Malta is preparing a Eurobond issue of between €300m and €500m for launch in the next 12 months. It will indicate the island’s determination to be an active member of the eurozone, which it joined in January. The island has set up a debt management office to structure and sell the issue to the markets.
These developments reflect a change in fund-raising strategy. An historic policy of issuing many but small bonds is to be replaced with a drive to issue fewer securities but with larger denominations. The island believes its faithful adherence to EU financial ratios will ensure the success of this issuing strategy.
Michael Bonello, the governor of the Central Bank of Malta, says: “There has always been a heavy take-up [of issues] and they are oversubscribed several times over. The interest rates are always very attractive and the bonds are perceived to be a very good buy.
“The debt management office has rationalised [the strategy] and we plan to have fungible issues. There will be fewer but larger issues. The debt management office will approach fund raising in a very professional way. It will no longer do it just to fill the gaps in the budget,” he says.
Accession boost
The island’s financial community has been boosted by its EU membership. Hedge funds, insurance and banking institutions from many European states have moved into the Maltese Financial Centre to gain an early foothold in one of the EU’s most outward-looking states. The doyen of the island’s banking community is HSBC, which moved to Malta about 10 years ago, when it bought a state bank. Today, it has a banking network across the island.
“The whole financial community is expanding strongly,” says Professor Joe Bannister, chairman of the Malta Financial Services Authority. He cites the growing numbers of insurance companies, investment companies, hedge funds and banks that have set up shop in Malta in the past four years. The amount of lending by Maltese-based financial institutions has risen from €6.8m in 2004 to €4bn in 2007. Malta’s financial centre accounts for about 12% of gross domestic product (GDP), although that is expected to rise to about 25% in the next five years.
Diverse business
The island is open to all reputable financial players, says Mr Bannister. “Our business comes from every direction. We foresaw that there would be developments in the insurance sector and in hedge funds, largely because we geared up for it. We saw a niche in the market and that is now developing quite well. As the country becomes better known, it will be a diversified financial services sector.”
Malta’s enviably low overheads attract many international players. Rents, for example, are almost a 10th of those in London and a quarter of those in Frankfurt. Wage costs are also low in comparison with major centres. According to Anthony Fisher, a UK consultant who has worked with the Maltese government: “Malta has lost none of its competitive advantage since joining the EU. In fact, EU membership has added to it.”
Malta has gained an edge over some other EU members by allowing companies to move their operation from another jurisdiction to Malta – so-called ‘re-domiciliation’ – without having to close down the company and re-open it on the island. The island has redoubled its efforts to enforce transparency after the Financial Action Task Force censured it some years ago. Mr Bannister says that staff on the island learn a culture of compliance on training schemes in large financial institutions.
Economic beacon
The prospect of joining the eurozone has served as a beacon for the managers of Malta’s economy. Their policies have helped this small economy to keep in line with EU requirements. For example, the ratio of its deficit to GDP has decreased from 11% nine years ago to today’s 3%. Inflation is maintained at low levels.
A tough monetary regime has been accomplished by a process of reform and institutional change, guided by the goal of eurozone membership. Malta has embarked on a privatisation process. It has also lifted restrictions on the entry of foreign financial institutions into its financial markets.
Conformity with EU standards has been critical to the implementation of policy, says Mr Bonello. “The Maltese economy is already very closely linked to European trade and finance. We have long had a market economy, and our trade and financial relationships were directed to Europe. It was a natural development. Our trading partners had got together to form a single market. We needed to be able to tap into the single market without having to face trade barriers or other impediments.”
Legislative moves
The country has also passed a raft of legislation that places it at the heart of the European mission. Mr Bonello says that the island sticks religiously to the EU’s Stability and Growth Pact and to the Lisbon agenda. “This helps governments to focus on the important things, otherwise they get lost along the way, especially when elections come up.”
The passage into membership of the eurozone has been painless and Malta is now ready to reap the benefits. These will be particularly marked because the island is heavily dependent on international trade and tourism. “The euro means lower transaction costs and lower exchange risks. European companies will not have to hedge their positions as they are trading in their national currency. The euro area is our major trading partner and the single currency will make life much easier and simpler for our exporters and importers, and less costly,” says Mr Bonello.
Tourists will also benefit from Maltese membership, he says. “You don’t have to change money. Tourism is very important to us. People from Europe come with the money they have in their wallets and they don’t have to bother about changing money when they come to the airport.” Some local sources assess that eurozone membership could add 0.8% to Maltese GDP.
New regime
The need to pursue a European fiscal and monetary regime has curbed the ambitions of local politicians, says Mr Bonello. “Joining the EU and picking an early moment to join the euro instilled a sense of rigour we might not have found easy to do in the context of the electoral system and two-party politics as practised in Malta. EU membership has brought a discipline on policy makers that they might not have taken to so readily and so quickly. We have operated a fixed exchange rate and defended it by tying it to a basket of strong currencies. Exchange rate stability has been an important element in our economic development.
“As we started a process of capital account liberalisation, we could only do it by maintaining interest rates at a level that was higher than the competing level in Europe. Otherwise money would have flowed out and we would have collapsed the rate,” he says.
Membership of the eurozone has ensured that Malta has moved to the centre of the EU. However, the Maltese authorities believed that it achieved the final accolade of European acceptability when some French banks recently visited to discuss setting up offices. Maltese companies use English as their business language and they use English civil law, so the French have traditionally regarded Malta as an Anglo-Saxon destination. The arrival of some French institutions is regarded as a breakthrough. Malta, they appeared to be saying, has come of age as a true European financial centre.
