Malta's money menaced by US deficit

Malta's prosperity is in serious danger not because of internal mismanagement of its money, like the nonsense in its ports, but from worisome economic developments, primarily in the United States.

These are seriously threatening to send the world economy into a downward spiral caused by competitive currency devaluations, such as happened in the 1930s.

The signs of serious trouble in the world economy are unmistakable and can be seen by examining the behaviour of the dollar, the euro, and of gold.

Malta is one of the world's most open economies. A disproportionate percentage of its GNP depends on international exports and tourism. Tourism alone accounts for a quarter of its GDP.

This proportion has only to be compared with the percentage of foreign trade in the US GNP. This is a mere 15%. It is obvious that, if the US economy sneezes, the Maltese economy will catch cold.

The US is the biggest influence on the world economy. It is difficult to forecast with precision its impact on our economy. It is far from the ability of anybody or any organisation in Malta to monitor this economy on their own.

Economic departments in government and the Central Bank, which are supposed to be overstaffed, have only a tiny fraction of the number of economists one finds in advanced countries doing similar work. Malta hardly has the underpinnings of what it takes to make the right economic decisions.

This is proved by facts. When financial organisations like the International Monetary Fund and the World Bank send delegations to Malta, they very often send very junior people - often on their first assignment.

This is not to mention the cavalier attitude to research of our economy by the leading rating agencies, such as Moody's and S&P, who pretend that they can monitor it by failing to perform what they require for this purpose in all other countries where they operate.

This state of affairs has often had disastrous consequences for Malta's money, notably in the Mintoff era. In 1985 a mistake about the dollar devaluation cost the Maltese taxpayer Lm88 million in one day.

Another massive dollar devaluation is on the horizon. In the three years after 1985 the dollar fell 40 per cent. This decline was amply foretold at that time by The Economist.

The Economist, along with the London Sunday Times and such world famous newspapers as Le Monde of Paris, are all forecasting a massive fall in the dollar, which could easily threaten a world economic revival or - possibly something much worse - a world depression.

A world depression on the scale of the Thirties, when the US lost 50% of its GNP, is unlikely, for at present economics is far more highly developed as a science than it was at that time.

Those Maltese who have the productive management of their private wealth at heart, along with that of their country, should study carefully the opening pages of the 'Survey of the World Economy', which appeared in The Economist of September 20.

The Economist is known for its pro-American feelings, but this survey can be hardly said to be flattering to the US. The Economist has been hard because it knows that the world is in grave danger of massive economic contraction, which has already began to manifest itself.

London hotels have had the worst summer since the Forties. In Malta we all know what disagreeable noises are being made by STMicroelectronics, which depends to an important extent on the American market, and which uses the dollar as its international currency.

We can only ignore the noises of our microelectronics industry at our grave peril. Does Malta need a Thatcherite revolution? It might be preferable to economic destruction and communism. The nonsense in our ports must end immediately.

Surprise developments

Surprise developments in the value of currencies are very common. There is an American deficit which, largely because of the botched-up Iraq war and the Twin Towers catastrophe, is going out of control.

The deficit is probably approaching 6%. Such a situation, along with the surprise decisions taken at the recent G7 conference, can quickly create trouble for a small, open economy like Malta's.

The situation is best described by The Economist: "At the end of 1970s, after decades of almost continuous current-account surpluses, the United States was a creditor country, with a net stock of foreign assets worth about 10% of GDP. Persistent current account deficits turned the country into a net debtor in 1985, since when it has been getting deeper and deeper into the red. At the end of 2002, net external debt reached 25% of GDP.

"That is higher than the debt levels at which some Latin American countries hit financial disaster in the 1980s debt crisis and on a par with the peak debt level America reached in the 19th century, but it is not specially high by the standards of other rich countries.

"Many industrial nations have net foreign debts worth 40-50% of GDP. Australia's debt stock, for example, reached 60% of GDP in the mid-1990s, and Ireland's peaked at over 70% in the early 1980s.

"The trouble is that, on current trends, America's debt stock looks set to rise sharply. If the current account deficit remains at 5% of GDP, and the economy grows by 5% in nominal terms (roughly its trend rate of real growth plus inflation of just under 2%), America's debt stock will reach 40% of GDP by 2007 and 60% in a decade." These are dire predictions indeed.

Such a financial situation is disaster-prone and liable to surprise developments of a most unpleasant type. Malta must think ahead for a possible massive fall of the dollar, which as in the Mintoff days of 1985, can prove to be devastating.

In those days we saved ourselves by revaluing the gold element in our foreign reserves. Since then that gold element has been massively run down. It can no longer act as a buffer against currency policy mistakes.

The Central Bank has now wisely moved 75% of Malta's reserves into the euro. This is likely to be, for reasons which I shall demonstrate, a currency which will be revalued upwards. Trends show that it has been moving in step with the upward movements in the price of gold. Charts have appeared on Bloomberg showing these correlations.

A small, open economy like Malta's needs a stable currency like the euro, and it is important that the common people will come to accept with enthusiasm the euro in their pocket. This is far from being solely a matter of economic motivation.

For the euro to function efficiently in the Maltese economy, it must also be accepted politically with enthusiasm. Sweden did not reject the euro for economic reasons. The Swedish business class and the most enlightened opinion in the country wanted to see their country's entry into the euro, but the common people rejected it not for economic reasons but because they saw in the euro a further decrease in their country's sovereignty. This is identical with the position in the UK as manifested in its Prime Minister Tony Blair's recent speech.

The euro is not enough in Malta's fight against the disruptive threat of a dollar devaluation. Faith in paper currencies and investment in equities will come back in spite of the present sombre dollar outlook.

In the opinion of Barclays Bank, in which investors have had a great faith, this will take about 17 years. This opinion shows us that in the meantime investors have to seek refuge to some extent in a store of value, which is proof against such surprises as the Twin Towers disaster. This store of value, which is by no means efficient as a means of exchange, can only be gold.

To be concluded

Mr Azzopardi Vella has advised S&P and has been the promoter of the Malta Development Fund. E-mail: johnazzopardivella@hotmail.com.