Euro-dollar parity spells troubling times for Maltese importers

With the euro tumbling to parity with the dollar, Maltese economy experts are sensing troublesome times for imports and public finances.

Last week the value of the euro fell to its lowest level in 20 years, meaning European citizens will have to fork out more euro to buy the same dollar products they used to.

There’s a common consensus among Maltese economists, including the top brass of the Central Bank and Stock Exchange, that a weak euro will see increasing costs for local importers, especially for those who make dollar purchases.

Edward Scicluna, Governor of the Central Bank of Malta, explained that Maltese importers will have to pay more euro to acquire the same amount of dollars for goods and services outside the euro area.

“Exporters on the other hand will find that the euro price they had quoted will require less dollars in the US or sterling in the UK, and thus their prices become more competitive when compared to similar goods produced in those respective countries.”

Philip von Brockdorff, an associate professor at the University of Malta, explained further that a weak euro will impact Malta’s imports from non-EU countries if those imports are paid in US dollars, or if the raw materials of those products originate from third countries.

“The price of raw materials sourced from EU suppliers, but originating from third countries, could also be impacted by the strong US dollar relative to the euro,” he said.

Joseph Portelli, Chairman of the Malta Stock Exchange (and a former foreign exchange trader himself), agreed that a weak euro will amplify current inflationary pressures, especially with regards to products traditionally purchased or valued in dollar terms.

“On the other hand, the advantage to seeing a weak euro is it makes European exports more competitive,” he said.

Economist Stephanie Fabri similarly remarked that Malta’s balance of trade with the US, at least when it comes to goods, is negative, meaning that Malta imports from the US more than it exports. “This will impinge on our imported inflation.”

EY partner Chris Meilak said the effects of this on the Maltese economy will depend on how reliant a business is on foreign trade and energy.

“For Maltese companies that trade overseas, their foreign revenue (in dollars) is now worth more when converted to euro and brought back home. For local consumers and local craftsmen already feeling the inflationary burden, it can play into the price of imported commodities which will further inflate their costs of living and production, respectively.”

Energy prices

A weak euro is no tonic for the state of energy and fuel prices. Payments for natural gas and oil tend to be in US dollars, with eurozone countries now forced to pay more euro to purchase fuel at previous prices.

“Indeed a weak euro will exasperate inflationary pressures, making any dollar-denominated products like fuel more expensive,” Portelli said.

Meilak pointed out that the EU is trying to sway away from Russian imports, making US imports more costly for major energy importers.

“One could see higher energy prices in the EU as a result of both the direct increase in energy prices and the price of the dollar with respect to the euro.”

The biggest loser in this is the government. “A weaker euro would mean government having to pay more to keep fuel prices at pre-crisis levels,” von Brockdorff said.

Scicluna shared this sentiment. “The euro depreciation will imply further costs to the government, with obvious implications for public finances, unless the public entities have entered into hedging agreements either for exchange rate changes, or US dollar price changes, or both.”

Hedging agreements take many shapes, but in all formats their aim is to protect investors from adverse fluctuations in the market.

Tourism and airlines

Competitive prices will be a good sign for Malta’s tourism industry, the country’s biggest export. Scicluna said that a weak euro will make going abroad more expensive for the Maltese, but tourists coming to Malta from outside the eurozone will find local prices more palatable.

However, Meilak pointed out that this positive effect could be counterbalanced by the rising EU commodity prices resulting from the war in Ukraine.

Another negative effect on tourism could come from the European-based aviation industry. Von Brockdorff pointed out that aviation fuel is generally procured in US dollars. “A weaker euro would result in higher costs for the industry, possibly increasing ticket prices.”

But there’s a mitigating factor to this, according to von Brockdorff. Airlines commonly hedge against fuel, a strategy that allows companies like Ryanair and Lufthansa to save millions of euro, “albeit for a defined period of time”, Brockdorff said.

“Higher ticket prices, however, would obviously make air travel more expensive. When combined with the higher prices Europeans are paying at the moment and for the foreseeable future, this raises concerns about the future of the airline industry following the rebound which has seen airlines, including Air Malta, reaching capacity levels of above 90%.

How did it come to this?

Portelli pointed to three reasons as to why the US dollar has been rallying against most major currencies.

“The Federal Reserve has been considerably more aggressive in raising interest rates to combat inflation than the ECB has,” he pointed out, adding that American fixed-income products will appear more attractive than European ones.

“Secondly, there’s a feeling that the EU economy is weaker than the US, thus the ECB may be less aggressive raising rates.”

His third point was that, between the uncertainty in Ukraine and a global economy facing stagflation, there is an element of ‘flight to quality’ to the US dollar – a phenomenon in financial markets which sees investors shifting en masse out of high-risk investments.

Von Brockdorff similarly said that euro-dollar parity is down to the late response on the ECB’s part to react to the euro inflation rate.

But he also adds four other factors that resulted in the euro slide. Supply problems are limiting the euro area’s potential output, while fears of high energy and commodity prices are beginning to impact consumption.

On top of this, businesses are postponing investment due to the prospects of an economic slowdown, while Germany – the euro area’s largest economy – registered a trade deficit for the first time in years.

Alternatively, Stephanie Fabri pointed out that this event is not representative of the euro’s value relative to the dollar.

“The US and euro-area monetary policy cycles are currently not synchronised, with US rates rising much faster than in the euro area, thus boosting the value of the dollar.”

She argues that this situation has been driven primarily by the dollar rising in value, rather than the euro falling. “The level of competitiveness in the euro area has not reduced in ways that indicate a structural loss of competitiveness.”

However, when looking towards the long-term Portelli notes that currencies rarely stay at an extreme point for too long. “I’m sure the euro will stabilize and rally again towards $1.20 in the coming years.”

Fabri is more cautious, saying that the EU needs to identify ways of exerting influence in an era of increasing geopolitical significance. “If a strong currency is one way of doing that, the EU must necessarily find ways of increasing the euro’s attractiveness abroad.”

“To do that it needs to increase the attractiveness of its economy. And given the current global situation, this is one of Europe’s biggest challenges.”