17 23 January 2001
Malta's EU accession and the financial services sector - an HSBC perspective
HSBC Bank, in its January statistical review, highlighted the great deal of activity currently taking place in the financial services sector as a result of the stringent timelines in Malta's EU accession bid. Following are extracts of the review, in which the chapters relevant to the sector are discussed, while the nation's economic perspective is also emphasised.
As in all other sectors of the economy, those involved in financial services are monitoring closely and participating in the considerable number of changes taking place as Malta updates its legislation, enacts new laws and adapts its regulations with that of the Acquis Communautaire in its bid to become a member of the European Union.
The National Plan for the Adoption of the Acquis sets out the areas of structural reform and economic policy measures required to be implemented in Malta in the process towards EU membership. As this plan assumes accession will be in 2003, it lays down what can be done and achieved by 2002 and what will take longer.
The commercial banks, through the Malta Commercial Banks' Association (MCBA), the Central Bank of Malta (CBM) and the Malta Financial Services Centre (MFSC) and various other interested bodies are all actively involved in the consultation process in specific areas relating to Malta's EU negotiation process which affect the financial services sector.
In fact, the MCBA is a special interest member of the Malta EU Steering and Action Committee on the following four chapters of the Acquis: Chapter 3: Free Movement of Services; Chapter 4: Free Movement of Capital; Chapter 11: Economic & Monetary Union (EMU); and Chapter 23: Consumer and Health Protection.
That is not to say that these are the only chapters of EU legislation that will affect the commercial banks as there are definitely others, however, these are the main ones which merit their direct involvement and expertise to ensure the best negotiating position is arrived at prior to discussing with the EU.
At present, Malta has provisionally closed 10 Chapters out of the 31 of the Acquis and is negotiating on another seven. Out of those, it is Chapter 23, which has been concluded, while those relating to Free Movement of Capital and EMU are being discussed. Negotiations on Chapter 3: Free Movement of Services have yet to commence.
Chapter 3: Free Movement of Services - While negotiations have not yet started, the bulk of the work concerning this chapter has been going on for some time.
A joint CBM-MCBA committee has been actively working on setting up a Deposit Protection Scheme. The project, which should give due consideration to our unique market structure and commercial banking set-up is now nearing completion and the recommendations are soon to be presented to the authorities. Similarly, the MFSC is working on introducing an Investors Compensation Scheme. Both Schemes are expected to be completed and come into force by the beginning of 2002.
Another area which the financial services sector is involved in is that regarding data protection. A Data Protection Act has recently been tabled in Parliament and the banks, besides being actively involved during the consultation process, are now working on how to implement it in the best manner possible.
The MCBA is also working closely with the CBM in undertaking an exercise of reviewing the Banking Act to align it with existing EU legislation.
Chapter 4: Free Movement of Capital - This chapter is presently being negotiated in Brussels. Input from the banks involved various departments including Treasury (capital movements and investment), IBD (payment systems) and Security and Compliance (prevention of money laundering).
Chapter 11: Economic and Monetary Union - This is another chapter currently being discussed with the EU Commission. To comply with this area of legislation the MCBA has been working with the CBM in the areas of financial statistics and payment systems. Amendments are also required to the Central Bank of Malta Act in order to strengthen its independence and bring it in line with the requirements of the European System of Central Banks statutes and the Amsterdam Treaty. Other banking and financial legislation have also been examined to ensure they are in line with EU practices.
While EMU will not affect us locally for a number of years, considering our interaction and relations with Eurozone markets, it is still important to assess what impact this will have on the local economy.
Chapter 23: Consumer and Health Protection - Negotiations on this chapter have been provisionally closed. An important step taken by Government to align itself with this part of the Acquis was through the Consumer Affairs (Amendment) Act 2000. The banks actively participated in this legislation and are presently assessing its implications.
This legislation covers various areas including Legal and Compliance issues (unfair contract terms and practices and misleading advertising), Credit and Advances (credit charges and APR), Marketing (comparative and misleading advertising), and those relating to Security (pyramid schemes).
Others - There are a number of other chapters which concern the financial services sector for various reasons which include Small and Medium Size Enterprises, Competition Policy, Social Policy and Employment, amongst others. The banks are also studying and monitoring the implications of these on their operations.
Due to tight timeframes there is a lot of activity happening within the financial services sector in relation to the EU accession process. To ensure the best results are achieved, it is essential that there is co-operation between all interested parties. It is good to note that apart from the various committees and working groups of the MCBA, there is also the CBM-EU Advisory Committee for Banks, which gives monthly updates on EU related matters, and interaction with the MFSC and other bodies.
Ultimately, the results should prove to be beneficial for the financial services sector.
Official statistics for the first nine months of 2000 indicate that year on year real GDP grew by 4.3 per cent. In nominal terms, GDP expanded by seven per cent and reached Lm1.2bn. Manufacturing exports increased significantly whilst there was a notable advance in investment. As has been the case in recent years, growth was mainly export-led largely on account of the transport and machinery sub-sector dominated by ST Microelectronics.
In real terms, consumer expenditure increased by 5.8 per cent while as a result of heavy investment in the manufacturing industry fixed capital formation in real terms increased by I8.7 per cent. These results indicate that consumer expenditure and gross capital formation started recovering from the sluggish rates of recent years.
Household disposable income increased by 4.4 per cent to Lm789.6 million which signifies a real terms increase of 1.6 per cent. Wages and salaries which contributed 50.1 per cent of households' income improved by 5.7 per cent to Lm469 million, reflecting improvements in average wage and salary levels as well as an increase in the gainfully occupied population. The non-wage component consisting of income from self employment, rents, dividends and interest improved by 7.3 per cent to Lm298.8 million.
Enhanced profitability levels as well as additions to the self-employed sector contributed to this improvement. Supported by higher disposable income, private consumption went up by 7.9 per cent to Lm731.7 million. On the other side of the coin, household savings declined from Lm78.7 million during the same period last year to Lm57.9 million, bringing down the household saving ratio from 10.4 per cent to 7.3 per cent.
By the end of the outlook period the annualised inflation rate increased by nearly one percentage point, to reach 2.67 per cent from 1.73 per cent in September 1999. Imported inflation, due mainly to higher energy costs was responsible for most of this increase. A comparison with the inflation rates of a number of EU members indicated that inflation varied from a low 0.8 per cent in the UK to a high 3.2 per cent in Luxembourg.
In general, inflation rates in the EU followed an upward trend except for Greece, the UK and Portugal, who experienced a declining trend. Higher oil prices and the relative weakness of the Euro against the US dollar, yen and sterling contributed to increased inflationary pressures in the Euro area.
Over the outlook period the economically active population rose by 3,343 to reach 141,857 while the labour supply increased by 1,926. As a result, the number of unemployed persons went down to 6,594 pulling down the unemployment rate to 4.4 per cent as at end September 2000, from the 5.5 per cent reported during the same period last year.
Employment generation remains private-sector led, both in private market services, as well as direct production, while public-sector employment continues to decrease.
The manufacturing industry registered a notable improvement in output as total turnover underpinned by higher exports improved by 28.2 per cent to Lm834.2 million. On the other hand local sales remained stable at last year's level. Investment in the sector increased to Lm55.6 million from Lm25.2 million in the nine months to September 1999. Improvements were registered in both the wages and profit components of value added. Value added per capita for the whole manufacturing industry increased from Lm8,935 in 1995 to Lm11,638 in 1999. Meanwhile, average weekly earnings per employee followed the positive trends of recent years rising to Lm106.42.
As can be observed in other developed economies, the structure of the Maltese economy is gradually evolving to become more services orientated. Tourism still remains the principal services activity, however, Malta's potential in other services related activities, in particular financial services and Freeport activities, continues to develop and improve.
Positive results were noted in the registration of new international companies and in the provision of investment services and collective investment schemes. Moreover improvements were recorded in insurance activity.
The tourism sector continues to perform rather well. According to official statistics, tourist arrivals for the first nine months of the year reached 974,026, an improvement of 495 over the same period last year. Meanwhile, during the same period gross foreign exchange earnings from tourism declined by 2.35 per cent to Lm203.6 million and cruise passengers declined by 13.97 per cent to 124,397.
Improvements were noted in accommodation capacity and tourism related employment. In absolute terms, the UK market registered a loss of 954, however, its share of the market has roughly remained unchanged at 34.3 per cent. Meanwhile, Germany with 16.7 per cent of arrivals and Italy with eight per cent continue to grow in importance.
Government finance figures for the first nine months of the year indicate that the shortfall between total expenditure and ordinary revenue increased by 5.5 per cent to Lm57.l million. Ordinary revenue went up by 3.42 per cent to Lm453.4 million, much of which was accounted for by substantial increases in revenue from VAT, income tax and social security contributions. Total expenditure went up by 3.3 per cent to Lm46l million. This overall increase was characterised by an increase of 5.4 per cent in recurrent expenditure to Lm402.8 million, a decrease of 9 per cent in capital expenditure to Lm58.3 million and a 7.3 per cent increase in public debt servicing taking the total to Lm49.5 million. Excluding privatisation proceeds, the deficit declined by Lm20.6 million to Lm63.l million from Lm83.7 million during the same period in 1999.
In the first nine months of 2000, broad money, which consists of currency in circulation and residents' deposits with the banking system, exhibited a decrease in the growth rate. Broad money increased by 2.6 per cent to Lm2,506 million, as compared to the 7.3 per cent growth rate for the same period last year. A fall in savings deposits and a slower growth rate in demand and time deposits were mainly responsible for this deceleration. Savings deposits went down from Lm637.3 million as at December 1999 to Lm606.8 million.
During the same period, time deposits increased from Lml,333.3 million to LmI,288.9 million, an increase of 5.4 per cent (1999, 8.5 per cent), while demand deposits improved by 10.1 per cent to Lm2I6.4 million (1999, 16 per cent). A fall in savings deposit rates in conjunction with a wider choice of investment opportunities as the financial and capital markets develop and become more liberalised were mainly responsible for the noted deceleration in bank deposits.
Monetary expansion was driven mainly by increases in domestic credit in particular loans to the private and parastatal sectors, which rose by 8.5 per cent to Lml,771 million.
Credit to the personal sector accounted for most of this increase. Decline in interest rates and increased competition between the major banks in particular for mortgages and new credit card schemes may have contributed to this increase.
Significant increases in the wholesale and retail trade and tourism sectors was also noted. Net foreign assets remained stable, increasing by 0.7 per cent to Lm954.5 million. While the net foreign assets of the monetary authorities decreased by 5.8 per cent to Lm697.5 million, those of the banking institutions increased by 23.6 per cent to Lm257 million. While a higher import bill contributed to the decrease in reserves of the monetary authorities, the international banks were mainly responsible for the increase in those of the banking sector.
Throughout the outlook period, the Central Bank refrained from cutting the discount rate, which following three consecutive cuts during 1999, stands at 4.75 per cent. Thus, the absorption rate band of 4.70 -4.75 per cent and the injection band of 4.75 -4.80 per cent were left unchanged.
The bank's decision reflects concerns about inflation and the risk of increased capital outflows, as international interest rates particularly in the Euro zone were rising. Meanwhile, in April the Central Bank abolished the restrictions on the maximum interest rate that banks could charge on loans and advances for house loans. As a result interest rates on lending have become fully liberalised and are now being solely determined by market forces.
The Maltese lira registered losses against the USD and the Yen. At the same time it gained ground against the Euro and remained steady against the GBP. Given the relatively strong weight of the Euro in the Maltese lira basket, the movements in the exchange rate of the Maltese lira during the first nine months of the year largely reflected the Euro's persistent weakness on the foreign exchange markets.
The first nine months of 2000 saw a substantial increase in both exports and imports. Exports rose by 35.3 per cent to Lm776 million, while imports rose by 34.1 per cent to Lml078.7 million. As a result, the trade gap widened by 31 per cent to Lm302.7 million from Lm231 million in the same period last year. A higher fuel import bill, capital goods and industrial supplies accounted for most of the increase in imports, while consumer items rose considerably less sharply.
Strong export growth was mostly accounted for by the machinery and transport equipment sector, as new capacity in ST Microelectronics came on line. Most other sectors, though exhibiting high growth rates, remain small in absolute terms.
The significant increase in exports by the machinery and transport equipment sector was reflected in a higher export activity to the American and Asian markets and a lower share of exports to the EU.
In fact the EU's total share of exports declined from 49.9 per cent in the period January-September 1999 to 33.8 per cent this year. Meanwhile the share of exports to the American continent increased from 22.2 per cent to 29.0 per cent, whilst Asia's share increased from 20.5 per cent to 22.7 per cent.
However, despite this decline, the EU still remains Malta's major trading partner. Meanwhile, a notable increase in exports to Switzerland was also registered.
Compared to the same period last year, the current account registered a significant deterioration, ending with a negative balance of Lm89.1 million compared to a positive balance of Lm9.2 million as at September 1999. Most of this deterioration was due to a wider visible trade gap, a lower surplus in the services account as well as a decline in the net positive balance on the current transfers account. Net inflows in the capital and financial account increased by Lm47 million to Lm77. 1 million, while reserve assets declined by Lm38.5 million as compared to an increase of Lm44.8 million during the same period in 1999.
In the short to medium term real economic growth is forecasted at around 3.4 per cent. However, due to improvement in employment growth, a better performance by the tourism sector, stronger capital formation growth and the commencement of new infrastructural projects, domestic demand is expected to recover gradually.
Inflation is expected to edge up slightly as stronger domestic demand adds to international inflationary pressures due to higher energy prices and the strength of non-Euro currencies.
Fiscal consolidation aimed at reducing the budget deficit to 3 per cent of GDP and stabilising total public debt deficit at 60 per cent by 2005 is expected to continue. However, if any meaningful impact is to be made on the deficit, decisions on the two main categories of expenditure, namely welfare payments and public service pay have to be taken.
Later on this year we expect the commission appointed to look into the pensions issue to come up with recommendations that may include the introduction of private pension schemes. The government also aims to accelerate its privatisation programme, mainly to reduce the need for further public-sector borrowing. Although no concrete privatisation programme has yet been presented, candidates for privatisation this year and next include Malta Freeport, Bank of Valletta, Malta International Airport, Malta Oil Bunkering and the Lotto Department.
In-spite of the introduction of a withholding tax on Collective Investment Schemes no tax would he levied on capital gains from such schemes. The Budget measure in this regard was merely aimed at making a fund manager handling such schemes subject to collecting a withholding tax just as an individual would be.
Research kindly provided by HSBC Bank Malta's Corporate Research Department