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| January 13, 2003 | Monday | Ziqa'ad 9, 1423 |
World economies
The centre-right government is trying to avert the EU sanctions by cutting a budget deficit that last year breached its 3 per cent limit. These efforts are aggravating the effects of the international downturn, which has already led to factory closures, layoffs and an expected rise in unemployment.
The previous socialist administration bequeathed a forecast budget deficit for 2001 of 1.1 per cent of the GDP — which turned out to be 4.1 per cent. The new prime minister, has pledged to cut the deficit to 2.8 per cent of the GDP this year and to 2.4 per cent in 2003. The socialist government’s budget for 2002, increasing value-added tax from 17 to 19 per cent, postponing promised cuts in corporate and personal income tax, freezing civil service recruitment, abolishing or merging state institutes and stopping municipalities from incurring more debt.
The 2003 budget proposes to cut current government spending by 10 per cent in most areas. However, it keeps public investment at roughly the same level as 2002 to help stimulate economic growth. It also includes tax incentives for companies reinvesting profits to help double export growth to about 6 per cent in 2003. Some economist doubt that economic recovery in the rest of the EU, which accounts for 80 per cent of Portuguese exports, will be strong enough to support such expansion.
But an increase in exports is considered essential if Portugal is to shift the focus of economic growth away from domestic consumption. In recent years, soaring domestic demand has resulted in a serious imbalance in external accounts. The current accounts deficit rose to the equivalent of 8 per cent of the GDP last year, compared with an average surplus of 0.4 per cent in the EU as a whole. Recent growth in Portugal has been based on domestic consumption and investment resulting in a level of indebtedness that is impossible to maintain.
When internal demand contracts, Portuguese companies have always refocussed on export markets. As members of the euro, Portugal can no longer devalue its currency to encourage this trend. But export growth of about 6 per cent next year would be a perfectly natural consequence of contracting domestic demand.
The government’s rigorous clampdown on expenditure has led to a series of strikes and protest by public sector workers. Trade unions have been further incensed by proposals that wages should be negotiated in relation to average inflation in the EU. Portuguese inflation is 1.5 per cent higher, and forecast to fall from an expected 3.5 per cent this year to about 2.5 per cent in 2003. Economic growth is expected to fall to well below one per cent in 2001, reflecting falling demand in the rest of the EU. The most worrying trend for Portugal is that the GDP growth is expected to fall below the forecast EU average of 1.5 per cent this year, interrupting a cycle in which the country has been steadily catching up with the rest of Europe in terms of the GDP per capita. The gap between the GDP growth in Portugal and the EU average has been steadily falling since 1998, when Portuguese economic growth of 4.5 per cent was almost two percentage points above the EU average.
Malta hopes to join the European Union on May 1, 2004. On that date the EU is scheduled to take in 10 new members from southern and eastern Europe. Nestled in the central Mediterranean, about 90km south of Sicily and 290km from the coast of North Africa, it is unsurprising that Malta has a strong maritime and trading tradition. It is made up of three main islands — and two tiny ones — of which the largest, Malta spans just 27km.
During the past 38 years, despite few natural resources and some political turmoil, Malta has prospered outside the European Union. But although, the GDP growth during the past decade averaged 5 per cent annually, the nation is by no means a rich one. The GDP per capita in 2001 was only $15,000, about 45 per cent of the EU average, compared with 82 per cent for Cyprus and 62 per cent for Slovenia, both of which are also preparing to join the EU in 2004.
Tourism is today a key contributor to the island’s prosperity and it has become a popular package holiday destination, particularly for Britons and Germans seeking solace in sun, sea, sand and lively nightlife. However, the global slowdown in tourism in the wake of the September 11 terror attacks in the US has hit Malta hard. Tourist numbers are expected to fall 9 per cent this year. Manufacturing industry, which employs 30,000 in a workforce of 147,700, has felt the weakening of its export markets. Overall, the GDP in 2001 fell 0.8 per cent and is expected to have remained soft this year. So far employment has held up.
Malta’s Freeport is now the third largest transshipment port in the Mediterranean, with 15 per cent of the regional market, compared with 5 per cent a decade ago. The country also runs the world’s fourth largest shipping register, having increased the tonnage carrying the Maltese flat more than seven-fold since the late 1980s. The GDP growth of about 5 per cent a year for the past decade has been depressed by the thousands of job cuts in the shipbuilding industry and the prevalence of tax evasion. The economy also remains vulnerable to shocks. With a tiny home market and easy access to a European population of 400 million, Malta’s exports account for more than 85 per cent of its GDP, placing it among the 10 most trade dependent nations in the world.
However, the aim of being both internationally competitive and widely diversified remains elusive for an economy so small. As a small nation, Malta’s special status in economic engineering terms has seen it attract aid per capita six or seven times the norm for a middle-income country. Similarly, foreign direct investment on a per capita basis is disproportionately high. The country is also long on local capital. The domestic equity and bond markets cannot attract enough issues to satisfy investor demand, while Maltese banks are queuing up to offer finance.
Banking is dominated by two banks the HSBC of the UK, which bought the Mid-Med Bank from the government in July 1999, and the Bank of Valletta, which the government floated on the Malta stock exchange, while retaining a 24.5 per cent stake. Together they enjoy a healthy share of the island’s retail banking, although they face competition from the privately-owned Lombard Bank and the APS Bank. A number of foreign banks are also present, offering international banking facilities to the non-residents. International fund management groups are also beginning to offer products to Maltese savers, using the Maltese investment companies as local representatives.
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