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Malta’s financial sector and in particular its banks are emerging from the credit crunch relatively unscathed. Malta’s financial institutions are conservatively run and are viewed as being well regulated. The country’s banks have taken a cautious approach to lending and, as a result, have avoided the liquidity problems that have befallen many others.
But Malta's economy has of course been affected by the downturn to some extent. It is dependent on foreign trade, manufacturing - especially electronics and pharmaceuticals - and tourism all of which have been impacted by recession.
Malta recorded a growth in GDP of 2.8% in 2008. Inflation has dropped from 4.7% in 2008 to 1.8% today. The current account deficit is 5.1 per cent of GDP, down from 6.3 per cent in 2008. (Malta adopted the euro on 1 January 2008.)
Over the past decade the Maltese Government has pursued a policy of gradual economic liberalisation and privatisation – after many years of heavy state control and intervention in the economy. Numerous steps have been taken to shift the emphasis in trade and financial policies from reliance on direct government intervention and control to policy regimes that allow a greater role for market mechanisms. Its growing role in the global asset management industry is an example of the shift of emphasis during this decade. (But financial services in Malta are not anticipated to grow beyond 25% of GDP.)
Fiscal policy has been for some years directed toward bringing down the budget deficit after public debt grew from 24% of GDP in 1990 to 56% in 1999. By 2007, the deficit-to-GDP ratio was below 3%, as required for membership of the euro.
Government and politics
Malta became independent in September 1964, having previously been under British rule. The Constitution of 1964 established Malta as a parliamentary democracy, guaranteeing separation between the executive, judicial and legislative powers, with regular elections based on universal suffrage. Legislative power is held by the unicameral House of Representatives (69 members excluding the Speaker). Members are directly elected for five years (subject to dissolution) on the basis of a single transferable vote system of proportional representation. The Cabinet exercises executive power and is responsible to the Parliament.
In 1974 the Constitution was modified to make Malta a Republic. The President is elected for a five-year term by the House of Representatives and appoints the Prime Minister and, on the latter's recommendation. Malta remains a member of the Commonwealth. Malta is a civil law jurisdiction with legislation that is modelled on English law.
Maltese domestic politics are dominated by the two main parties - the Nationalist Party (PN) and the Malta Labour Party (MLP). In the national elections held in March 2008, the Nationalist Party defeated the opposition Malta Labour Party by a narrow majority. However, the MLP won a majority of the 65 seats contested. Malta’s constitution provides for extra seats to be allocated to the party which wins the nation-wide vote to ensure it has a one seat majority in Parliament. Prime Minister Dr Lawrence Gonzi retained his position and Dr Tonio Borg was appointed the new Minister of Foreign Affairs, a role he holds in addition to his previously held role as Deputy Prime Minister.
Stability and infrastructure
Malta is an exceptionally stable domicile – both from an economic and political perspective. It looks likely to emerge from the recession in a healthier state than the vast majority of international fund jurisdictions.
Malta has a strong infrastructure and good Internet connections. It is however the most densely populated member of the EU and travelling around the island can be subject to serious delays.
Threats to this domicile
There are no real threats to this domicile. In fact many expect that the Maltese fund industry will experience strong growth over the next few years on the back of anticipated wave of redomiciliation from the offshore centres to the EU, the AIFM Directive and the fact that this domicile is equally well placed to develop as a long only and alternative fund centre. Malta is a lower cost location than both Dublin and Luxembourg but is also, like them, part of the euro-zone.
The only concern is that Malta could experience such strong growth in asset management over the next few years that its fund industry service providers might struggle to keep up. Unlike Luxembourg Malta cannot import people from over the border. And unlike Ireland service providers cannot build large fund servicing facilities in lower cost locations a long way from the city centre.