An oil price hike – will this dampen our economic trajectory?

Author: George Mangion 
Published on Malta Today 1st February 2018

The IMF report on Malta issued this week gives favourable comments on our economic appraisal. The finest accolade is trumpeted on GDP growth estimated to have expanded by 6.8 percent in 2017, accompanied by dynamic job creation. This has rendered the economy on full employment and employers are now looking for outside workers to help fill sustainable jobs.

Risks to the outlook are broadly balanced, and the external position is assessed to be broadly in line with fundamentals so it is fair to state that the patient is no longer in sick bay and is moving steadily on his two feet and even starting to compete on some hurdles.

The IMF has kind words about us, notwithstanding the negative press hurled in Brussels about a number of alleged infringements on matters of national transparency and governance, saying how our economic growth remains one of the strongest in Europe, owing to favourable economic conditions and sound policies. These are the fruit of structural reforms which in the words of IMF led towards the culmination of strong private and public balance sheets.

But it is not all hunky dory as there remain acute challenges to upgrade the infrastructure while avoiding unwarranted stimulus.

The government’s strategy to continue regulating expenditure on big spender departments (such as healthcare by privatising part of the hospital service) will in the medium term result in building larger fiscal buffers. This will soften the pain of debt servicing which has gradually increased over the past administrations and acted as a hidden brake to prosperity.

The fruits of the various reforms, including the Investor Programme scheme (hotly reviled by the Opposition), have fuelled the cash flow and together with successful attraction of FDI, helped in reaching a fiscal balance showing a modest surplus for the second consecutive year in 2017. This is in sheer contrast to chronic annual deficits registered for the past 35 years. This fiscal pattern, if maintained will contribute to a moderation of public debt.

Growth is expected to be driven largely by domestic demand, backed by buoyant services exports. Yet as can be expected not all is rosy in the garden as banks are still facing a good share of non-performing loans despite a healthy improvement in asset quality and declaring respectable annual profits. The fly in the ointment is concentration on home-mortgages and property-related loans. The latter reflect the intensive building frenzy that has gripped the island with a proliferation of multi-million building projects aimed exclusively to cater for more HNWI and luxury end of the market.

The Malta Developers Association has even financed a study by KPMG to determine if a property bubble is in the offing and the authors in their assessment concluded that while caution is always needed, they think there is no fear that there will be a substantial mismatch between supply of luxury units and demand from a future stream of buyers as more foreigners are attracted to invest, and KPMG is confident about a growing trend of Igaming executives renting expensive apartments while various government schemes encourage first and second time property buyers.

Moving on, one appreciates the advent of a development bank. This augurs well to diversify funding sources, enhancing traditional bank lending, especially on infrastructural projects (such as land reclamation and waste incineration), which needs longer term credit away from traditional banking sources. Such diversification of funding sources including better use of capital markets has served us well, yet in the words of IMF specialists they recommend a stronger effort to address data gaps and enhance the oversight of non-bank lending.

Naturally the MFSA needs a facelift to position itself in a stronger position to safeguard the financial system’s integrity. Having reviewed IMF’s latest economic assessment there are subtle messages to be learned by reading between the lines.

Questions come to mind such as – can the Brexit process result in future problems to our export to the UK? Will it negatively affect our strong British-based tourism for the forthcoming years? Are we doing enough to attract potential UK business which is looking for a EU base? Are we effectively tapping openings in banking, insurance, aviation and will our iGaming sector lose its glamour should the UK decide to lower its gaming taxes to repatriate offshore companies to settle in a non-EU regulated free zone?

These and other questions are food for thought for our political masters and it is wise that we do not rest on our laurels. Another harbinger is the persistent rise in the price of oil (now reaching $70 per barrel). Will this add costs that dent competitiveness of our service exports? As an island we still rely 100% on fossil fuel for electricity generation albeit now on LNG given that our dependence on renewable energy is under 7% and it does not look as if it is going to triple in the short term – so oil price is an important factor being an importing country.

Rising global demand and falling OPEC supply may yet flush out more pressure on the oil price. Martijn Rats of Morgan Stanley says that may keep the market roughly in balance with shale-producers in the US planning to raise output from 5.8m barrels a day (b/d) to 6.8m b/d over the next 12 months. This may have a stabilising effect on the international oil price once Brent crude hovers above $70 a barrel, and when OPEC and the other petro-states recently met in Vienna all expected oil prices to continue to augment. This means that in the short term one expects oil prices to gradually rise to the next range of $80 to $90 a barrel, giving a fresh impetus for new exploration initiatives.

Late last year, the Times of Malta announced that the government appeared to be trying to start a new push for oil and gas exploration in Maltese waters after a hiatus of six years. Sources were quoted that the official journal of the European Union issued a notice saying that Blocks 1, 2 and 3 of Area 3, an area of 6,000 square kilometres north of Malta, are now available “for authorisation on a permanent basis under either an exploration licence or an exploration and production licence”. The NOC is now urged to announce a licensing round to attract consortia for the three blocks on offer.

In conclusion, as stated earlier, history has taught us a lesson on upstream initiatives that we need to continue political negotiations with neighbouring countries to resolve any delineation disputes in our Continental shelf. The IMF report has showered us with good tidings yet it warned us on the need to diversify our economic pillars currently based on mass tourism, property development, financial services and Igaming.

Can we start looking seriously for investors in oil and gas exploration now that the oil price is going up?

George Mangion

Author: George Mangion 
Published on Malta Today 1st February 2018
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