Resilience and strong fundamentals

Anthony Manduca

After being negatively affected by the global financial and economic crisis in 2009, Malta’s economy has been quick to emerge from recession and experienced very healthy economic growth in 2010. Following a contraction of 1.9 percent in 2009 (much less than the EU average of 4.1 percent), GDP grew by 4 percent in the first six months of 2010. For the full year, the government expects a growth rate of 3.4 percent, and 3 percent in 2011.

“I think the way we responded to the global economic crisis, especially the way we helped the manufacturing and tourism sectors has clearly paid off and we are witnessing the positive results,” Finance Minister Tonio Fenech said. The key government response  has  involved  financial  support for  individual  companies,  rather  than  a general national stimulus programme, and assistance for the tourism sector through increased funding.

Malta’s fiscal deficit has been kept under control and the government is determined to reduce it to 2.8 percent by 2011 from the present level of 3.8 percent. And both the inflation and unemployment rates have stayed low. A study by Allianz SE, a Brussels-based research institute, has in fact singled out Malta and Germany as the only two EU member states to have boosted their competitiveness and fiscal stability in the last five years.

Malta’s tourist arrivals have surged, thanks mainly to the government’s policy of increasing airline seat capacity and routes and of allocating additional funds to the Malta Tourism Authority. Parliamentary Secretary for Tourism Mario de Marco said that tourists’ spending was up by 20.5 percent in the first eight months of 2010, translating into an increased expenditure of €132 million compared to the same period of 2009. “This is even higher than what was spent in the same period in 2008, a record year, when the figure was €750 million. This year €777 million was spent,” he added.

But the recovery in tourism remains fragile, with hoteliers complaining of increased government-induced costs and declining profits. The Malta Hotels and Restaurants Association, for example, has been critical of the government’s decision to raise the VAT rate on hotel accommodation from 5 to 7 percent from January, with the Association’s president George Micallef saying he was “shocked” by the decision. And austerity measures introduced in the UK – an important source tourism market for Malta – could have also a bearing on the number of British tourists visiting Malta.

The factors that make Malta attractive to foreign investment are its well-educated and multilingual workforce as well as its competitive labour costs, strategic location and business-friendly policies. The government’s Vision 2015 strategy has identified seven sectors for development which will give Malta a comparative advantage by 2015, namely financial services, ICT, tourism, manufacturing, health, education and Gozo – Malta’s sister island, which is to be turned into an ecological model of sustainable development. According to Prime Minister Lawrence Gonzi, “The point is that Malta has good basic fundamentals that continue to be very, very strong,”

The financial services sector is now a major pillar of the country’s economy and Malta has a lot to offer the industry: a well-trained, English-speaking workforce, the presence of the ‘big four’ accountancy firms, a low-cost environment, an advantageous tax regime backed up by 55 double taxation agreements, an EU-compliant (flexible) domicile and a single accessible regulator which is able to act with speed, flexibility and a minimum of bureaucracy.

The financial services sector accounts for around 15 percent of GDP (including its indirect contribution) and employs over 6,000 people. Some 60 percent of foreign direct investment into Malta takes the form of capital inflows in the financial sector and in 2009 the sector grew by 22 percent despite the international financial crisis.

Joe Bannister, the chairman of the Malta Financial ServicesAuthority (MFSA), believes Malta’s success in financial services is largely due to the creation of a robust regulatory regime following international standards. “The regulatory authority has adopted a policy of openness and transparency,” he said. “Companies are invited to discuss issues with the regulator. Companies can seek redress from the financial services tribunal and any changes in fees proposed by the MFSA have to be approved by the government.”

Malta’s banking sector, which domestically is dominated by HSBC and Bank of Valletta, has transformed itself from one with only four retail banks serving the domestic market to a reputable international banking centre and finance hub. Maltese banks’ prudent business model enabled them to escape largely unscathed from the 2008 banking crisis. The latest World Economic Forum report on global competitiveness ranked Malta among the top 10 countries in terms of soundness of the banking system.

The €275 million SmartCity project, which is transforming the former industrial zone of Ricasoli along the lines of Dubai’s Media City, could lead to the creation of some 5,600 new jobs, and embodies the government’s belief in the importance of the ICT sector. Last year alone, around €1 billion were invested in ICT businesses in Malta. The country is also moving in the direction of high-value-added production, which offers higher pay for greater skills, in sectors that include pharmaceuticals, biotechnology and sophisticated technology.

“The Ernst & Young Malta Attractiveness Survey states that 74 percent of foreign investors in Malta are considering expansion next year,” said Alan Camilleri, chairman of Malta Enterprise. “Last year [2009] Malta Enterprise – during a year of recession – approved €80 million worth of projects, €50 million of which were foreign direct investments and the other €30 million were expansion projects, which is the highest amount in the past four years.”

Although Malta’s economy seems to be on the right path, the government still has to face a number of challenges that it cannot afford to ignore. These include further reducing the size of the public sector, pension reform, boosting spending on research and development, maintaining its competitiveness – notably with wage levels – and reducing the public debt from the present level of 69.1 percent to below the Maastricht threshold of 60 percent. But at a time of difficulty elsewhere in the EU, Malta’s relative economic resilience and strong fundamentals can give it real confidence in the future.

About the author:

Anthony Manduca is Business Editor of The Times of Malta.


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