Tag: finance

Evaluating Malta’s economic revival

Posted on by Colette Mangion

Author: George Mangion
Published on Business Today 2nd May 2019

With only a few weeks to go for the European and local council elections, the government is doing its best to showcase its economic performance.

The Central Bank of Malta report lauds the administration for its stellar performance and provides statistics to back this assertion.

It’s main line of contention is the achievement of a modest surplus which has surfaced in the past three years compared with chronic deficits in the previous 30 years.

This surplus peaked in 2017 at €387.2 and has slowed down to €250.8 in 2018. The surplus is calculated as the difference between total revenue €4,783.2 million and expenditure €4,532.4 million of General Government.

One may laud the administration in its policy of fiscal control which over the past six years has seen debt as a share of gross domestic product continue to decline. This peaked at 72% in 2012 and has now eased to 46%.

One needs to explain that according to the Maastricht Treaty, the gross nominal consolidated debt should not exceed 60% of GDP otherwise an excessive deficit mechanism status will be triggered and laggards have to suffer punitive fines until the situation is regularised.

In September 2018, the stock of general government debt amounted to €5,512.0 million, down by €234.8 million when compared with June 2018. This was largely due to a €233.1 million decrease in the stock of long-term securities.

Comparing 2018 over 2017, total revenue increased by €353.8 million, while total expenditure increased by €490.2 million. One notes that the decrease in general government debt was more pronounced than the surplus recorded in 2018 which as stated earlier had decreased from the record level achieved in 2017.

In order to arrive at the General Government sector’s positive balance for 2018, adjustments are made to the balance of the Government’s Consolidated Fund which in fact registered a deficit of €70.2 million – a decrease over the surplus of €182.7 million recorded in 2017.

One can explain this situation as follows.

This positive change is attributed to the accrual basis of accounting demanded under the Brussels rule, in which case accounting for the full proceeds (not the statutory 30% portion) from Investment and Passport scheme.

Obviously, this is a contributing factor which one expects to be of a temporary nature given the constant pressure from the Opposition to stop it.

Having briefly visited the salient economic achievements of our economy, one may ask how this growth compares with other countries which have also leaped ahead of the curve.

The first champion in the group of ex-Communist countries is Poland. It is the 8th biggest economy in the European Union. The country’s industrial base combines coal, textile, chemical, machinery, iron, and steel sectors and has expanded more recently to include fertilisers, petrochemicals, machine tools, electrical machinery, electronics, cars and shipbuilding.

Since 1989, it has increased its GDP per capita by almost 150%, more than any other country on the continent. Since 1995, it has also become the fastest-growing large economy in the world beating even the Asian tigers such as South Korea, Singapore and Taiwan.

Poland’s ongoing GDP growth performance is reaching 5% in 2018 and a projected 3.5-4% growth in 2019 and 2020. Other economic athletes are Czechia and Slovakia. These pose an unsmiling challenge to Malta’s own performance.

In fact, only 1.5% of young employed Czechs and 3.8% of young employed Slovaks were at risk of poverty in 2017.  In the Czechia, the at-risk-of-poverty rate among young employed people reached a peak of 5.2% in 2012, and the following year in Slovakia (6.1%).  As of January 2019, the unemployment rate in the Czechia was the lowest in the EU at 1.9%.

This compares with the rate in Malta of 3.5% in the fourth quarter of 2018.  One is surprised to read that Norway’s unemployment rate matches that of Malta at 3.8% but hit a record low of 2.4% in 2007.

An Asian champion is Singapore. This country is reputed to thrive on latest innovation and regularly funds start-ups and its SME’s to reach higher rates of economic success. It is no exaggeration, that its stellar growth is the envy of many EU countries and Malta could do well to learn some lessons from its commercial acumen.

Singapore’s seasonally adjusted unemployment rate stood at 2.2% in the first quarter 2019. It remained the highest jobless rate since the second quarter of 2017, amid signs of external economic headwinds and uncertainties in 2019.

Moving on, we meet the success of Japan where its jobless rate increased to 2.5% in March 2019 from a five-month low of 2.3%.

Having seen the picture of economic successes registered by competing countries, one cannot rest on our laurels even though it appears that Malta has started the righteous path to a stable recovery.

Our industry is still suffering from low technology and the country needs to double its contribution towards innovation and training of its workers to meet the exigencies of the so-called 4th industrial revolution.  Having said that, one lauds the government’s debt strategy. This ensures that the financing needs of the public sector are met at the lowest possible costs and that its debt service payment obligations are met in a timely manner.

The other positive aspect is that the debt levels (mostly local government stocks and bonds) remain sustainable while simultaneously minimising interest rate risk.

The cost of servicing debt is gradually diminishing yet one cannot overlook the fact that there is no sinking fund to repay such bonds. Reducing debt by a primary surplus, depends solely on the turnout of higher exports and the continued flow of proceeds from the IIP scheme. Quoting the Central Bank reports, it states that both components are expected to mitigate the upward pressure that interest expenditure once the build-up of debt recedes.

One appreciates the pressure on government to think out of the box in order to maintain economic growth and achieve its social responsibility to improve the well-being of citizens. More funding is needed to provide affordable social houses given the recent meteoric rise of property prices (this exceeds that of Hong Kong) and government aid to address the creeping cost of living for the low-income groups and pensioners.

Otherwise, the isle of milk and honey can aspire to move forward to meet its quest in reaching the top position as one of the gifted economic achievers.

 

George Mangion

Author: George Mangion
Published on Business Today 2nd May 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

The Reform of MFSA and Implementation of Vision 2021

Posted on by Colette Mangion

Author: George Mangion
Published on Malta Chamber 1st April 2019

One welcomes the new financial crime compliance plan Vision 2021 announced by the Malta Financial Services Authority (MFSA). This move did not come a moment too soon. It is essential that the rules of doing business within the global financial system are not only well-written but also robustly enforced.

Over the two decades that the sector was piloted by Professor Joe Bannister as chairman at MFSA, he saw the financial sector grow from a modest size in 1994, to give birth to a reputable centre of international business. During Prof. Bannister’s watch, commentators lamented that MFSA’s autonomy from the strings at Castille was paper-thin, so it comes as no surprise that the International Monetary Fund (IMF) and other international organisations are now insisting on its operational independence.

The latest move to remove dead wood from the ranks by granting early retirement is noted, since challenges that are facing the incumbent CEO (previously the Chairman and CEO of the Malta Gaming Authority) are significant. The demise of private banks such as Nemea, Sata and Pilatus last year were the fruits of past decisions, but realistically, three bad apples in the barrel does not mean that the entire domicile is beyond redemption. One welcomes the latest IMF report which has been requested by the government, as it gives a very piercing analysis of the factors which attributed to the recent shortcomings in the banking sector. However, it complimented the superlative growth in the economy, in particular, the financial sector. This contributes 11 per cent to the gross value added and also accounts for more than 10 per cent of employment.

MFSA as a single regulator employs 320 professionals. This is no small team to oversee approximately 2,300 licensed entities but MFSA envisages the scope for regulation is growing and wishes to recruit another 160 trained staff in two years’ time. With the current shortage of local professionals, this can only mean enlisting foreign experts. In the wake of international pressure, MFSA now wishes to further tighten the screws by clamping down on potential incidents that lead to the path towards money laundering and terrorist financing. The new CEO wants to be seen as a colossus fighting the infidels that penetrated the fragile fortress, leaving in their wake a stigma of AML and terrorist financings decoys. He claims that Malta needs to grow responsibly and set standards which are in line or better than those of our peers in Europe. Stoically, he embraces technology and innovation, entering the fintech space with optimism and preparedness. This is all very grand, but it needs a higher subvention from Government, possibly reaching €12 million at one go. It is a fact that the annual surplus (circa €10 milllion) posted by the Registry of Companies has always helped fund operations at MFSA with the balance repatriated to Government. This can now be ploughed back to fund the above-mentioned reform.

So why is MFSA contemplating securing the extra funding needed for a transformation to be sourced out of an increase in fees-charged to the sectors and its practitioners? MFSA has long stopped financing promotion of the sector, rightly saying it cannot be seen compromising its impartiality. This is commendable, but then the sector has to be actively promoted to compete with other jurisdictions that are constantly fine-tuning their laws and financial concessions to lure blue chip companies. Practitioners, out of a sense of duty, do not think twice to dig deep into their pockets to tour the globe and promote the island. Together we can succeed to rebuild our ranking as a top-class domicile with the help of Vision 2021.

George Mangion

Author: George Mangion
Published on Malta Chamber 1st April 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

MFSA rebranding: new wine in old wineskins

Posted on by Colette Mangion

Author: George Mangion
Published on Malta Today 6th March 2019

One welcomes the new financial crime compliance plan “Vision 2021” announced by the MFSA. This move did not come a moment too soon. It is essential that the rules of doing business within the global financial system are not only well written but also robustly enforced. Over the two decades that the sector was piloted by Professor Bannister as chairman at MFSA, he saw the financial sector grow from a modest size in 1994, to give birth to a reputable Centre of international business.

 

During Bannister’s watch commentators lament that MFSA’s autonomy from the strings at Castille was paper thin so it comes as no surprise that the International Monetary Fund and other international organisations are now insisting on its operational independence. The board of governors and CEO have always been nominated by the government of the day. The challenges that are facing the incumbent CEO (previously the chairman and CEO of the gaming authority) are significant. The demise of private banks such as Nemea, Sata and Pilatus last year were the fruits of past decisions and we are all too wise -now blaming that supervision was found wanting.

 

One welcomes the latest International Monetary Fund report which has been requested by the government and it gives a very piercing analysis of the factors which attributed to the recent shortcomings in the banking sector. But it compliments the superlative growth in the economy in particular the financial sector. This contributes 11% to the gross value added and also accounts for more than 10% of employment. MFSA as a super regulator employs 320 professionals. This is no small team to oversee approximately 2,300 licensed entities but MFSA envisages the scope for regulation is growing and wishes to recruit another 160 trained staff in two year’s time. In the current shortage of local professional this can only mean enlisting foreign experts. In the wake of Panama Papers revelations, MFSA now wishes to further tighten the screws by clamping down on money laundering and terrorist financing.

 

The new CEO wants to be seen as a Colossus fighting the infidels that penetrated the fragile fortress leaving in their wake a stigma of AML and terrorist financings decoys. He claims that Malta needs to grow responsibly and set standards which are in line or better than those of our peers in Europe. Stoically, he embraces technology and innovation, entering the FinTech space with optimism and preparedness. This is all very grand but it needs a higher subvention. It is a fact that the annual surplus (circa €10milllion) posted by the registry of companies has always helped fund operations at MFSA with the balance repatriated to government. So, why is MFSA contemplating securing the extra funding needed for a transformation to be sourced out of an increase in fees charged to practitioners. MFSA has long stopped financing promotion of the sector, rightly saying it cannot be seen compromising its impartiality.

 

This is commendable, but then the sector has to be actively promoted to compete with other jurisdictions that are constantly fine-tuning their laws and financial concessions to lure blue chip companies. Practitioners, therefore dig deep into their pockets to tour the globe, attend conferences, seminars and give presentations so that the island stands a better chance to compete. The logic to tax practitioners with higher fees may not a good idea. Practitioners cannot be blamed that the regulator is calling for “adequate resources” to preserve the effectiveness and operational independence of the domicile. This extra funding is warranted in a scenario that saw financial institutions constantly changing their business model and Malta’s attempt to harness blockchain and digital currencies.

 

Certainly, a generous tax revenue is collected from the sector and this goes towards the general welfare of the community so now that foreign observers such as IMF and EU have reported weaknesses in the armoury, it goes without saying that Castille needs to put money where its mouth is. Moreover, investment in the latest supervisory technology, business intelligence and knowledge management tools will become mission critical to the success of the MFSA. Last year, no money was spared to host mega Blockchain conferences promoting the island to qualify as FinTech hubs, FinTech strategies, and as a centre of excellence but at the same time Castille shies away from helping local firms who put their shoulder to the grinding wheel.

 

Therefore, it is opportune for PKF Malta in launching The Bit-Pod concept. This is a meeting place for informal discussions among practitioners, engineers and DLT enthusiasts to network and discuss latest topics on the vast subject of this technology. It is a non-profit organisation, as it helps connect entrepreneurs (mainly start-ups) to people, programming engineers, and other resources across the DLT and virtual currencies domain. Whether you are looking to connect, learn, share, or work, The Bit-Pod offers a selection of opportunities to network with other start-ups this may help you scale the slippery slopes of licensing and running an ICO or a virtual wallet. Back to regulation, the fly in the ointment is the need to renovate banking supervision. Again, referring to the Financial Sector Assessment Program on Malta’s financial stability, this found that the banking sector was in good health, but warned that high exposure to property-related loans and rising property prices posed a risk to the country’s financial system.

 

It found that our retail banks face challenges coming from a property and construction boom. It emphasises that “Core domestic banks’ high exposure to property-related loans, together with the rapid house price appreciation, poses a risk,”. It does not come as a surprise, that in the shadow of the disgraced Pilatus bank one expects the IMF to be vigilant and not ignore aspects of alleged money laundering transactions at that bank. Pilatus bank (last audited by KPMG) was the centre of political controversy ever since a series of leaked FIAU intelligence reports flagged evidence of money-laundering and serious compliance shortcomings two years ago.

 

In conclusion, on a positive aspect we note the comment by EU in its latest “Country Report” saying the rally in the economy is exemplary but as can be expected we cannot rest on our laurels. Castille must strive to ensure that its development is sustainable in the long term.

George Mangion

Author: George Mangion
Published on Malta Today 6th March 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

Exam fever hits virtual currencies practitioners

Posted on by Colette Mangion

Author: George Mangion
Published on Malta Today 13 October 2018

Mindful of the legal and technical minefield that may lay ahead, the MFSA called for experts to help design and draft parameters leading to a safe framework and good governance.

Last week saw three packed halls with young lawyers and finance executives sitting for a two-hour long exam concerning three laws introduced by the government on ICO, DLT Exchanges and cryptocurrency regulation.

Rumour has it that over 300 sat for the exam after attending four introductory public lectures conducted by the MFSA and a number of chosen consultants. The results were announced this week and sadly only a handful passed. This has peeved many practitioners since they were given to understand that licences to agents wishing to introduce virtual currency business were to be limited to those who passed the test. Be that as it may, it shows that there is a strong desire among practitioners to join the lucrative crypto bandwagon.

The government is being advised to take the bull by the horns and with the assistance of technical advisers, it has rushed the Malta Digital Innovation Act together with a framework for virtual financial assets. This is pioneering work hoping that Malta will succeed (as it did in the remote gaming sphere) to be a leader in Blockchain regulation.

Some may say that Malta has struck while the iron is hot and plunged ahead in the sensitive area of virtual currency trading when larger countries such as China, India and EU countries are banning it.

But of course, it is all a matter of who dares wins. Quoting the Prime Minister at a recent speech he gave to thousands of delegates attending the Delta event last week, he wants to jumpstart the process to regulate ostentatious topics such as Artificial intelligence (AI) and the internet of things in an all-encompassing regulatory framework.

Delta Summit is the world’s first government-led (and funded) event promoting Blockchain and bringing together service providers, experts and public entities. Malta just about climbed the hill of Blockchain, now we must try scaling the mountain of AI – a subject into which USA tech giants pour billions of dollars annually in research and development. This may encourage the finance minister at the next budget to scale up the dreary amount of funds allocated for applied research.

Silvio Schembri, parliamentary secretary for innovation, proudly announced that the summit would send a strong message to institutions worldwide. Mindful of the legal and technical minefield that may lay ahead, the MFSA called for experts to help design and draft parameters leading to a safe framework and good governance.

It is an open secret that government is keen to be seen helping innovation and would like to see Malta becoming a jurisdiction that attracts talent from all over the world. Little Malta aspires to become an economic superpower in the Med. But readers may ask how Bitcoin can become mainstream unless Fintech is attracted as well.

Readers still feel confused with the terminology and so to help clarify the jargon one can simplify the myth by describing Blockchain as the track while Bitcoin is the train. It is always a case that banks and monetary institutions are wary of the new challenges of virtual currencies but like the internet which was resisted in its early days, the revolution is here to stay.

Just ponder how since we left the Gold Standard, we have run billions of transactions in fiat currency which are not backed by any intrinsic value yet we trust such paper currency. We know that following a of Quantitative Easing practised in EU and USA has seen the printing of billions of paper currency by Central banks to calm the markets and wipe off excess liquidity. Holders of fiat currency hold no qualms to trust in its exchange value.

If someone asks how Blockchain technology solves this dilemma, the answer is that Blockchain deciphers the trust issue. Typically, we can ask ourselves five questions. These are:  Do we really trust the intermediaries?  Do we trust credit cards? Do we trust the fact that transactions represent real value? Do we trust banks? Do we trust our government?

Without going into the controversy which arises from answers to these questions one can do a reality check by saying that if and when cryptocurrencies become mainstream, then trust peaks. We all heard about Bitcoin, Ethereum and other coin variants which currently form part of a popular framework, yet there will be many others. Let us remind readers that located in Valletta is a company-styled Grand Central, hosting a service office and is fully operational concerning payments in Bitcoin.

This service was recently launched by Ravinder Deol, himself an international producer of cryptocurrency training courses. It is interesting to note how Grand Central being the first of its kind in Malta now offers membership plans to suit different working styles, ranging from a hot desk by the hour to a dedicated co-working desk or private office rented by the month.

In addition to providing members with fully serviced workspaces, Grand Central also has exclusivity in Malta to offer international partnership services. Its website states that thanks to linkup in London it offers guest membership of five business clubs in UK operated by The Brew, providing members with a London base and business community with whom to network. Quoting Iain Harvey, founder of Grand Central, he said: “We are always looking at what extra flexibility we can give our members and this time it’s that we offer payment channels.”

It is undoubtedly true that cryptocurrencies have had a very volatile year but even so Grand Central feels that their flexibility is paying off as membership numbers continue to increase. Banks in Britain and the United States have banned the use of credit cards to buy Bitcoin and other “crypto currencies”, fearing a plunge in their value will leave customers unable to repay their debts.

Here one can mention that Lloyds Banking Group Plc, recently said it would ban its credit card customers from buying crypto currencies, following the lead of JP Morgan Chase & Co and Citigroup. Quoting Joseph F. Borg, VP of Bitmalta, he thinks the technology will also transform banks, whether they like to embrace it or not. In the meantime, there is speculation that a handful of foreign banks are applying to the MFSA for a licence to provide virtual currencies business in the coming months. In this way the unassailable vision of Silvio Schembri will become a reality and the entire island gains.

George Mangion

Author: George Mangion
Published on Malta Today 13 October 2018
Get in touch: info@pkfmalta.com | +356 21 493 041