Warren Deguara, Erica Maria Brincat and Aleandra Muscat
Over two years have passed since the United Kingdom (UK) left the European Union (EU), and a year later, from the establishment of the EU-UK Trade and Cooperation Agreement (TCA). What has been the impact of these developments on Maltese firms? Answering this question is not straightforward because of other significant events that occurred during this period, such as the COVID-19 pandemic.
Nevertheless, we attempted to address this question by conducting a survey with Maltese non-financial companies (NFCs) to collect information on the impact of Brexit on their costs and trade patterns. Responses were received from 96 firms covering all major economic sectors and firms of different sizes. The information was drawn from our regular meetings with high-level representatives of corporations and institutions as part of the Business Dialogue exercise that the Central Bank of Malta conducts.
The firms participating in the survey import from the UK more than they export. A sectoral breakdown shows that respondents in the manufacturing sector are the most exposed to the UK while the construction and real estate sector is the least exposed.
Overall, slightly more than half of the responding firms were not impacted by Brexit, while the remaining companies noted that the impact of Brexit on their company was either ‘negative’ or ‘very negative’. Such negative replies were more frequently noted among small and medium sized firms, and among firms in the manufacturing and wholesale and retail sectors.
The survey asked firms on how they were impacted by Brexit based on seven different criteria. The most common effects reported by those impacted by Brexit were increases in costs and regulations, longer lead times and lower availability of inputs and demand. In fact, the absolute majority of companies impacted by Brexit reported an increase in their input costs. These costs include transport costs and raw material prices, as well as other fees charged.
Another major issue reported by firms concerns longer lead times. One company executive noted that “lead times are the biggest problem as everything is taking much longer to be done. Exchanging business with UK has resulted to be more challenging due to the non-EU relationship.” Additionally, a quarter of impacted firms indicated that demand decreased, while lower availability of inputs appeared to be a less concerning issue. Lastly, employment of UK nationals and competition were the least issues of concern.
Our findings indicate that increasing regulations and costs are major concerns for all firms irrespective of their size, although higher costs are less of an issue for large firms, perhaps due to healthier finances and economies of scale. While sectoral analysis shows that increasing regulations and costs are common across sectors, prolonged lead times are more widespread among manufacturing and wholesale and retail firms.
Brexit appears to have had a bigger impact on imports than on exports. In fact, over half of the companies interviewed across all sectors have lowered their imports from the UK, while only a small share of companies reduced exports. Medium-sized companies were more likely to report a decrease in imports from the UK.
Around 10% of the companies noted that they were forced to close parts of their business due to Brexit, leading to lower export levels. Even though it may be difficult for companies to distinguish between changes in selling prices due to Brexit or because of other factors, particularly the transportation costs as a result of the COVID-19 pandemic and, more recently, the war in Ukraine, around 40% of firms contacted reported to have increased their selling prices. Meanwhile, most companies kept marketing efforts, investment plans and employment levels unchanged.
Overall, it is difficult to disentangle the impact of Brexit due to the unprecedented significant events that occurred in the last two years. Some of the factors identified, however, such as the increased administrative burden in terms of the required paperwork and more complex border control procedures are clearly associated with Brexit. Most firms participating in the survey consider these changes to be permanent rather than temporary. Firms exposed to trade with the UK should thus carefully consider their strategy to mitigate these threats to their business model and, at the same time, identify any business opportunities that may arise from Brexit.
Access to the full report is available from the website of the Central Bank of Malta:The Impact of Brexit on Maltese Firms – Insights from a Survey with Local Non-Financial Corporations.