Looking beyond our economic horizon is possible

Although our economic growth rate has ‘rollercoaster-ed’ somewhat over the last decade, we have not only weathered the global financial crisis admirably but came out of it stronger than ever. 

Today we have a very healthy growth of close to 4.0%, while real GDP per capita has increased by 20% in the last decade. 

Taking a similar up-and-down path, the national debt as a percentage of the gross domestic product (GDP) has, of late, been declining year-on-year. 

Our balance of payments as a percentage of the GDP went from 8.2 in the red ten years ago to 3.4 in the black this year. 

Closer to the very heart of this report, foreign direct investment has increased by almost 17 times in the last decade. As one diplomat recently told me ‘we punch above our weight’ 

Between 2005 and 2014, real private consumption rose from €3.6 billion to €4.1 billion. 

Over the same period, the number of people in employment increased by almost 30,000 while unemployment has been steadily going down since 2010. Today we have one of the very lowest unemployment rates in the European Union (EU). 

Over the last few years, company profits and bank deposits have been on the rise. And between 2004 and 2014 the average household disposable income rose by about 13% in real terms. 

This is a quick glance at the big, decade-long economic picture which, on balance, is quite a positive one. Taking a couple of steps closer to the picture reveals other interesting trends that shed a light on the way forward. 

Over the same period, the size of services sector spiked from 72.7 to 82.7 as a percentage of the GDP. 

At the same time — and perhaps not surprisingly to most — manufacturing and industrial production lost almost 4 and 5 percentage points respectively. 

Clearly, in these two areas, global and local competitiveness issues are taking their toll. 

This year’s survey shows that more current investors believe that they will continue operating in Malta in the foreseeable future. Yet this confidence can quickly evaporate unless we keep a close eye on what is happening around us.

This issue also needs to be put in the perspective of the small size of our economy. When a sector becomes successful in Malta, it quickly gains relative economic dominance. As a result, the more vulnerable that dominant sector is to continental and global market forces, the bigger is the threat to our economic and financial stability. 

Furthermore, while technology and globalization have helped to liberate our country from our tiny size and geographic fate, and thereby opened up new markets for us, this is a sword that cuts both ways. 

Today, our competitors for foreign investment are from near and far. From long-standing EU members, such as in certain sectors of the regulated financial services market, to late accession countries with lower labor costs but with high educational levels in others. When it comes to back-office operations, including regulated ones, game development, data warehousing, research functions and others, we really are in competition with the whole world. 

In this light, the central double bind comes clearly into view. The more operators in the currently successful sectors such as iGaming and financial services we attract, the more vulnerable to outside market forces our economy becomes. The more we try to nurture up-and-coming knowledge-based sectors as we must, the more this vulnerability increases.

There are therefore still a number of things that need to be done for today’s investors and tomorrow’s potential ones. 

First, in order to continue liberating ourselves from the limits set by size and geography, we should persist in exploring new high-value added, knowledge-based sectors and niches in them. And I emphasise niches. 

Secondly, we should never let up in our efforts to be at the cutting edge of technological developments. Thirdly, we need to incentivize new labour supply sources in areas where there simply are not enough Maltese workers. 

With these overarching objectives as foundations, I wish to make six concrete suggestions for discussion and implementation: 

New financial services

Malta can take a lead in FinTech, the use of technology to provide financial services. In May this year the Economist spoke of a Fintech revolution. Some examples are crowd-funding, peer-to-peer lending and online payment solutions. We did a study in the UK together with Cambridge University and the market in Europe is expected to reach €7bn in 2015 – and it is growing fast. We do have some examples in Malta too.

Malta could be a pioneer in the sector. One may argue that a number of aspects are covered through existing regulation but if we are to compete we need to meet the needs of people in the industry and rethink the regulatory regime. If we are serious about this, we need to think and act quickly. The UK is already moving in this direction through its financial services innovation hub. Not to mention Israel, Sweden and Estonia. There may be a small time window in which to offer an alternative regime. We will be talking more about Fintech during the course of the day. 

Global trading hub

We already have an emerging asset management industry – given our vocation as a trading nation we should look at extending our experience in investment management and trading to another activity – commodities. Our country can be turned into a commodities trading hub by building on existing attractive features and making sure we are the best in the area. This may include regulating certain activities and developing a global trader type of programme. Here we might want to look at what Singapore is doing. 

Logistics hub

Malta can truly become a logistics hub. To get there we would need to look at duties, customs, clearance processes, costs (particularly government-induced), and ways of stimulating capacity, of course, always subject to state aid rules. Rotterdam might be a model to look at here.

Online-to-your-door

Our small country can become a hub for Asian e-commerce by making it the key Mediterranean and European destination for goods sold online by Asian platforms for distribution to businesses and end consumers all over Europe.

Transport by a different route

New technology is now the main driver of more efficient, comfortable and faster transport. Malta could implement, or support the implementation of best-in-class, web-enabled solutions in parking management, transport sharing and tracking. Of course, I do realize that this is tricky because our infrastructure remains an issue and regulation alone is not enough.

I am fully aware that the whole island’s infrastructure needs an upgrade. Can’t there be electronic traffic deviations in case of congestion or accidents? Life can really be made much easier in the 21st century. What we are discussing is not rocket science. Just look at the Nordics, San Francisco and other places. We will be more forthcoming on this front during the course of the day!

Immigration

There is one untapped source of labour that risks becoming a drain on finances when it could be contributing to further economic growth. Currently, irregular immigrants arriving on our shores are either languishing in detention centres or being employed illegally in the underground economy.

Malta could take a path-breaking step by surveying their skills, imparting new ones to them and turning them into productive employees with dignity, rights and obligations. Simultaneously, the ban on irregular employment of immigrants should be strictly enforced. To be sure, what I have in mind here is tap into a resource of skills and knowledge and giving those who have their rightful due. 

Ronald Attard is EY managing partner

This is an abridged version of the speech given at EY’s latest conference ‘Malta Open for Business’