Malta 2013 – A Year in Review

MEDIA ROOM

The below review aims to provide you with an overview of the financial services sector in Malta throughout 2013 based on analysis and studies carried out about Malta, its economy and its financial services industry, by various reputable institutions and credit rating agencies throughout 2013.

According to the Malta Financial Services Authority (MFSA), the financial services industry in Malta has continued to grow throughout 2013 despite the persisting challenges and increasing competition in this sector. Financial services account for some 12 per cent of Malta’s GDP and is worth more than €1 billion to the Maltese Islands in direct and indirect revenue and approximately 10,000 people are employed in the sector.

It would appear that the first months of the year, particularly as a follow up to the banking crisis in surrounding Mediterranean states, Malta was subject to strict scrutiny from international institutions and credit rating agencies.

The first to report on Malta, in April 2013, was credit rating agency Fitch Ratings. In its report, the agency remarked that the Maltese banking sector was placed on a strong footing– an important reflection in view of what events taking place in neighbouring Mediterranean states. The agency stressed that banks in Malta would not be expected to face problems that could jeopardise their viability and would therefore not be expected to require support.

The financial services industry in Malta has continued to grow throughout 2013 despite the persisting challenges and increasing competition in this sector. Financial services account for some 12 per cent of Malta’s GDP and is worth more than €1 billion to the Maltese Islands in direct and indirect revenue and approximately 10,000 people are employed in the sector. In this review, we look at reflections, analysis and studies carried out about Malta, its economy and its financial services industry, by various reputable institutions and credit rating agencies throughout 2013.

During the first months of the year, particularly as a follow up to the banking crisis in surrounding Mediterranean states, Malta was subject to strict scrutiny from inter-national institutions and credit rating agencies. The first to report on Malta, in April 2013, was credit rating agency Fitch Ratings. In its report, the agency remarked that the Maltese banking sector was placed on a strong footing– an important reflection in view of what events taking place in neighbouring Mediterranean states. The agency stressed that banks in Malta would not be expected to face problems that could jeopardise their viability and would therefore not be expected to require support.

It noted that domestic banks in Malta are less reliant on non-resident deposits or capital markets than its foreign counterparts and consequently have much more limited exposure to foreign securities and loans.

This outlook was confirmed by the European Commission, in its Alert Mechanism Report. In its in-depth analysis of Malta’s financial sector, the EC noted that the financial sector is internationally-oriented with very little link to the domestic economy, and therefore does not pose large risks for domestic stability.

The domestically-oriented financial sector, “which invests in resident assets and funds itself in Malta, is significantly smaller, relatively well-capitalised and profitable. Moreover these banks have strong liquidity as evidenced by the very high ratio of liquid assets to short-term liabilities”. The Commission’s outlook on the Maltese economic performance was generally upbeat: “The Maltese economy demonstrated resilience throughout the crisis. Economic growth in Malta in the years before the crisis was in line with the average for the euro area.”

A few weeks later, Standard and Poor’s confirmed Malta’s Stable Outlook, based on – according to its own words, Malta’s relatively strong institutional and governance effectiveness, and its prosperous economy. Malta’s growth performance has been one of the strongest in the eurozone with real GDP per capita averaging just below 1% annually between 2007 and 2012. S&P defined “Malta’s domestic financial system as stable”.

“The presence of internationally oriented banks poses little threat to the government by way of contingent liabilities; these institutions have little or no interaction with the domestic economy. The subset of the system that is partly funded by domestic deposits (that fall under the deposit compensation scheme) and short-term foreign lines, but with no domestic assets, could become increasingly systemically important”, concluded the agency.

In June, it was the International Monetary Fund’s turn to carry out and in-depth analysis of Malta’s economy and financial services industry. “Malta has shown remarkable resilience in the face of a major crisis in Europe. Since the beginning of the crisis, the average growth of the Maltese economy has been one of the best in the euro area and the unemployment rate remains one of the lowest. This resilience was underpinned by robust service sector export growth and a sound banking sector. As a result, the current account balance has improved gradually in recent years, turning into surplus” claimed the IMF.

In September, the influential World Economic Forum’s Global Competitiveness Report confirmed Malta’s placing as a top-20 financial services jurisdiction. Specifically Malta was highly ranked in terms of soundness of its banking institutions (14th), the regulation of Securities Exchanges (17th) and the strength and reporting standards (13th).

This was followed up by an OECD report, highlighting the quality of the Maltese tax framework stating that it was in full conformity with the requirements related to International transparency standards and exchange of information for tax purposes. Malta climbed six places in the overall classification placing 41st out of 148 countries. It has also maintained its status of an innovation-driven economy.

The last review by a credit rating agency, Moody’s took place in October, with Malta’s Sovereign Outlook Rating being improved from Negative to Stable. The key drivers underpinning Moody’s were its expectation that debt metrics will stabilize in 2014 given an economic recovery; Malta’s lack of funding stress and limited contagion risk from the euro area as well as the resilience of the Maltese banking system, with banks following a very conservative and traditional banking model that has not presented problems for the sovereign even through the worst of the financial crisis.

Commenting specifically on the Maltese banking sector, Moody’s noted that the banking sector continues to report favourable indicators. Although its size and concentration risk are vulnerabilities, the system is very well capitalized and has a very limited reliance on wholesale funding due to its ample liquidity.

High deposit levels (at about 185% of GDP) highlight the amount of domestic wealth available to cover the sovereign’s financ-ing needs and anchor systemic liquidity. Moreover, banks follow a very conservative and traditional banking model that has not presented problems for the sovereign even through the worst of the financial crisis.”

Finally, one of the best accolades for the present year was provided by the illustrious Hedge Funds  Review Service Provider Rankings (HFR SP) 2013 published in late November. Malta has been named European domicile of choice amongst investors and managers with a total of 22.1 per cent of all European votes cast in the annual survey.

Margie Lindsay, Executive Editor of Hedge Funds Review said: “It is clear many more hedge funds are considering Malta as a first-choice domicile from the voting patterns this year. “Malta’s attractiveness as a domicile lies in its competitive advantage on cost as well as a regulator that is open to new strategies and approachable by fund managers who are just starting out.”