For many years now, I have been looking at Malta with feelings of surprise and admiration.
While it is true that its historical circumstances and geographic location forced this country/island to find effective ways of survival early on, no one could have predicted that it would have achieved this in such a determined and resilient manner. Not only has it been able to maintain significant economic performance in comparison to other countries in the euro zone, but it has done so during times of great economic and social turmoil, both in Europe and North Africa, its two neighbouring continents.
Recently published numbers do not lie: in 2015 Malta saw a historical 6.3% growth rate, the second highest in the European Union and everything suggests that this trend will continue in 2016 and 2017. This success is due to a consistent increase in investment and private consumption, both leveraged by a diverse economic development strategy based on attracting foreign direct investment (FDI). The financial services sector is the main reason for attracting FDI to Malta, as shown by the data published in February by the Malta National Statistics Office: during the first half of 2015 financial activities and insurance accounted for 98.1% of FDI, corresponding to an estimated flow of €5.2 billion and an increase of €3 billion year on year.
The timing could not have been better to talk to the chairman of one of the main contributors to this success story, namely Kenneth Farrugia, Chairman of FinanceMalta, the body that promotes the financial services industry, which recently earned the Silver Label awarded by the European Secretariat for Cluster Analysis. This is the only organization in the country and the first European cluster operating in the financial services sector to obtain this recognition.
“Malta has learned many lessons from the crisis”
In response to our question about what has been the formula for this success, Kenneth Farrugia explained that Malta has learned many lessons from the crisis that hit Europe in 2007/2008. Because of its geographic location, the country has been at the centre of various crises – the ongoing problem of various countries in North Africa and the financial crises of Southern European countries. One of the lessons learned was the importance of maintaining a rigorous and conservative attitude toward financial activities. According to Kenneth Farrugia, Malta was able to stand out thanks to the extremely conservative and prudent manner in which Maltese banks have managed their assets. The Maltese banking sector is very strong and is the foundation of the growth of the international services sector in Malta.
However, the major leverage for Maltese growth was the internationalization of its economic sectors. In the 1980s, when Malta decided to join the European Union, it had to adapt its entire legislative framework accordingly. During the first phase, operators became aware of the new opportunities that this would bring, but they started mostly by serving the domestic market. When Malta joined the European Union, the sectors gained an entirely new dimension, thanks to the internationalization of the country’s economy. This is illustrated by the fact that there are currently some 27,000 fund managers in Malta, while 10 years ago there were only a handful of them.
In the opinion of Kenneth Farrugia, Malta’s value proposition lies in the fact that it has one, single, serious and business-oriented regulator, a solid legislative framework and political and economic stability. The quality of its resources and infrastructures are also important, of course, and although these factors are of a less objective nature, they play a very significant role when it comes to the decisions made by foreign investors, and they make the difference when choosing a jurisdiction for internationalization.
“Malta’s value proposition lies in the fact that it has one, single, serious and business-oriented regulator, a solid legislative framework and political and economic stability”
While internationalization is crucial, diversification of economic sectors is no less important. The strategy of the Maltese government has been precisely that: stimulate the development of various economic sectors and benefit from ensuing synergies and complementarity. Today, financial services already contribute to 13% of Malta’s gross domestic product, but tourism continues to be a sector of great importance to the economy, both in terms of product and job creation. However, the country has always had a strong maritime tradition and Malta’s registry is currently the largest in Europe and the seventh largest in the world. More recently, we have also seen the aviation sector develop, both commercial and private (private jets) with the appearance of major commercial and private operators that have resulted in increased direct flights from Malta to other major business centres, such as Dubai. Other sectors that have seen growth are the film industry (the Gladiator was filmed in Malta) and the health and medicine sector, which are industries with great potential for growth and economic impact.
“As regards substance, our actions are based on proportionality”
All of these developments inevitably generate questions about the response capacity of the country regarding the substantial needs of its investors. In answering this question, Kenneth Farrugia was decisive: “Substance is the cornerstone of any investment in Malta. No licence is granted if substance is not created in the country. However, the Maltese authorities are very much business-oriented and they act in accordance with proportionality, i.e. we believe that substance must be required in accordance with the business plan and the reality of each company. We must offer these conditions for investors to find in Malta the answer to their needs for substance. From a taxation point of view, this is a very important aspect, in so far as we must ensure that we are dealing with real activities that are at the heart of the income that is subject to benefits.”
As such, the government has created incentives for companies to attract highly qualified professionals from abroad, and more and more professionals have chosen to reside in Malta. Not only are the tax incentives important, but there are many advantages in having a stimulating professional activity on a small island, because the balance between one’s professional and personal life is quite incredible, not to mention security, good climate and good accessibility. In addition, there has also been an effort to increase the domestic offering of qualified resources through investment in training, free childcare and incentives for working mothers. Kenneth Farrugia went on to add, “We are aware that this combination between a qualified local offering and the capacity to attract professionals from abroad is very important in responding to our clients’ needs for substance.”
“If we stop innovating, we stop growing”
Anyone who follows Malta’s development rapidly understands that it is its meticulous implementation of its strategic vision that sets the country apart. One of the key elements of its strategy is innovation. Kenneth Farrugia points out that it is not only possible for Malta to continue to innovate in financial services, but that it is indispensable. “If we stop innovating, we stop growing and we are convinced that innovation is the main differentiating factor that sets Malta apart from other jurisdiction. We must constantly innovate and improve our value-added offering and make an effort to implement a consistent pipeline of new ideas flowing out into the market. However, innovation does not merely involve new products; it has various aspects: we can innovate through legislative changes, improved processes, increased quality of services . . . Innovation has always been at the heart of our activity and we have been able to keep up the pace during different phases and cycles. We have no doubt that we will continue to innovate.”
We also have no doubt that Malta will continue its top level performance and serve as model for performance and management of economic development.