Malta: a small island making a big impact

Malta hit the international headlines earlier this year when two Libyan airforce pilots, apparently defecting from Colonel Muammar Gadaffi’s regime, landed their fighter jets on the island. It was a high-profile example of a problem that has beset Malta, along with Italy and other southern Mediterranean countries, in recent years – large-scale illegal immigration from north Africa.

Yet Malta deserves to be in the news for positive reasons too, because it has a compelling economic success story to tell. The World Economic Forum’s 'Global Competitiveness Report 2010-11' ranks Malta 11th out of 139 countries for 'financial market development', up from 13th in the previous year and 34th the year before that. Malta is also ranked eighth for 'strength of auditing and reporting standards' (up from 12th the previous year), 10th for 'soundness of banks' (up from 13th), 12th for 'regulation of securities exchanges' (up from 13th) and 50th in the overall 'global competitiveness' rankings (up from 52nd).

Malta used to be an offshore financial centre, but that all changed when it joined the EU in 2004. Its financial sector and legal and regulatory regime are fully compliant with EU requirements, and financial services account for 12% of the country’s gross domestic product (GDP).

From banking to funds

Kenneth Farrugia, chairman of FinanceMalta, which promotes Malta as an international financial centre, says that although growth in banking has slowed in recent years, it has increased rapidly in funds and insurance. “Local clients are well serviced by the existing banks – such as Bank of Valletta, HSBC, Lombard and APS – so it is difficult for new players to penetrate the domestic market unless they have a compelling proposition,” says Mr Farrugia, who is also general manager for Valletta Fund Services, the fund administration arm of Bank of Valletta. “The growth areas are in international banking," he adds.

“As far as the funds industry is concerned, a cluster has taken shape. There are more than 400 funds registered in Malta, including Ucits [Undertakings for Collective Investments in Transferable Securities] and hedge funds. This cluster has extended to the setting up of fund management companies – there are just under 70 on the island, most of which are foreign. We also have 18 fund administrators.”

The EU’s Alternative Investment Fund Managers Directive is attracting a lot of interest in Malta from EU and non-EU managers needing an EU platform from which to serve the European market. “Some fund managers will rethink their domiciles strategies and go for a European domicile, and Malta will benefit from that as we are considered an important jurisdiction,” says Mr Farrugia. 

Foreign direct investment [FDI] throughout the entire economy was €11.9bn at the end of June 2010, nearly double the previous year’s amount. “There were significant equity capital injections into foreign companies, and 83% of that increase was in the area of financial intermediation,” says Mr Farrugia. “That tells you that the financial industry is really taking off, but it also rings alarm bells because 83% is a high number and from a diversification point of view we would not want our economic growth to be over-dependent on financial services. That’s why the government’s 'Vision 2015', which is trying to grow the economy in six or seven core sectors, makes sense to us.”

Even with regards to its role as a financial centre, Malta is not without its problems. It makes much out of being “a stepping stone between Europe and north Africa”, but the war in Libya and unrest in other parts of the Maghreb region has taken the gloss off that selling point. “Political instability always brings these counties under the microscope and increases sovereign risk,” says Mr Farrugia, but in countries such as Egypt, for example, the “short-term pain” will be followed by “long-term gain”.

A potential lack of qualified people within Malta is also a threat. To address this, more students are taking university degrees that are linked to financial services, and the government is running child-care programmes and other incentives to attract women back to work. “If you have a child and return to work within the first year, you get a full year [of earnings] tax-free,” says Mr Farrugia.

Outperforming the eurozone

Many European countries are suffering from sluggish economic growth, and a handful have sovereign debt problems, but Malta does not fall into either category. It was hit by recession in 2009, but the downturn was shorter (only three quarters, against five for the euro area as a whole), and shallower (a contraction in GDP from the previous peak to the trough of 4.6%, compared with 5.3% for the euro area as a whole).

“During 2010, the Maltese economy experienced a strong cyclical upswing, led by a recovery in the electronic components and tourism industries, the export sectors worst hit by the recession,” explains Michael Bonello, governor of the Central Bank of Malta. “All through the downturn, moreover, economic activity was underpinned by steady growth in the financial and related business services sectors. As a result, real GDP growth was 3.7% in 2010, while unemployment fell to 6.1% by January 2011. In the euro area, GDP is estimated to have grown by almost half as much, with unemployment remaining at about 10%.

“The fiscal deficit target of 3.9% of GDP for 2010 seems to have been met, while public debt rose slightly to about 69% of GDP,” says Mr Bonello. “Although additional fiscal measures are required, the effort is smaller than that needed by the euro area, which recorded a deficit of more than 6% of GDP in 2010 and a debt ratio of about 85% of GDP.”

The central bank’s forecast for this year is for a more modest growth in output of about 2.5%, broadly in line with the expected normalisation in world trade, compared with about 1.7% for the euro area. Similarly, Malta’s deficit and debt ratios are expected to end the year at just below 3% and 70% of GDP, respectively, compared with euro area averages of about 4.6% and 86.5%.

Aviation takes off

Beyond financial services, Malta’s main industries are tourism and manufacturing, but others are growing in importance. With a well-established maritime tradition, Malta has built up the second largest shipping register in Europe and the eighth largest in the world. Transport Malta is spearheading a drive to broaden the register beyond big commercial ships and persuade owners and operators of luxury and commercial yachts to register and manage their vessels in Malta.

Malta is also a growing centre of excellence in aviation. Lufthansa Technik and SR Technics have aircraft-servicing operations on the island, the latter commencing operations in 2010. Transport Malta is using the presence of such companies, and the success of its ship and yacht register, to communicate the benefits of registering and managing aircraft in Malta to owners, operators, lessors and financiers of private and corporate jets.

In 2010, Malta ratified the Cape Town Convention, the international treaty that standardises aircraft transactions and registration. The government also passed the Aircraft Registration Act to implement the convention, to regulate the registration of aircraft and aircraft mortgages, and to make aircraft registration in Malta overall more attractive.

Joe Schembri, policy manager at Malta's Ministry of Infrastructure Transport and Communications (MITC), says that about 20 private jets have been registered since the middle of last year. “Enquiries are coming in from Europe, Russia, the Middle East and further afield,” he says. “Last year we laid the foundations and started the marketing drive. This year we will follow up with further initiatives, such as fine-tuning the fiscal product, adopting the IS-BAO [International Standard for Business Aircraft Operations], and stepping up the marketing campaign. There are parallels with the finance and shipping sectors in terms of what we intend to achieve in aviation, such as no-nonsense legislation and excellent service.”

FDI drive

Dr Austin Gatt, Malta's minister of infrastructure, transport and communications, is one of several ministers involved in encouraging more FDI into the country. As already mentioned, FDI in Malta at the end of June 2010 was nearly double the previous year’s total of €6.1bn, according to the National Statistics Office.

“Today our focus on FDI is creating added value rather than simple job creation,” says Mr Gatt. “We are usually more appreciative of investors who add value or give a service that we don’t already have, rather than simply employing people." He cites finance, transport, IT, electronics and pharmaceuticals as particular areas of interest for foreign firms. “In pharmaceuticals, we have an exemption from international patent law which allows us to manufacture generic medicine much earlier than you can do anywhere else in the EU, so we are attracting a lot of FDI in generic medicine manufacture. The exemption has another 30 years to run.”

In December last year, Arriva UK won a large public contract to provide a modern bus service in Malta, starting on July 3, 2011. The 400 bus owners, who between them currently operate 520 ageing and battered buses – some of them dating back to the 1950s and 1960s – are being bought out by the government for €55m. Arriva will replace them with 280 new vehicles, add new IT infrastructure and employ 1000 people.

“The arrangement with Arriva will allow us to cut the bus subsidy immediately to two-thirds of what it is now, and eventually to about 10%,” says Mr Gatt, who is quick to point out that fare rises will be modest and strictly controlled. “We are attracting a lot of foreign investment in other infrastructure and transport projects, such as the new cruise line terminal, and the renovation of Fort St Elmo in Valletta, which will include a hotel.”

On the IT and communications side, SmartCity Malta opened for business last October. It is a technology township with seafront views and is owned by TECOM Investments of the United Arab Emirates. So far $27m has been invested, and the eventual spend is projected to be $300m, making it the largest foreign investment in Malta’s information, communications and technology sector.

Due to its position in the middle of the Mediterranean, Malta is growing in popularity as a 'nearshore' location for foreign knowledge-based companies serving the entire EU single market. Costs are relatively low compared with many other EU countries, and its time-zone, infrastructure, support services and European culture make it an attractive alternative to far-flung offshore locations such as India and the Philippines. HSBC recently set up a call centre in Malta to service its premium UK market, and in February Hewlett-Packard announced it was setting up a project office in SmartCity.

“Malta’s international airport is run by and owned on a long lease by an Austrian company, which has invested about €200m in it,” says Mr Gatt. “It started five or six years ago, and is now building a business centre and hotel there. Malta Freeport is operated on a 65-year concession by CMA CGM, the third largest shipping line in the world. It has invested about €250m already and will invest another €100m over the next 10 years. The freeport is number four in the Mediterranean and the owners want to take it up to number two, handling 4 million TEUs [20-foot equivalent units, a standard measure to quantify container traffic] a year.”

So although financial services have been attracting the greatest share of FDI, other sectors are doing their bit to bolster Malta’s presence on the world map.