Prof. Edward Scicluna discusses the challenges posed by Malta´s rapid growth and the actions Malta is taking to unleash the potential of its capital markets, in an era of strict banking regulations.
The recent Winter EC forecast placed Malta first in Europe for growth, how has the Ministry of Finance interpreted these findings?
By whatever estimates you go by, growth rates will be diminishing over time, there are enough risks around the world pointing in that direction. What´s important is what we are doing compared to our piers i.e. other European member states. The commission has put us at the very top of the league for forecasted economic growth, despite the fact that the figures in those forecasts could change, we will still be the fastest growing out of all the European countries both this year and the coming year. That shows that there is something happening in Malta because we have enacted a combination of good fiscal governance with an eye on economic growth, not at the cost of economic growth. Sometimes fiscal consolidations are done in such an abrupt and aggressive way that they affect growth, while we managed to balance letting the economy continue growing with trimming and we succeeded. We have used our fiscal reform to encourage work, mostly by cutting the tax on work and increasing it on consumption, mainly on environmental burdens such as plastic, cement and anything that puts a burden on the economy.
We have also encouraged women, that was our hidden resource among the labor force. In previous administrations we were among the lowest female participation in Europe, now that has improved considerably by the provision of tax breaks and the provision of free childcare.
What new challenges has rapid growth brought to the economy?
In the past, our headaches were generating investment and finding work for our youth. Today we have the 2nd lowest youth unemployment rate in the EU. Now the challenge is for infrastructure to keep up with the economy, when you have a 7.8% average GDP growth year in year out it’s a very fast rate for the existing infrastructure to keep up with. The speed of growth was unexpected, so we need more housing more office space, more roads to avoid congestion and this type of investment is now catching up with the economy.
The other challenge we face lies with the environment and the waste produced from this growth. I just came from cabinet where we were discussing waste and how to dispose of it. These are the issues of a small island economy, but we prefer having these kinds of issues than having no investment and no growth.
Malta´s Banks weathered the global financial crisis well due to their strength; how would you characterize the current strength of Malta´s banking industry?
The banks are still strong, but we must admit that the banking industry all over the world is meeting with new challenges especially within the EU from the post crisis regulations imposed on them. Malta is doing very well in capital requirements and reduction of non-performing loans. In terms of good governance there is an increasing burden placed on the industry which frustrates investors or people coming from outside the EU. So, we must balance this, on one side with prudential standards and anti-money laundering standards at the same time banks are there to do business and facilitate commerce so this is a challenge for the banking industry.
In Europe we need to make more use of the capital markets which compared with the United States are very limited. Our culture is banks, in Germany people believe in banks and that creates problems. One needs to take more risk, share risk and expect a better return. So, the EU is looking into what we need to do to develop capital markets and we hope that this time we get it right. Compared with the United States we still don’t have as many people willing to take risk for higher reward and become a businessman rather than take a secure job. This requires a greater focus on the capital market rather than on banks, also this is a cultural shift which is quite complex. The EU is aware of it, but we need to deliver.
With that in mind, what action have you taken to promote Malta´s capital markets?
We have made a lot of inroads. We have created another platform where we take small family businesses who want to borrow 5 million for example and savers can go to the market and fund them, we have significantly lowered the costs of doing this type of business. So, we are promoting the businessman to go on the market and the saver to go to the market instead of the bank. We have a lot more initiatives, we are creating more indices and providing more information in order to encourage risk taking and better use of your money.
What action is the government taking to ensure this current boom is sustainable?
I don’t want to look at this period as a boom, I don’t like the term boom because it’s not. Malta has discovered the formula for growing at a faster rate, it might not always be 7% it might be 4%. It is important that Malta at least maintains a rate that is higher that the EU average. We aim to catch up with EU median wealth creation therefore must grow faster in order to reach that average. If we grow at the same rate as Germany, we will never converge. We are very close, in general about 90% of the average so we are getting there. The key thing to keep an eye on is distribution, the lower layers must participate in the success.
When you look at our budgets we talk about growth and distribution. There are measures to help those who haven’t got the opportunities get the opportunities and that’s how you achieve social cohesion. We have a lot of problems around the world with populist parties, strikes, rioting and so forth, which is mostly people’s dissatisfaction about their status vis-à-vis the country. We don’t have populist parties in Malta, so far, I think the reason for that has been that over the last 7 years success has been shared in a manner which hasn’t created those big pockets of people feeling left out.
Are you confident Malta can remain competitive as a leading financial services jurisdiction, considering the footloose nature of global capital?
In short, we have no choice, we have no resources we rely on being smart with new industries of the future and the future is in digitalization, AI, eSports etc. We were among the first to welcome new technology in many areas, we look where we can find a niche and remain meaningful for future generations. After independence, we started with the basic industries of manufacturing and tourism, then came financial services in the 90´s. More recently we had an opportunity with the rise of iGaming and we created a leading authority and regulatory framework. iGaming in Malta started with 2 firms and now we have nearly 400 firms, there is a big cluster, and they are very innovative.
How would you characterize Malta´s connection with the UAE?
We are very close, Emirates has very successful Malta Dubai flights. This connection is very important, some countries in the Mediterranean are so close but we don’t have the same level of connection with them.
Very often people from the Middle East come to Malta and like what they see, somehow, they feel at home. They hear our Semitic language in the background, and they can tell there is a lot of affinity. We are very happy doing business in Dubai and we look forward to the Expo.