Malta suffered a resounding defeat in the Eurovision song contest in May, coming second from bottom. Only the UK did worse, with «nil points». The two nations, which have ties stretching back centuries, took it on the chin and treated the international humiliation as a joke. The voting that really mattered to Malta took place earlier in the year.
In February, 54% of Maltese voted in a referendum to join the European Union (EU) next year. In April, the vote was endorsed at a general election in which the pro-EU centre-right Nationalist Party polled 52% of the vote to beat the anti-EU centre-left Labour Party with 48%. Having won independence from the UK in 1964, it is about to hand over a large part of its economic and political sovereignty to Brussels.
Situated in the Mediterranean, 60 miles south of Sicily and 200 miles north of Africa, the three islands of Malta are only 316 sq km in size with a population of 400,420. Its financial sector, though, is disproportionately large accounting for 12% of GDP and employing 5000 due partly to its tradition as a stepping stone between Europe and North Africa, and also its Anglo-Saxon business culture. Many of the senior people in Malta’s financial sector believe the EU will bring benefits.
The economy grew only 1% in 2002, and there was a decline of 0.8% in 2001 because of slow growth globally and the uncertainty surrounding EU accession.
David Pullicino, deputy governor of the Central Bank of Malta, says now that membership is assured, it will provide «an automatic stimulus to growth» as businesses prepare for entry.
More precisely, Peter Sant, an economist at Bank of Valletta (BoV), Malta’s second biggest bank, refers to a report by Professor Ali Bayar «which concluded that as a result of EU membership Malta would benefit from a one- off increase in its GDP of 6.45%».
Tony Camilleri, BoV’s chief officer financial markets, adds: «The EU has a number of trade agreements with non-EU countries in the Mediterranean, which Malta will benefit from immediately.»
Downside to accession
There is a downside, as John Dalli, minister of finance and economic affairs, and a long-standing EU protagonist, accepts. «Like all other accession countries, we will have to synchronise ourselves with EU monetary and fiscal policy,» he says. «There will be some loss of control over our economy, but with the OECD (Organisation for Economic Co-operation and Development) and the World Trade Organisation breathing down our necks, we don’t have total control anyway.»
Malta’s membership entails eventual adoption of the euro in three to four years’ time. The Maltese lira is pegged to a basket of currencies: the euro with a 70% weighting, sterling 20% and the US dollar 10%.
A disadvantage of giving up the national currency is that certain levers of economic policy, such as interest rates, will be controlled by the European Central Bank. Mr Pullicino from the Central Bank of Malta believes that this is a small price to pay and, besides, as Malta’s currency is already linked to three other currencies, it has to follow the interest rates of the currencies to which it is fixed.
Although some sectors of the economy notably small and medium-sized enterprises engaged in various manufacturing and services activities are likely to find it difficult to comply with the panoply of red tape that emanates from Brussels, the financial sector is a different matter. Since 1994, Malta’s financial services laws and regulatory framework have been reformed along EU lines as part of the government’s preparations for eventual membership.
This reforming process included not only the dismantling of the country’s offshore industry, but also the creation of a single regulator, the Malta Financial Services Authority (MFSA) last October.
Malta is also no longer a tax haven. Nine years ago it had a big offshore sector, with some 3000 offshore registered companies, but now only about 100 are left and even those will be gone by next year.
The MFSA is the country’s single regulator for all banking, investment and insurance business. It also regulates the Malta Stock Exchange and houses Malta’s Companies Registry. «The old model of regulation by market sector had become increasingly bureaucratic, expensive and complex,» says Professor Joe Bannister, the MFSA’s chairman. «Moving towards a single regulatory authority is in line with global best practice.»
Careful preparation went into transferring the regulatory and supervisory powers of the Malta Financial Services Centre, the Central Bank of Malta and the Malta Stock Exchange to the MFSA. «We looked at other financial services authorities around the world to ensure we got our structure right. We cherry- picked ideas,» says Prof Bannister.
«We have been screened by a number of international organisations the EU, the OECD, the FATF (Financial Action Task Force on Money Laundering), the World Bank and, a few weeks ago, the International Monetary Fund,» he says. «The IMF found nothing that caused us concern. It concluded that our regulatory system is very robust.»
Mr Camilleri says there are commercial benefits of having a tougher regime. «The fact that Malta is part of the EU will prove Malta and the BoV have high regulatory standards, that they belong to the premier league,» he says. «It will help Maltese banks to source cheaper funding through syndicated loans.»
He admits to some drawbacks. A large chunk of his bank’s earnings come from foreign exchange dealings with the euro, which will diminish when Malta adopts the single currency. Interest margins will probably reduce. Competition will intensify local customers will be able to borrow from other banks in Europe.
Mr Sant says: «The cost to the bank of converting to the euro will be about 1%-2% of our operating costs for a two to three-year period.»
Two banks dominate retail and corporate banking: BoV with 43% of the market and HSBC with 47%. Two others have most of the remaining 10% of the local business: Lombard Bank and APS, a church-owned bank (the Diocese of Malta).
There are also four or five Austrian banks, including Erste and Volksbank. They used to operate offshore serving non-residents but, with the winding up of the offshore financial sector, all have or will soon have converted to onshore business, mostly in the wholesale sector.
Bank of Valletta
BoV is owned by the public (60%), the Maltese government (25%) and Italian bank Banco di Sicilia (15%). In 2002, total assets were Lm1.9bn (E4.4bn), pre-tax profits Lm14.5m, number of branches 49 and number of staff 1585.
In spite of its small size, it is the largest organisation quoted on the local stock exchange and has been putting up a good fight against a global goliath that wants to be a friendly local.
«When HSBC entered the Maltese banking scene in 1999 by buying Mid-Med, some were concerned that its size and reputation would allow it to take over much of our business,» recalls Mr Camilleri. «That hasn’t happened. BoV’s share is much the same as it was four years ago.»
It has six representative offices overseas: two in Australia and one in Canada where there are sizeable Maltese communities; one in Italy, «which taps inward investment opportunities into Malta, and also provides us with a stepping stone into other EU countries»; one in Tunisia, which opened three years ago; and one in Libya, which opened last year.
The latter two form part of a strategic aim to strengthen BoV’s position as a conduit for commerce and investment between Europe and North Africa, a strategy in which a representative office will be opened in Egypt this year.
Volksbank Malta is the Austrian bank with the biggest presence on the island, with one branch and 25 staff. Thomas Havlik, managing director, says it converted its offshore licence to an ordinary banking licence last November and now operates in a similar way to the other commercial banks in the country.
«There is one big difference our balance sheet currency is the euro, not the lira,» he says. «This means that for corporate and personal loans, if the customer has an income in euros or dollars, we can lend in those currencies and transfer the benefit of the low interest rates that prevail.»
Volksbank also participates in some of its parent’s international syndicated loans, and at a lower margin because operating costs are lower. «Some deals would not make sense done in Austria,» says Mr Havlik. «We do about 15-20 syndicated loans a year here, of around E3m-E5m in size.»
The insurance sector
There are 19 insurance companies in Malta five local and 14 foreign authorised to carry out insurance business, plus 32 agents and 24 brokers. The biggest life company in Malta is Middlesea Valletta Life, with 60,000 policyholders accounting for 56% of the market. It is owned by Middlesea Insurance (Malta’s biggest composite insurer), Bank of Valletta and Munich Re.
Joseph Rizzo, general manager of Middlesea Insurance, says: «We are striving to write business abroad, including in the EU. We don’t need to wait until we are in the EU. We already have a company in Italy, a branch office in Gibraltar, and are looking at opportunities in Greece and the Gulf.»
Pensions should be a future opportunity, says Mr Rizzo. The Maltese rely on state pensions but the government is working on a programme of pensions reform to provide tax incentives for local people to take out occupational or private pensions.
In parallel, a regime is being set up that will allow cross-border pension funds to be set up in Malta, with tax benefits based on double taxation treaties with other countries.
It would enable workers switching countries to take their pensions with them and would be helpful to multinationals operating across the EU. If it goes ahead, it will be one of the first regimes to be created under the new pan- European Pensions Directive framework.
The finance and economic affairs minister, John Dalli, admits that being in the EU will mean «losing control of the steering wheel and accelerator a little bit». But this should help inward investment, financial services and the country’s economy in general. It will also give the Maltese some influence, no matter how small, within a community of 25 nations.
LICENCE TO PRINT MONEY
De La rue, the British banknote company, has a print works in Malta that is bigger than any of the company’s other print works in the world, including the UK.
The factory which was expanded last year prints the currencies of several countries, but Maltese lire for the Central Bank of Malta are printed at one of De La Rue’s UK plants.
Guy Potter, regional manager at De La Rue, says the country is an ideal place in which to do business. «It has a hard-working and educated labour force,» he says.
«Business costs in general such as commercial property are reasonable, and there are good telecommunications and transport services with Europe and North Africa.»
The Banker November 1, 2003