Central Bank Governor: “To Say Malta Is Just a Financial Services Economy Is Really Missing the Point”

Earlier this year, the European Commission described Malta as one of Europe’s “most dynamic” economies, highlighting its buoyant private consumption, strong foreign investment, and robust employment growth.

It should come as no surprise therefore that – as was the case during the global banking crisis of 2009 – the current financial climate seems to be a little sunnier in this part of the Mediterranean, just as storm clouds begin to gather over the rest of Europe yet again.

Amid the gloomy eurozone landscape – one that Bloomberg recently described as having “gone from bad to worse” – Malta’s economy shines the brightest and is currently the fastest growing in the EU-28.

Some commentators have singled out the country’s headline-grabbing financial services sector as the central character in this success story, but to attribute all credit to just one industry would be misguided – or so says Mario Vella, Governor of the Central Bank of Malta.

“To simplify Malta and say it’s just a financial services economy is really missing the point. In my view, one of the main reasons why we managed to withstand the impact of the [2009] crisis was because we’re essentially a diversified economy.”

The continued resilience of the Maltese economy today – a decade on from a recession that brought Europe to its knees – is the enduring result of this diversification strategy, says Governor Vella.

“Over the years we have managed to – over many years actually – we’ve managed to diversify the economy of this country in a smart way. So, we have services balanced by production. We have different sort of services, we have different sorts of production, and that is reflected in the global structure of our exports. Now that we’re diversifying that even further, I think there is the explanation of why we’re managing to grow this fast in an international environment that, quite frankly, does not seem to be conducive to fast economic growth – and yet we manage.”

Besides diversification, the rationale of Malta’s success has been its approach to getting its macro-fundamentals right. With this, what had long been considered a defect in terms of a traditionally conservative banking sector is now being re-evaluated as a major economic strength.

“The fact that we run surpluses, the fact that our balance of payments is doing well, I think is an extremely important indicator of how things work in this country”, explains Vella. “The domestic banks, so I am talking of 2, 3, 4, go for extremely conservative policies.  They are essentially retail bankers and, although there have been pressures because of low interest rates, they have managed to do pretty well.”

Small but Mighty

“In 2018 we were in the 6.6 per cent growth region and this year we’re in the 5.5 per cent…” states Mario Vella. “We expect a period now of normalisation…but it will still be high by any European standard.”

Another protective element is the fact that Malta has been able to capitalise on its small size to become extremely nimble at all levels of the economy and governance.

“The labour input, the labour force, can be extremely flexible and mature.”, says the governor of Malta’s central bank. “The very fact that wages, and other conditions are negotiated at the level of the firm, between trade unions generally who have been around for 60-70 years, and who are extremely accustomed to understanding the importance of economic survival and success in this country, which essentially means exports. It means that everybody is extremely realistic about what is doable and what is not doable. If agreements had to be reached on a national level, as happens in a number of European countries, including some Southern European ones, that flexibility would come amiss.“

Malta therefore has been able to position itself as an important voice in the EU with regard to monetary policy, fiscal reforms, and budget. However, given the rapid trajectory of the Maltese economy, there are now rising voices of concern over the country’s capacity to maintain its current growth rate.

Vella likens the situation to a car reaching its top speeds – eventually it will need to slow down and require some maintenance.

“In 2018 we were in the 6.6 % growth region and this year we’re in the 5.5%, that’s nothing to cry about.”, claims Vella. “We expect a period now of normalisation, so our GDP annual growth will tend to plateau, to flatten a bit, precisely because we’re growing this fast.  And I cannot see us growing too much slower, plateauing doesn’t mean going back to 1-2%, it means staying at the 5% level, more or less. It will still be high by any European standard, but given the peaks we’ve experienced, we think there will be some moderation.”

Loaded for Bear?

“Malta is increasingly prepared [to respond to the demands of its dynamic financial services sector],” says Vella.

While confident that Malta remains in perfect control of its own economic vehicle, the Central Bank Governor does identify some potential external obstacles lying further down the road.

The sluggish growth of Germany and political uncertainty in Italy – one of the country’s major trading partners – are particularly areas of concern for Malta and ones they are “watching very closely”, reveals Vella.  And though the potential direct impact of a no-deal Brexit is “manageable”, there would likely be indirect consequences due to the negative effects of the UK’s secession on Malta’s trading partners.

There are some inherent challenges facing Malta too, particularly with regard to the island’s demographic and geographic constraints. Its tiny population of 460,000 – the smallest in the EU – means it is difficult for Malta to meet the human-resource demands of a fast-growing economy. To counterbalance this, the island-nation has increasingly had to attract foreign workers to its shores, which in turn poses risks.

“The inflow of foreign human resources, in fairly large numbers, I think we are in terms of 20% of the labour force, could be a financial stability issue if things suddenly change”, explains the Governor. “They need to have a place where to live, and they need to have housing that they can afford, otherwise they won’t stay. We need to make sure that with construction moving at the pace it does, we need to ensure that there are buffers in case for any reason the situation changes.”

“Then there is the issue of space. We can’t quite grow horizontally, we can only do that vertically, and that presents issues.

The environment has become an extremely sensitive issue, culturally, socially and politically. That is an issue when it comes to constructing and providing decent and affordable accommodation for new resources coming in. Not only the new resources coming in but also for the local population.”

To build, the construction sector needs funds – that is where the banking sector comes in. However, following a dip in the profitability of the sector in 2018, there have been questions over its long-term sustainability. The Maltese Central Bank attributes the fall in revenues to a “rise in costs” and has labelled it a “one off”, emphasising that its analysis indicates nothing to suggest further slumps.

Maltese Banks

“A deeper analysis of profitability in the Maltese banking sector shows that we are profitable and there is nothing to suggest that our profitability will dip,” says Vella.

However, the question posed by most industry analysts is whether traditional banks can continue to fare well in the face of increased competition and lingering sectorial challenges.

“Well, clearly there are a number of new actors on the stage, which will require them to do things”, says Vella, adding that “competitiveness is now challenged positively by fintech-based innovators”, which is something banks will have to take “seriously”.

The entry of these disruptive new players onto Malta’s financial services scene – facilitated last year through the introduction of pioneering laws – has not only caused consternation amongst traditional banking executives, but also amongst bosses at the European Commission and International Monetary Fund (IMF), who are worried what the unchartered regulatory waters could mean for the integrity of Malta’s financial systems going forward.

Nonetheless, the Governor is confident that while concerns are justifiable, they are something that Malta is actively addressing through the collaboration of domestic and international authorities.

“As financial systems are becoming increasingly more complex worldwide, you need to be increasingly aware of the risks of money laundering and terrorism financing. From that point of view, we take it very seriously, and so does the Maltese government. We’ve gone through important assessments in terms of the IMF and the Financial Sector Assessment Program. , they’ve come and done their homework and given us their objective views, and then again the MONEYVAL assessment. In 2018 the Fourth Anti-Money Laundering Directive of the EU was transposed into Maltese law and in April of the same year, that’s last year, 2018, we adopted the National Anti-Money Laundering Counter-Terrorism Financing Strategy..”

“The Central Bank is part of a consortium of regulators and authorities working on this, and again, I can only emphasise the fact that we’re taking it extremely seriously.”