff prices. Who can provide a lasting solution to calm traffic con- gestion which is leading to more road accidents, some fatal. Millions of euros for new roads were earmarked by Hon Ian Borg, the ex- roads minister but no solution is in sight. In fact, parts of the Marsa junc- tion are still without proper signage and the promised 40 mins savings to drivers using a controversial Central Road in Attard has not materialized. Affluence has resulted in over 450,000 licensed vehicles (of which only 17,000 are EV or PHEV) and there seems no effort to build a prom- ised underground Metro that was an- nounced amid much razzmatazz be- fore the 2022 elections. Critics note that history is littered with examples of supposedly world-changing tech- nologies that challenged entrepre- neurs, only to fail to live up to the promise. One typical example was riding the Fourth Industrial Revolution curve. Ebullient announcements from Cas- tille remind us of the excellent rank- ings expressed by IMF forecasts, DBRS, Fitch all of which placed Malta as "the fastest growing EU economy this year and the next, with the lowest unemployment rate in both years. In our prime minister's words de- spite weakening international condi- tions, the IMF has revised up its GDP forecast for Malta to 3.8% and sees us as the fastest growing EU economy this year and the next, with the lowest unemployment rate in both years. Locally, we recall how millions were poured in to advertise Malta as the blockchain island. Pity so far only a handful of companies registered as the majority settled in Central Europe. Malta Enterprise should wake up to the notion that we missed the oppor- tunity to automate - as we were made to believe that its main purpose dur- ing the two years prior to a general election was to undertake payment of wage supplements to furlough work- ers. End of pandemic and the army of TNC's have been recruited as a means to solve the acute shortage of low- wage workers. Has the formula of importing low-wage migrants (most- ly living on minimum wage) help re- duce and calm inflation? Not really, although lately inflation is found to have reduced to 5% from the core rate of 7%. Again, some food items and most energy are fully State subsidized al- beit on a temporary basis. Although local demand factors are encouraging yet export growth is expected to slow down from the high growth rates reg- istered in recent years, in line with the projected moderation in global de- mand, while imports are expected to rise, driven by investment growth. The services sector composed of fi- nancial services, gaming, tourism and aviation continues to underpin Malta's current account surplus. In the past, our debt ratio may have hindered us from trying harder to innovate. Yet party apologists rejoice how during L'Aqwa Zmien" the economy showed a buoyancy with some years deliver- ing a surplus. Now, perhaps partly due to the Russian war and post Pandem- ic the annual surpluses morphed into deficits and this year debt is hitting close to the 60% mark of GDP. The finance minister tells us that our unemployment rate is low and due to improved demand, we are experienc- ing worker shortages so pushing us to up our debt limits is a fair price to pay as most of it can be attributed to helping the economy recover from the pandemic. Notice how the Central Bank headed by an ex-finance minis- ter came out with good tidings in its latest business dialogue. The rabbit came out of the hat. Re- joice because 47 per cent of firms ex- pect business activity to improve in the short term, marginally higher than 46 per cent in the preceding quarter. Firms report that the pressure of costs has eased considerably due to im- proved supply chain conditions. However, some firms were unable to give a prediction in this regard due to the high level of global uncertainty. Companies expressed concerns about labour and skill shortages and pres- sures to increase wages without cor- responding augment in productivity. Indeed, many firms expect wages this year and next to rise by over five per cent. The net share of firms planning to increase their staff complement fell by 16 percentage points, to a net 45 per cent. This is a splendid dialogue by CBM which has taken a snap shot of what companies felt this year. One hopes, that the prognosis is doable since exports need more vim to reach the pre Covid highs. The Economist Intelligence Unit forecasts that the global economy will suffer next year partly due to rising energy prices and two major wars in Ukraine and Israel. History has proven two things. First, that in spite of all its disadvantag- es, the free market is still the market structure that generates most wealth. Second, such disadvantages need to be eliminated through effective reg- ulation and public policies that pro- mote the common good. Thus, it is up to any government to determine where the balance of pow- er between capital and labour should lie. A laissez-faire attitude where most regulators are run by politically ap- pointed incumbents has always been a malady of our society since Independ- ence. Still let us enjoy A1 appellations.