Financial services now stand as one of the main pillars of the Maltese economy. IFC Media speaks with Minister for Finance Professor Edward Scicluna regarding the rapid development of Malta as an IFC.
IFC: How important is the financial services sector to the Maltese economy?
Edward Scicluna: The financial services sector has witnessed significant growth over the years, and today stands as one of Malta’s key economic pillar, with a GDP contribution of 12 per cent and employing over 10,000 mostly in well-paid, high quality jobs. Clearly Malta’s economic vision is based on a significant diversification – from high-value added manufacturing to IT, from tourism to financial services and online gaming.
However, the financial services industry has continued to grow in its different sub-sectors, including banking, insurance, investment companies, as well as new business in emergent areas such as pensions and retirement schemes. Evidently, the financial service industry is an important source of economic growth and increased Government revenue, which is then re-invested in the different societal needs, ranging from quality education to healthcare.
IFC: What do you consider significant milestones in its development?
ES: Malta continued to implement significant reforms built around full consensus throughout the Maltese political landscape. This included a programme of reforming all its finance sector legislation in line with international best practice and was one of the first six countries in the world to reach an advanced accord on fiscal matters with the Organisation for Economic Co-operation and Development (OECD).
Today, Malta not only follows international policy, buy it is actively involved with the OECD, the EU and the Commonwealth in modelling global regulatory policy. This is not enough – we continuously build on these achievements – Malta has now over 70 tax agreements with various countries around the world – ranging from Europe to the US, from Southern America to the Middle East.
IFC: What was the impetus to create a successful financial centre? And why in your opinion is it a success?
ES: As an island practically devoid of natural resources, Malta’s success depends on its human resource to thrive and prosper. We have invested heavily in the education of our skills base and this is certainly an integral part of our success. It is no coincidence that in 2013, the World Economic Forum ranked Malta’s educational system amongst the best 20.
Within the sector itself, success is attributable to a number of reasons. First of all, Malta seeks to play a proactive role in the industry, rather than reacting to developments. In this manner we seek to identify the new niches of growth which can enable the sector to grow forward. We continue to invest heavily in the training of our personnel, aided by tax grants, which attract highly qualified personnel from abroad to our shores.
In terms of regulation, the Malta Financial Services Authority (MFSA) has built an important reputation for being an accessible and responsive regulator, which seeks to support potential investors in identifying tailor-made solutions to do business in Malta. Evidently, strict due diligence is observed, based on our mantra that quality is far more important than quantity. In parallel, Malta’s marketing efforts are then spearheaded by FinanceMalta, which is a public-private partnership that aims to strengthen Malta’s financial services brand through a comprehensive promotional programme.
All this is supported by ancillary benefits, ranging from a top quality IT infrastructure, to Malta’s cultural and historical offering – which makes it an ideal location to visit and stay for business and beyond.
IFC: How does Malta compare / contrast to other European IFCs such as Ireland and Luxembourg?
ES: As indicated before, our target is to keep building Malta’s reputation as a top quality jurisdiction in financial services. It is not our intention to compete with other jurisdictions – and neither do we want our economy to become fully dependent on one major sector.
Despite this effort at remaining true to our principles, Malta has received important accolades in the recent past. Towards the end of last year, as one example, a leading fund journal awarded Malta the coveted award of Europe’s favoured domicile in the hedge fund industry.
The World Economic Forum has also placed Malta’s financial centre amongst the top 20 world jurisdiction in terms of key indicators ranging from financial market development to soundness of banks, and from the regulation of securities exchanges to the strength of auditing and reporting standards.
IFC: How has Malta weathered the economic downturn so well?
ES: Malta is a small and open economy that is dependent on international trade in goods and services for its economic survival. The Maltese people’s collective well-being is dependent on Malta’s resourcefulness, its productivity, its international competitiveness and on its ability to leverage internal investment and foreign direct investment. As a result, the Maltese Government has made a clear choice in favour of macro-economic stability:
It deregulated most economic sectors, strengthened market competition and enhanced consumer protection. It also put in place robust and credible legal and financial regulatory framework and systems that ensure stability, continuity and confidence. At this juncture it is pertinent to note that Malta’s banking and financial systems have over the past years been characterised by a resilient and robust structure which has been underpinned by prudent and cautious policy implementation. Moreover, contrary to what occurred in other EU Member States, the extent of resources devoted to the construction industry were limited such that the correction of the property market was orderly and did not result in high levels of unemployment. Furthermore, wage moderation helped sustain the labour market.
It diversified Malta’s economic base and is continuously opening up to new opportunities and the diversification of the Maltese economy occurred in sectors whose market proved resilient to the crisis. Furthermore, Malta’s financial, maritime and aviation industries and services are now well established and are contributing substantially to growth and job creation alongside the more traditional manufacturing, tourism and distribution industries. The Maltese Government is now working on new sectors: bio-technology and the creative and the green economies. Its strategies in these areas are well-developed and are already being implemented. The Government is investing heavily in Malta’s physical and environmental infrastructure, its communications networks, and its health and education sectors as well as in energy supply, energy efficiency and energy security. The Maltese Government is incentivising investment and strengthening access to investment finance to all enterprises. In general, the Government is taking all measures to create a business environment that facilitates entrepreneurship and that is conducive to growth.
It is investing heavily in Malta’s human resources. Over the past years, Government has renewed the educational set-up through significant investments in all the levels of Malta’s education system. The provision of diversified and dynamic vocational and lifelong learning programmes further assist in addressing the requirements of the labour market. Government is incentivising and rewarding work through a range of fiscal, family-friendly and active labour market policies. Moreover, it is noteworthy that during the economic crisis, firms in Malta were able to withstand the shocks by resorting to short-term measures, such as shorter working weeks, without resorting to massive lay-offs. The performance of the labour market has been positive with the Labour Force Survey reporting an increase of 3.1% in employment in the third quarter 2013. Notable increases came from female employment. The ofﬁcial Eurostat harmonised and seasonally adjusted unemployment rate stood at 6.4 % in November which is the same at the rate prevailing at the end of 2012.
It has strengthened Malta’s international competitiveness. The current account surplus stood at 2.8% of GDP during the ﬁrst three quarters of 2013, which was higher than the 2.3 per cent of GDP level recorded during the same period of 2012. This development was mainly underpinned by a lower deﬁcit in the goods account, which more than offset the decrease in the surplus registered in the services account. Meanwhile, net income outflows increased partially offsetting the slight increase in net current transfers inflows. Concomitantly, during the ﬁrst three quarters of 2013, net direct investment inﬂows increased to 3.4 per cent of GDP, when compared to the net outflows of 0.2 per cent of GDP registered during the ﬁrst three quarters of 2012. This stemmed from higher inﬂows of foreign direct investment and other capital which offset a reduction of reinvested earnings of foreign owned companies in Malta.
It is proceeding with the planned consolidation of government’s finances. In particular, it is noteworthy that in line with the Council Recommendation on Malta’s 2013 National Reform Programme and Council opinion on Malta’s Stability Programme for 2012-2016, Malta is required to correct its excessive deficit by 2014 in a sustainable and growth-friendly manner. Over recent months, the Maltese Government has upheld its commitment to a sustainable fiscal position by gradually but consistently reducing the fiscal imbalance, to reach a balanced budget in the medium-term. In the first eleven months of 2013, the shortfall between recurrent revenue and total expenditure of Central Government declined by €34.8 million when compared to the corresponding period last year. During 2014, the decline in the general Government deficit is projected to be sustained. Government is committed to undertake policy reforms in order to safeguard public finance sustainability whilst supporting economic growth.
Malta’s performance to date in each of these areas has been creditable. However, in the context of an extended period of economic and financial instability and risks and renewed geo-political tensions and their risks to peace and economic stability, vigilance must never be lessened.
The Maltese Government will therefore continue with its policy for macro-economic stability and to manage all the risks to such stability, including those that result from geo-political tensions. The Government will continue work to ensure free trade and fight off any protectionist measures. The Government will continue with its fiscal consolidation strategy. However, it will also work with the European Union to balance this strategy with a parallel one for economic growth and employment.
IFC: How important has the Malta Stock Exchange been in the growth of the Malta as an IFC?
ES: The Malta Stock Exchange has been an active, as well as a successful contributor towards the development and growth of the local financial services sector through the creation of a capital market with over 75,000 mostly retail investors. The Exchange’s operations are domestic, but it has recently made significant strategic investments to ensure international connectivity through the use of a global trading platform, Xetra, which is operated by Deutsche Bourse in Frankfurt and a custodial relationship with Clearstream AG, a global custodian.
The Exchange, while continuing to support the domestic market is investing resources to attract international listings to Malta, provide access to international markets and custodial services and is also actively promoting its services internationally.
IFC: What are your feelings with regard to the move towards automatic exchange of information, FATCA etc?
ES: The world has become increasingly globalised and cross-border activities have become the norm. As a consequence, tax administrations need to work together to ensure that taxpayers pay the right amount of tax to the right jurisdiction. One key aspect of international tax co-operation is exchange of information. Exchange of information comes in different forms and includes exchange upon request, spontaneous information exchange and automatic exchange of information.
There is currently a trend towards shifting the international standard in transparency in tax matters towards automatic exchange of information. Malta is committed to be a tax transparent jurisdiction and a therefore it is only natural that Malta adopts automatic exchange of information as part of this commitment.
One needs to point out that Malta already exchanges information on an automatic basis in relation to the EU Savings Directive. Malta has now negotiated and signed a FATCA Agreement on the basis of the latest Model 1 Intergovernmental Agreement (reciprocal version) issued by the US. The basic purpose of this Agreement is that financial institutions (e.g. banks) which are resident (or carrying on business) in Malta or the US will be required to comply with certain prescribed reporting obligations. This Agreement will require financial institutions in both Malta and the US to submit the required information to their own tax authorities which in turn will automatically share such information with the other tax authority.
Such shared automatically exchanged information will be useful both for Malta and for its tax treaty partners in order to ensure that the relevant tax laws are being complied with.
IFC: Is there a fear of over regulation in the sector, particularly from the EU?
ES: What happened over the past five years was certainly unprecedented, and unfortunately brought about a significant level of distrust in financial institutions as well as a general instability which is affecting other sectors of the economy.
The regulatory changes, particularly those intended at strengthening the banking industry are addressing these issues and have already succeeded in bringing about a level of stability, particularly amongst our European counterparts. We will, however, remain attentive in seeking a balance between the key objectives of fulfilling our legislative tasks, including being responsive to consumer expectations, without imposing unnecessary burdens on the service providers. In this context, proportionality is a crucial feature in regulation and supervision.
IFC: What role can / does Malta play as an investment stepping stone into the region? In to new markets eg, China, Africa etc?
ES: Malta is very strategically located at the heart of the Mediterranean with very close ties to mainland Europe, North Africa and the Middle East. The island is considered the best choice for investments in knowledge-based sectors and high-end manufacturing. Malta is also considered an ideal logistical hub due to its excellent port infrastructure. This, together with EU membership, makes the country a perfect gateway to the Euro-Mediterranean region and beyond.
IFC: Malta has been ranked impressively as 41st in the Global Competitiveness Index 2013/14 – to what does it owe this rating and in particular being ranked 14th re soundness of its banks?
ES: Besides soundness of banks, Malta ranked higher in other indicators too, such as - technological readiness, health and primary education, quality of educational system, quality of math and science education, intensity of local competition, strength of auditing and reporting standards, business costs of crime and violence, quality of port infrastructure, telephone infrastructure, internet bandwidth, local supplier quantity, FDI and technology transfer, ease of access to loans. As can be evidenced, this is a long list of indicators wherein Malta ranks in the top 20 within the Global competitiveness index. This indicates that the soundness of banks is not the only factor which has contributed towards this positive result.
IFC: The most problematic issue for doing business in Malta was listed as inefficient government bureaucracy – how can this be addressed?
ES: One of the most problematic issues listed as hindering business in Malta has indeed been listed as inefficient government bureaucracy. This government has pledged to reduce the existing unnecessary bureaucracy in is different forms, whether this is faced by citizens in general, business, or the public administration itself. Needless to say, the reduction of excessive government bureaucracy faced by business is a priority. This is not an easy task, but it is one which has commenced and which will continue throughout this legislature, and with everyone's commitment inroads can be positively made.”
IFC: What will be growth areas?
ES: The financial service industry is a very dynamic and continuously evolving world. We need to continue striving to identify those niches of growth – whether its new products or services, for which we can develop the necessary regulation so as to attract further business to our shores.
While banking, investment and insurance services are well established – over the past years, we have seen new developments, such as the setting up of occupational pensions, and pension fund administrations in our jurisdiction. Creating a diversified sector is healthy for Malta.
We need to continue preparing our human resource base for these developments and this is why we are continuously upgrading our educational offering at our University and technical college to embrace such changes, while ensure a close cooperation between industry and the educational institutions.
IFC: How important are IFCs such as Malta to the global movement of wealth and for the facilitation of investment?
ES: IFCs have an important responsibility – yes they are centres through which considerable amount of wealth goes through – but this is what places more responsibility on us. Unfortunately, we have seen the financial crisis create a crisis within societies. We want to be strong enough to avoid this – this is why our regulatory efforts will remain meticulous – without however stifling an industry, which, can indeed form the basis for further economic growth and job creation – to the wider benefit of society as a whole.
IFC: How can Malta’s role within the global financial architecture be further developed?
ES: Malta as a Member State of the European Union implements all EU legislation in the national legislation and therefore its financial supervisory architecture is that of the EU, however, where possible under the legislation Malta carries out innovation through regulation without infringing the legislation. In the past after careful study, the MFSA has implemented new legislation concerning Protected Cell Companies for insurance etc. This is ongoing work.