Monday 20 February 2017

Malta - 'A' Rating?

Fitch Ratings has affirmed Malta's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A' with a Positive Outlook. Furthermore, the issue ratings on Malta's senior unsecured foreign and local currency bonds have also been affirmed at 'A' and 'F1', respectively. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign and Local Currency IDRs at 'F1'.

Fitch - Key Rating Drivers

When commenting about Malta’s ratings, Fitch noted that these reflect the high national income per head compared with the ‘A’ median, Malta's robust economic growth and a large net external creditor position. The ratings are constrained by ongoing structural bottlenecks as captured by the weak World Bank Ease of Doing Business indicator
Fitch’s Positive Outlook for Malta reflects the rating agency’s view that the public debt/GDP ratio is on a downward trajectory and that economic growth will keep outperforming similarly-rated peers.

2016 saw Malta’s economic growth remain strong at 3.9% year-on-year over the first three quarters which has been boosted by robust public consumption.
The rating agency forecasted that the “Maltese economy will keep growing at a faster pace than the 'A' median at an average 3.3% over 2017-2018, supported by strong employment growth, rising disposable income due to continuous wage appreciation and the launch of new investment projects in the health, education and transport sectors.” This projected growth is in line with the forecast in the Malta Budget 2017.

Sectorial Analysis

The pharmaceuticalremote gamingfinancial services and tourism sectors are expected to experience strong export performance this year. Despite higher import-intensive investments related to the EU funding cycle, exportations from the aforementioned sectors will help Malta maintain a solid current account surplus over 2017-2018. Fitch continued to add that Malta’s external position compares favourably with ‘A’ rated peers with a net international investment position estimated at 47% of GDP at end 2016.

Real GDP growth was revised up by 4.9pp in 2014 and 1.3pp in 2015, following national accounts revisions published by the National Statistical Office in December 2016. This can be attributed to upward revisions to non-residential construction and machinery, as well as service exports particularly from the gaming industry. This result was a substantial improvement in the public debt/GDP ratio and to an upward revision of potential GDP growth to 5.4% in 2016, reflecting higher estimates of total factor productivity.

Fitch has also pointed out that high revenues from excise duties, income tax, and the Malta International Investor Programme (IIP), have helped Malta’s gross general government debt fall to an estimated 59% of the GDP at end-2016 from 60% in 2015. The rating agency is expecting it to further decrease to 56% in 2018, on the back of an improved primary surplus and strong nominal GDP growth, still higher than the 'A' median of 52% of GDP.
With respect to fiscal deficit, Fitch’s estimations fall in line with those of the Malta Budget 2017. It is expected that fiscal deficit shall decrease to 0.5% of GDP from an estimated 0.7% in 2016. “Robust economic growth and additional indirect tax measures will boost tax revenues and offset more moderate revenue from the IIP, increased expenditure related to the EU presidency and lower tax on pensions,” adds the agency.

With respect to the local airline, no further capital transfer has been budget for Air Malta as the government expects private investors to take a stake in the company this year.
Fitch maintains a favourable outlook on the future of Malta’s deficit and believes that it will remain stable in 2018 as higher absorption of EU funds enables lower public investment.
Government-guaranteed liabilities remain amongst the highest in the European Union at 14.8% of GDP at the end of 3Q16, although they are set to decrease to 11.9% of GDP at end-2017, when the temporary guarantee granted to ElectroGas for the construction of a new power station expires. The rating agency also noted that most guarantees relate to profitable companies, including the utility company Enemalta, Freeport Group Corporation and Malta Industrial Parks.


Fitch has also reviewed the Maltese banking sector which continues to register substantial growth. “Malta's banking sector remains profitable, liquid and well capitalised, albeit highly concentrated, with core banks representing 219.5% of GDP as of end-September 2016. Asset quality has improved with non-performing loans decreasing to 5.6% of total loans at end-September 2016, and we expect it to improve further,” states the agency.
The agency assumes that the government would only be predisposed towards supporting the core domestic banks that are systematically important, particularly the Bank of Valletta (109% of the GDP at-end 2016) while on the other hand, HSBC Bank Malta (81% of GDP) is more likely to be supported from its parent company.

Finch rating agency propounds that a sharp correction in the housing market constitutes the main domestic risk to the sector through mortgage lending and real estate collateral. However, the rise in house prices has moderated and the pace of mortgage lending decreased to 6.2% as of end-September 2016 from 11% a year earlier.
The rating agency has also commented on future developments which could individually or collectively result in positive rating. These could include:
  • A longer track record of consolidating the public finances that leads to a lower government debt/GDP ratio.
  • A significant decline in contingent liabilities or a low likelihood that these contingent liabilities materialise.
  • Progress in addressing key weaknesses in the business environment

Friday 10 February 2017

Its a Family Affair!

Malta is the first European jurisdiction to enact a specific Family Business Legislation. The new Family Business Act has come into force on 1st of January 2017. This piece of legislation is acknowledged as being a pioneer in the area of Family Business because of a number of reasons.

Primarily, this new law recognises a ‘family business’ in a new legal form. Malta is the first jurisdiction to specifically legislate for family business and define this business model for identification and regulation purposes. The definition is listed in Article 3 of the Act, consisting of both direct and indirect modes of ownership. Direct ownership of the family business can take the form of a listed company, a limited liability company, a registered partnership, a business set up as a trust, an unregistered partnership and any other business as the Minister may prescribe. Indirect ownership of the family business is identified in holding companies, those held in a trust and private foundations. In view of the fact that prior to this legislation, there has never been an EU harmonised, legally-binding definition of what constitutes a family business, this addition is somewhat significant.

The Family Business Act also establishes and introduces a Regulator who shall be a person appointed for a period of three years to manage, supervise and administer the Register of Family Businesses. The Regulator’s role is to assess all applicants seeking to register as a family business under the Act and ensure on-going compliance with the legislation. The spirit of the Act ensures that a regulatory framework encourages family members within the same family to transfer their family business inter vivos, as opposed to transfer causa mortis. In doing so, this mode would far likely result in the success of the continuity of the business and the law also introduces a number of benefits and assistance which help family businesses facilitate the transfer.

The benefits currently applicable for businesses upon registration as a family business are listed in Article 41(C) of the Duty on Documents and Transfers Act and in 2 measures provided by Malta Enterprises with regards to transfer of ownership and support services.

Wednesday 1 February 2017

Block Chain Chapter at Malta Stock Exchange

The Malta Stock Exchange (MSE) has set up a Blockchain ThinkTank consisting of members of the Exchange’s Board, its Chairman and Chief Executive and outside experts. The latter will assist in the formulation of a strategy geared towards addressing blockchain as an emerging technology. Chairing the committee will be Dr. Abdalla Kablan, an MSE Director, entrepreneur and academic specializing in machine intelligence, big data, analytics and computational finance.

MSE's Chairman Mr. Joseph Portelli said “Malta and the MSE are quite fortunate to have at our disposal our country’s preeminent technologist and a globally recognized expert on blockchain technology. Dr. Kablan has a proven track record within the technology space, evidenced by his latest start-up Hippo Data, the first Maltese company to ever be selected into the London Microsoft Accelerator Program.” This program is an initiative that helps entrepreneurs grow their companies.

Malta Stock Exchange
Originally starting off as the platform on which the ‘much-debated’ currency of bitcoin was based, put simply, blockchain is merely a distributed ledger. It encompasses a method in which information is recorded and shared by an accepting community. Each member in the so called ‘chain’ maintains his or her own copy of the information and all members must validate any updates collectively. Each update is a new “block” added to the end of the “chain.” In other words, it can be summed up as a potentially very secure ledger of digital events, shared between all parties that choose to participate in the events. Parties’ identities and data are protected by cryptography and recordal of new ‘blocks’ or changes in events can only be updated after there is at least 51% or more participant consensus. With such entry of such information, erasing thereof is not possible, hence disintermediating the concept and doing away with a central, monitoring and certification authority.

The platform / protocol manages the manner in which new edits or entries are initiated, validated, recorded, and distributed. Blockchain is the ‘tech-charged’ equivalent of the public ledgers of the past, with the added value of permanence, transparency, searchability and the elimination of third party intermediaries. The inception of blockchain saw the replacement of the intermediary (the keepers of trust) with complex algorithms and technological verification methods. Blockchain can be used in all types of transactions, including those related to contracts, assets, liabilities, identities, or practically anything else that is usually publicly available but can be described in digital form. Entries are permanent, transparent, and searchable, which makes it possible for community members to view transaction histories in their entirety.

In the world of capital markets blockchain is now being used by the Scottish stock exchange and the Australian Stock Exchange. Reasons for its popularity include advantages of speed (allowing investors and brokers to receive their money only 15 minutes after a trade is executed) and reduced costs (blockchain could save the financial industry over 41 billion annually in back office costs).

The Malta Stock Exchange's creation of a specialised committee to assess this is definitely a positive move in the right direction and tallies perfectly with the Exchange's recent 23 point Strategic Plan that will focus on internationalisation and modernisation of the Exchange.