Download financemalta 6th annual financial services conference

FINANCEMALTA 6TH ANNUAL FINANCIAL SERVICES CONFERENCE
SPEECH OF THE MINISTER OF FINANCE THE HON PROFESSOR EDWARD SCICLUNA
Navigating the crisis in the Euro Zone – Malta’s Challenges and Opportunities
26TH APRIL 2013 - CORINTHIA HOTEL - ST GEORGE’S BAY – ST.JULIANS
Mr Chairman, Distinguished guests, ladies and gentlemen, good morning
It is with great pleasure that I address you this morning at the opening of FinanceMalta’s sixth annual
conference.
Much has changed since this organisation was established in 2007. We have been through a severe
financial crisis, the first stirrings of which became apparent that very year and which has now, a full
six years on, become a severe economic recession and a storm of a sovereign debt crisis.
Across Europe, countries and their citizens are facing some of their most difficult times ever. Oncegreat economies are struggling. GDP growth across Europe is anaemic, with some countries seeing a
contraction in output on a frightening scale. The level of unemployment in some of our neighbours is
frightening: look at Spain, with close to a quarter of its workforce unable to find work, and half of its
young people losing hope of earning an independent income.
This comes alongside a sovereign debt crisis that threatens the very stability of many of our fellow
European countries. Greece, Italy, Spain, Portugal and now Cyprus all have debts much larger than
their entire annual economic output. This is compounded by the problems created by poorly
capitalised banks.
All this feeds into a perfect storm, one which is extremely complex to deal with. On the one hand, the
urgent need to drive the debt to GDP ratio down to sustainable levels dictates that countries cut
spending to at least slow the rate at which the debt is growing. However the austerity programmes are
being found to fail to pay off for those very countries who have religiously undertaken them. This is
because they are choking off potential for growth, hitting tax revenue, and failing to dent the deficit.
Pulling out of a recession requires investment to lay the ground for a rebound in productive activity.
Navigating a sensible path between these two contradictory poles is a hard and complex task.
Malta, no doubt, is a keen observer of these turbulent waters. Our economy continues to grow,
although at a moderate rate. Our debt is higher than the 60% we are committed to as members of the
Eurozone, but not yet anywhere near the unsustainable levels seen in Greece, Italy or many other
European countries and is set to be reduced. The rate of unemployment in Malta is just 6.5%. Inflation
is under control at 2.4%.
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Malta does, of course, face big challenges; it would be foolhardy to think otherwise. Why have we let
ourselves dependent completely on oil for our energy needs? How much of the employment generated
over the past couple of years is precarious employment? How do we account for the fact that we have
among the lowest labour participation rate in employment, especially among women? How do we
account of the highest rates of early school leavers? How will we deal with the problems of an ageing
society?
In the light of the problems faced by some other European countries, Malta is doing moderately well.
In the light of other more successful and ambitious countries we need to be more focused if we want
to be in their league.
My government is therefore laying out plans to address all these issues head-on.
On the energy front we intend to promote independent private investment in Malta’s energy
infrastructure in the form of more efficient natural gas fired electricity generation plants. To increase
the female labour supply a bold plan to provide free child-care centres for all will be unveiled in the
near future, while ambitious targets are laid out to make a significant cut in the numbers of early
school leavers. Also our pension problem will be addressed in consultation with both the social
partners and the financial industry.
On the fiscal front we intend to continue, in spite of a one-time pre-electoral fiscal slippage last year,
to consolidate our public finances by 0.6% each year including this one, so that we not only continue
keeping our deficit with the 3% threshold but aim to reduce this figure until it turns into a surplus.
Only this way can we be seriously addressing our national debt problem.
In this respect in the coming weeks my ministry will be seeking approval in Parliament for the
ratification of the Treaty on Stability, Coordination and Governance in the Economic and
Monetary Union, known as the Fiscal Compact. This Compact is aimed at tightening fiscal
discipline in the Eurozone as well as strengthening economic policy coordination in order to
address more effectively the sovereign debt crises.
But now let us look at one of the factors which have contributed to our success so far. This is the
stability of Malta’s banks, which continued to apply sound banking practices and maintained a healthy
capital reserve ratio, allowing them to ride the storm that has brought many of their counterparts in
other countries to their knees. Over the past decades, Malta’s banks have consistently maintained
good banking practices, which just a short time before made them look dull and unexciting. The
result, however, was that they went into the crisis with strong balance sheets, with capital ratios well
above regulatory minima and strong loans to deposits ratios. This translated into stability for the
banks themselves and, importantly, for the businesses that relied upon them for operating credit and
thus for the economy as a whole.
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Through this entire storm, Malta’s financial services sector has managed to sustain its growth as
evidenced by the trends in the various financial services sectors to include the funds industry, the
various insurance operations, trusts and to a lesser degree banking. The list goes on. This begs the
question: how has Malta managed to keep its head above water when so many larger, better resourced
and bigger economies saw their fortunes decline? Clearly, this trend did not happen by chance but
rather this is simply a reflection of the growing international trust in Malta as a sound and reputable
financial services jurisdiction.
The price of getting this wrong, unfortunately, is clear for all to see in the fate of our fellow
Mediterranean island Eurozone member state, Cyprus.
It is not just the banking sector that underlies Malta’s stability, however. The entire financial services
sector maintains, for the most part, a high level of integrity and service quality. The sector is wellregulated, yet the regulator remains approachable and in touch with the industry. The basic message to
us all is that we can easily lose the stability we have enjoyed so far if we depart from these basic
principles. The high standard of corporate governance that has led to our relative success in the face of
adversity must be maintained.
This is now being recognised by the rating agencies that in the span of one week each came out with
reasoned opinion why Malta’s financial centre cannot and should not be compared with that of
Cyprus. If there was any doubt in view of the unfair attacks by a section of the international media,
this has now been
Thus it is with greater pleasure that I note that this conference will later this morning be looking at the
developments in corporate governance and how this affects the way companies and service providers
should act. Some of this development is being driven by new regulation, including, for example the
regulations on bankers’ bonuses recently discussed and approved by the European Parliament.
Yet the issues of good governance go beyond what can be legislated. Discussions on the best way to
compensate financial services operators, investment managers and advisors and others needs to take
place within the industry itself and not just between legislators.
Navigating our way forward from here will remain a difficult task. The objective is not just the
maintenance of Malta’s prosperity in isolation; in an interconnected world, and even more so in a
currency union, full realisation of our potential in Malta means that all our neighbours need to be
pulled out of crisis as well. The process of reforming the European regulatory regime to help
minimise the risk of future crashes is well under way, and Malta is participating actively in the
process. This includes the range of new regulations on things like alternative investment fund
managers, the new European regulatory structure, and the banking union.
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Development of new regulation, or the refinement of existing rules to make them fit their purpose and
achieve aims better, cannot and should not be the sole preserve of legislators and regulators. As with
the debate on corporate governance and the ethical standards we should expect from the community
of finance practitioners, evolution of the rules demands that industry and the broader society be
involved. This comes partly through the formal consultation processes at both the European and
domestic levels. It also implies discussion of proposals made by the authorities, as well new proposals
to be put to legislators and regulators following discussions in forums bringing together people in
industry and in government.
Besides taking a look at the development of the financial services sector in Malta and what the future
may hold for Europe and the Eurozone, I note that you will be looking at the development of an EU
banking union. This is but one part of the move towards a more coordinated approach to financial
regulation across the different countries within the European Union, a coordination that is the
necessary counterpart to the completion of a single European market for financial services. Equally, I
note that there will be a panel discussion on the opportunities beyond the internal market, which can
clearly contribute to the continued profitable growth for our domestic economy.
It has been recognised that maintaining a plethora of possibly divergent regulatory regimes across
different areas of an increasingly unified market is a recipe guaranteed to produce problems, as
inappropriate practices fall out of sight in the gaps between the rules. In a globalised economy, this is
so on a global scale; it is more urgent within a more formal single market like the European Union.
Much of the range of new measures introduced since 2008 by the European Commission and
Parliament has moved in this direction: the new regulatory structure for Europe, for example, aims to
ensure that national regulators act in a more consistent manner.
Proposals for a European banking union go further than that. I will not go into the details of the
proposals; you will be hearing and discussing them later this morning. But a Banking Union goes
further than a mere Single Supervisor. To succeed it requires a banking resolution and a deposit
guarantee mechanism. What I can tell you, however, is that this is no easy job. How can an EU-, or
even just a Eurozone-wide banking resolution mechanism work to protect depositors from losses due
to risks they never subscribed knowingly to, while shielding taxpayers from excessive liabilities and
either effectively recapitalising or winding down insolvent banks? This is not an easy question to
answer, as the rescue deal with Cyprus demonstrated in a very dramatic way.
That this has to be achievable with some sort consistency just adds to the complexity of the issue. The
dangers of not putting structures in place to achieve this are great; doing it and getting it wrong
presents a whole range of different problems, from prolonged instability which will undermine shared
prosperity for generations, to the destruction of the diversity which makes Europe and the European
Union such a potentially dynamic and exciting place to live and do business.
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This is why broad engagement in the process of formulation of these structures and the rules that will
govern them is so important. It is why FinanceMalta’s choice to include a discussion of the proposed
banking union in today’s conference, along with the commitment of individuals and industry groups
to participate in consultations and in broader discussion on the issues involved is so important. In
today’s complex and interconnected world, a vibrant public sphere is essential to effective
governance.
In conclusion, getting the structures and infrastructure right, ensuring that they fulfil their roles while
not exceeding their brief and eventually making the whole work effectively is a project very much in
progress. It is one in which we in Malta will participate fully. It is also one which, along with a policy
response that manages to find the right balance between austerity and growth, promises to return not
just Malta, but Europe to the road of shared prosperity.
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