Foreign Direct Investment attractiveness rating bounces back to 2020 results – EY-Parthenon survey

Last Updated on Tuesday, 18 October, 2022 at 12:01 pm by Andre Camilleri

Malta’s overall Foreign Direct Investment (FDI) attractiveness rating has bounced back to the results seen in 2020, standing at 58%, the EY-Parthenon’s 18th Malta Attractiveness Survey revealed.

During the Future Realised Conference on Tuesday, the results of the survey revealed what current investors think about investing in Malta, and what makes the island an attractive location to invest in, or the areas for improvement.

It showed that there was a bounce back in confidence by investors and policymakers alike after the country was taken off the FATF grey list in June 2022. There was also a decrease in the number of respondents who said that Malta is not attractive.

The survey showed, however, that despite the improvement in perceptions, the rating still falls short of the very high confidence levels achieved prior to 2020.

The parameter which is considered as the strongest and most attractive to most existing foreign investors is corporate taxation, which now stands as 71%, the survey showed.

Stability of social climate marked the second-strongest parameter (69%), an increase of 11 percentage points compared to that of 2021.

The survey also showed that telecommunications infrastructure (68%), has been another strong parameter over the last few years, ranking third on the scoreboard.

On the other hand, the survey showed that the stability and transparency of the political, legal, and regulatory environment, a parameter that used to score highly on Malta’s attractiveness scoreboard, is now seen to be attractive by 31% of respondents, up 14 percentage points from 2021.

While 41% still state that it is not attractive, this compares with 64% in 2021, at the time of the island’s grey listing, it revealed.

The survey also revealed that the attractiveness of labour costs (35%) saw the biggest decline over one year, losing 12 percentage points from that of 2021. Local labour skills level decreased by 10 percentage points, now at 40% attractiveness, and flexibility of labour legislation decreased by four percentage points, with 41%.

Malta’s greatest risk for the next three years are the changes brought about by international tax policy developments, where 58% of respondents believing that this is the biggest risk facing Malta’s FDI attractiveness, the survey showed.

These are followed by skills shortages (54%), banking challenges (38%), cost competitiveness (36%) and reputational concerns (36%). The survey showed that only 5% believe the war in Ukraine will affect Malta’s FDI attractiveness.

69% of existing FDI companies surveyed, totalling to a majority, still believe that their future is in Malta.

There was a decrease in the number of “no” responses, and an increase in the number of “don’t know” responses, with many respondents commenting that, in today’s fast-changing economic and geopolitical environments, a 10-year prediction has become increasingly difficult to make. The number of those who say “yes” has been slowly declining over the last few years.

On skill challenges, the survey showed that companies’ ability to retain specialized personnel has remained high and in line with the last year and pre-pandemic levels.

Due to the country’s economic expansion, however, Malta’s skill supply has been unable to keep up with increasing demand for specialized skills.

The survey showed that in 2022, 66% reported not being able to find the required specialized skills in the local labour market. This is still a slight improvement on the last year, which indicates that the challenge is being tackled on several fronts positively, and not worsening further.

The survey also asked respondents how their financial performance is currently being impacted by various external factors. The largest impact on financial performance was due to increased costs (excluding logistics) as a direct result of Covid-19, which impacted 66% of investors to a large or some extent.

60% were impacted because of increased operating costs due to inflation following the war in Ukraine, while 58% were impacted due to increased logistic costs as a result of Covid-19 and ongoing supply chain challenges.

The survey showed that 29% are experiencing a loss of revenue from source markets as a direct result of the war in Ukraine.

2022 respondents said that the top priority to remain globally competitive is education and skills, followed by ease of doing business and developing new economic sectors. The least prioritized was the shift to a low-carbon economy.

In his opening address during the Malta Future Realised Conference, EY Malta Country Managing Partner Ronald Attard said that the “Removal from the grey list has helped to restore investor sentiment. Although back on the right path, it is worth noting that at 58%, it still falls short of the extremely high confidence levels Malta was reaching a few years ago.”

He said that the country’s most attractive FDI feature could be impacted by external factors which may soon come into play.

“As in recent years, our strongpoint for FDI remains our tax regime. Survey respondents are clearly aware of the risks of this changing. If our biggest pull factor is potentially coming to an end, what is our attractiveness offer going to be in a new global tax environment? We have a great social climate and telecommunications infrastructure, but is it going to be enough?” Attard said.

Attard questioned whether attracting more people to the island would only serve to exacerbate other challenges, instead of providing a solution to the current skills shortages and labour costs. Attard said that this may not be the wisest of moves due to the small size of the country, and setbacks in infrastructure.

Attard spoke about balancing the economy with growing environmental pressures, where he said that friction is developing in the current economic model. He said that surveys indicate that people are tired of overdevelopment and construction, yet the country’s legal and tax framework prioritise property development as opposed to other activities.

“Even foreign investors on the island believe that to increase Malta’s investment attractiveness, the country should prioritise the quality of its built and urban environment, and the preservation of rural and natural areas,” Attard said. One-third of companies believe that environmental sustainability is critical for their investment strategies.

On the war in Ukraine, Attard said that the conflict is having far-reaching consequences, with record inflation and recessions impacting economies all over the world. He said that many of Malta’s challenges arise from the international context and geopolitical situation the country finds itself in.

Legitimate business is about hard work, smart ideas and capable people – Marisa Xuereb

The following is the speech given by Marisa Xuereb, The Malta Chamber President, during the EY Parthenon Malta Future Realised Conference 2022.

Hon Prime Minister, Hon Leader of the Opposition, distinguished guests, ladies and gentlemen, good morning.

Every year, EY Malta does a brilliant job of bringing us all together to take a snapshot of this miracle economy of ours: our dear Malta. For an economy of such a small size without any natural resources to speak of, we have done well. We do not have many large multinationals operating from Malta, but we have a handful of leading names in every sector that we have committed ourselves to develop over the years: from the original economic pillars of manufacturing and tourism, to our fully-fledged services sector driven by financial services, ICT and iGaming in more recent years. The degree of diversification of our economy is quite remarkable for a micro island state.

Our competitiveness has always rested on a combination of investment-friendly government policies and diligent human resources. Every sector that we have managed to establish in our economy has been built on robust fiscal and regulatory incentives coupled with a workforce that delivered good value for money. Our entrepreneurial private sector always sought to make the most of the opportunities presented to it. This recipe served us well for decades but was put to the test in the last couple of years through the FATF greylisting. The resolve of the regulatory authorities involved and the cooperation of private sector operators, particularly those in financial services, has enabled us to get off the greylist within 12 months – a major achievement for all involved that avoided permanent damage to our economy. The lesson learned is that reputation matters, and we should all be mindful of the risks of entertaining easy money.

Legitimate business is about hard work and smart ideas. It requires capable people. While Government policies have to fit within the parameters of EU and international law obligations, and the complexity on this front increases every year, the biggest challenge we are facing is that of guaranteeing a capable workforce going forward. Human resource shortages have been a mounting concern for several years. As our economy grows and demand for labour increases, new entrants into the labour market cannot meet the gaps left by the droves of people who retire and the increasing demand for more complex skill sets. The gains made through a steady increase in female participation in the last decade have plateaued, and the declining birth rate coupled with the eagerness of young graduates to seek greener pastures overseas, is making it very difficult for businesses to recruit locally. The international competition for third country national workers is making it harder to recruit and retain capable foreign workers as well. There is also a realisation that our infrastructure cannot cope with an ever-increasing population, and the pressures of this are seriously compromising our quality of life. Everything seems to be pointing in the direction of a major rethink of the way our economy functions: how can we do more with less people, and how can what we do be of higher value. In other words: how we can improve productivity and move up the economic value chain.

Foreign direct investment has a key role to play in the process of economic transformation that we need to embark on to achieve these goals. A lot of what needs to be done involves significant investment in technology, and the pace at which it will happen greatly depends on our ability to attract foreign investors who are able to bring in know-how that can augment local capabilities and foster synergies with existing technology companies. I would like to make an important point of clarification here. When I say technology, I don’t mean solely digital technology. The latter has become so present in our daily life that when we hear the word “technology”, we tend to think exclusively of digital technology – typically abbreviated as “tech”. But this is only one type of technology. There is a lot of other technology present in our manufacturing industry that we do not value enough. There is also a lot of other technology in our medical sector, where there is ample research potential. And there is a lot of other technology that goes into the building of infrastructure that we need to invest much more in. A decade of near-zero interest rates has seen a proliferation of investment in residential property that has not been matched by investment in infrastructure. This is the unfortunate legacy of lending policy support to speculation instead of systematic urban and infrastructural planning that would have guaranteed a much better quality of life for decades to come.

A major determinant of future resilience is our green transition. Let us be clear. Covid was a major economic shock and a menacing social experiment; the war in Ukraine and the ensuing energy crisis is one of the biggest political and economic challenges that the EU has ever faced; but climate change remains the biggest long-term threat to human life as we know it. The EU has recognised this and most recent legislative developments, including those related to state aid and trade, have been spurred by the green transition. It is therefore in the interest of every business to align its investment plans with the ambitions of the green transition to be able to benefit from the funding support available at present, and to avoid being subject to green taxes, whether directly or indirectly, in future. Admittedly, there is still quite a bit of confusion in the air triggered by the very bold attempt to address the pressing priority of decarbonisation through a very broad ESG-reporting framework that is highly susceptible to bureaucratic overkill, and risks shifting the focus away from the real carbon footprint of business activities to the asset-pricing interests of large corporates.

While the current geopolitical uncertainties are clearly impacting businesses and will have casualties, there are a couple of opportunities that require concerted effort at an EU level to be capitalised upon. There are players along the energy supply chain that are benefitting from supernormal profits. The EU has floated the idea of taxing such profits to be able to subsidies energy costs for low-income earners and businesses at risk. An alternative or potentially complementary line of action could be to incentivise the investment of those profits into renewable energy infrastructure that would help accelerate the green transition and reduce energy dependency risks in future.

The other opportunity is that of rebuilding some of the productive capacity that Europe has lost in the last couple of decades to cheaper, less regulated markets primarily in Asia. In the age of globalisation, when trade was seen as a gateway to prosperity and a peace broker, investment flows into and out of the EU were largely driven by the interplay of state aid rules and regional aid guidelines, and the cheap labour attraction of distant economies. Risk management came back to life with Covid and became key to survival with the invasion of the Ukraine. Near-shoring and reshoring are now topics of serious conversation. But their viability will be grossly dependent on how the EU will strike a balance between its ambitious pre-war carbon-reduction targets and its support of the manufacturing industry against the backdrop of spiralling energy costs. The state aid framework will be challenged more than ever before because countries have varying degrees of fiscal manoeuvrability as a result of the Covid-induced relaxation of the Stability and Growth Pact rules for fiscal discipline that has seen several eurozone Governments accumulate high debts. It is against this fiscal backdrop that the prospect of a looming recession in Europe raises real concern.

Economic growth is a universal measure of prosperity. It is subject to the criticism that it says nothing about the distribution of wealth and income, the quality of life of people and the sustainability of an economy – all valid points because it is true that economic growth measures none of this. But the real anomaly arises when accelerated economic growth actually results in more pronounced wealth and income disparities, a deterioration in the quality of life of people and unsustainable use of finite natural resources. And we have seen some of this happening in recent years. This does not mean that we must abandon the pursuit of economic growth for greater prosperity, but it clearly shows that the way we achieve that growth is what really matters.

The Malta Chamber of Commerce, Enterprise and Industry published an economic vision for Malta 2020-2025 a couple of years ago. In that document, we had identified human capital, digitalisation, sustainability and good governance as the four pillars on which our future economic growth needs to be built. If any of these four are weak, long-term prosperity will be compromised. We are making progress on digitalisation and good governance, but we are struggling with sustainability and human capital. Digitalisation delivers immediate productivity gains and is therefore the easiest to get decisionmakers to buy into. The only real constraint to our progress on digitalisation is the availability of adequately qualified and affordable human capital to make things happen. Good governance was given a push by our greylisting experience. Sustainability is more challenging because it requires making more judicious use of resources today to improve future outcomes for society at large. The deferment of benefit and its accrual to society at large rather than the individual requires a lot of education and a radical change in our value set to be truly embraced. There are reasons to believe that the moment we embrace this, even our biggest immediate problem – which is human capital – starts being alleviated. Some might argue, yes, because economic growth will stall and we will need less people. At the Malta Chamber we have a different understanding: it will happen because economic growth will be driven by investment in infrastructure and green technology that will improve our attractiveness to future-minded investors, more discerning customers and better educated human resources that are highly mobile and value sustainability because they understand how it impacts quality of life. Quality over quantity. Substance over form. Long-term vision over short-term goals. A better future realised.

Very interesting times lie ahead. The challenges are great for everyone. Let us use our strengths well and work hard to address our major weaknesses, so that we can turn the present threats into opportunities for a more resilient future. Thank you.

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