Reference Number: PR192503, Press Release Issue Date: Nov 20, 2019
​Dear President and Members of the Committee of the Institute of Financial Services Malta, distinguished guests, I thank the IFS for inviting me yet again to address this distinguished audience and all stakeholders in Malta’s financial services industry.
When I addressed you last year, sentiment about the international economic environment had started to become more uncertain than in previous years. Events since then have, if anything, consolidated this downbeat sentiment, to the extent that the European Commission titled its latest economic forecast as ‘A challenging road ahead’. International trade, which has been the mainstay of economic growth in recent years, is facing significant uncertainties, as liberalisation trends are being reversed. Increased barriers to trade in goods are impacting firms’ decisions to invest, and are dampening profitability. At the same time, progress in expanding international trade in services – which has the potential to lead the next wave of global economic growth – remains restricted.
I must say that, worse than the tariffs themselves, is the uncertainty surrounding the tariffs (tariffs on - tariffs off). Same as Brexit. Brexit on, Brexit off. Trade diversion and trade creation have an impact, but not as much as the current type of uncertainty associated with the brinkmanship and, perhaps one can say, one-upmanship being practised.
For countries dependent on external trade, these recent developments have already had quite an impact. The German economy, for instance, which was growing at 2.2% in 2016, is expected to by just 0.4% this year. While growth is expected to pick up somewhat over the next two years, it will remain well below the average observed since the financial crisis.
As one of the most open economies in the world, Malta is not immune to these developments. Declining foreign demand will put pressure on our exporters. However, I am confident that the impact on our economy will be lower, if not much lower, than on other exporting EU nations. This reflects the increased diversification of production in Malta, as well as the widening of our international markets. In fact, in its latest forecasts the EU Commission projected that our foreign demand will grow on average by 3.2% in 2019-2021, as against 2.5% in the rest of the EU. As a result, Malta is projected to retain a very considerable current account surplus over the coming years, consistently higher than that of Germany, and second only to the Netherlands.
This export performance is testament to the government’s efforts to attract new foreign direct investment and help firms tap new markets. The latest available figures show that at the end of 2018 the stock of FDI in manufacturing in Malta exceeded for the first time in history the €1 billion mark. In the services sector, including hotels and professional services, the total is now nearing the €3 billion mark. More broadly the pace of companies setting up in Malta, both owned by locals and by foreign residents, has continued to accelerate. Last year a record of nearly 12,500 new firms were set up in Malta.
This is one of the reasons why I am confident to say that our economy is entering these challenging times from a position of strength.
In fact, the European Commission is projecting that Malta will have the fastest economic growth in the EU in the next two years. While weakening foreign demand will cause our GDP growth to decelerate, our relative position vis-à-vis other EU countries will strengthen further.
This is not down to sheer luck. It reflects the policy actions we have taken in past years. For instance, our measures to make work pay and wean people off dependence on social benefits, together with the plethora of actions to help women remain or enter the labour market for the first time, has boosted the supply of labour. From a situation where our employment rate was 5 percentage points below that in the EU, we now exceed the EU average by nearly 4 percentage points. This increased supply of labour inevitably helped firms maintain wages at a competitive level, while at the same time it helped reduce skill shortages. Our policy to reduce the burden of taxation and government-induced costs has boosted disposable incomes of households, helping to increase consumption, while at the same time it boosted firms’ profitability, leading them to invest more.
Our success in shifting the fiscal position from a sizeable deficit to a surplus means that we are entering this new challenging economic environment with considerable fiscal space (more room for manoeuvring). Over the next three years we will still manage to have a surplus of close to 1.5% of GDP, despite carrying out the largest capital expenditure programme over the recent decades. We will be spending €2.2 billion to boost our nation’s infrastructure and strengthen our public services. Every year we will be spending more than 4% of our GDP in public investment, more than a quarter higher than the average that our nation spent annually since joining the EU.
This investment will be key to maintaining our success in future years. By boosting our infrastructure and bringing it in line with that of our EU counterparts, we will be able to enhance our competitiveness and continue to attract investment to our shores. At the same time, we will complement this investment in our physical infrastructure with a further boost in public spending on education. Since the latter year, we have managed to boost the number of public employees in the education sector by a third. This increased spending is leading to much better educational outcomes. While, in 2010, only one third of our population aged between 25 and 64 had at least post-secondary education, we now have more than half of our population that have achieved this level of education.
Does this mean that we have done enough, and it is just a case of keeping the boat steady during a temporary patch of bad weather? I do not think so. Rather I think that the challenging international economic environment that we are facing should lead us to refocus our efforts to strive further.
We need to redouble our efforts to make our industries less sensitive to changes in the economic cycle by helping them to go up the global value added chain. Firms with high quality products and services are much less prone to the vagaries of international demand. Over the coming years, we need to create an environment that continues to foster this progress. We need to bolster our physical and human capital so that the upgrading of our economy and its diversification into higher value added activities accelerates.
At the same time, we need to manage properly our fiscal space. We should not see this as a chance to stop doing ‘expenditure reviews’ or indulge in capital expenditure that is not justifiable. We need to continue seeking to lower the burden of our national debt, while maintaining the trend decline in recurrent expenditure as a proportion of our GDP. In the meantime, I have asked the World Bank to assist us in mapping our social benefits, which have accumulated over time to ensure their consistency and, more importantly, their progressiveness.
Turning to the role of the Maltese financial system, I think that the coming years will also present new challenges. In recent years, firms have tended to rely more on their internal funds, rather than on the banking system. This is likely to change now. We are already seeing bank credit to non-financial corporates picking up once again, and I believe that this is set to continue. While the risk appetite of banks may have reduced somewhat, I think there is ample scope for the Maltese banking system to play a leading role in the next stage of our economic progress. We have put in place a number of schemes to enhance access to credit, and I expect that institutions that we have created, such as the Malta Development Bank, will help sustain the rise in bank credit.
I believe that our financial services sector will need to transform itself, similar to the rest of the economy, and bolster greatly its infrastructure and way of operating. I am confident that this can be achieved. Our financial institutions are entering this phase from a position of strength, on the back of high liquidity, an improving asset position, and good profitability. Complemented with a dynamic leadership, this should facilitate the task ahead.
I cannot conclude without making reference to two big challenges already, namely taxation and AML. Taxation is a moving target questioning right to tax, location, revenue apportionment, minimum tax rates, and the digital tax. Today we are not sure what the impact really is on the big countries or small countries, or even the countries which are proposing the digital tax. Regarding AML, we are at present transposing the 5th AML directive. This will address certain gaps which are still outstanding in many Member States, including Malta. Next week, in London, we will be consulting the Home Office once again in the setting up of a Financial Organized Crime Agency.
To conclude, the Maltese financial services sector has been key to our economy’s success in past years. I have no doubt that in the coming years it will remain one of the mainstays of our economy and continue contributing to our nation’s energetic development and, more importantly, inclusive growth.     
Photos: MFIN