Foreign direct investment and the economy

The headline-grabbing figure is that the flow of foreign direct investment into Malta from the rest of the world amounted to almost €800 million in 2010, an increase of €250 million, or almost 30 per cent, over the previous year. This was chiefly attributable to an increase over 2009 in equity capital invested in Malta of almost €584 million. The increase in FDI mainly stemmed from companies based outside the European Union, accounting for almost 70 per cent of the increase.

Companies involved in “financial intermediation” (banks, insurance companies, monetary exchange bureaux and financial institutions) led the league table last year, accounting for almost 85 per cent of money flows into Malta. The financial sector registered almost €670 million in direct investment flows, followed by the hotels, restaurants and real estate sectors, with almost €59 million. The manufacturing sector, which also includes retail activity and the construction industry, accounted for about €39 million.

All these figures serve to underline the huge strides the financial services industry has made in Malta’s economic development. As manufacturing and light industry have fallen away, the importance of financial services to our livelihood, economic development and well-being have correspondingly increased. Foreign investment accumulated over the years accounts for over €12 billion, of which almost €10 billion pertains to the banking, insurance and other financial institutions. This is now a vital part of the economy, which rightly enjoys a high reputation for probity, competence and efficiency.

These figures are undoubtedly encouraging but are they in themselves enough to see the economy through the rocky economic shoals that lie ahead? The blunt answer is no. The large leap in FDI comes after the low point of the banking crisis of 2007-2009 when total FDI stood at almost twice what it is now, underlining that we are simply returning to earlier levels of FDI. More pertinently perhaps, while FDI stemming from the financial services industry is, of course, most welcome, Malta still requires pressing foreign investment in other, more job-intensive sectors of the economy to generate new employment for the workforce.

FDI is always a good indicator of confidence in a country and for the signs of improvement in Malta’s levels the country should therefore be truly thankful. However, it is but one factor in what is going on around us economically. It is a shaft of good news in an otherwise deepening gloom from which Malta, as a member of the eurozone, cannot hope to be immune.

The turmoil on the world stock markets in the past days was driven by fears of a renewed downturn in the global economy possibly leading to a double-dip recession. One of the main reasons – and the factor that most affects Malta’s future economic standing – is the eurozone debt crisis, which appears to resist all efforts to resolve it. Investors do not believe that the European institutions, most notably the European Central Bank, are strong enough to bail out the heavily indebted countries of the so-called southern European periphery or to stabilise these countries’ financial markets by buying their sovereign bonds.

Malta’s position is like that of a cork in a stormy sea. It is an open economy that is extremely vulnerable to the vicissitudes affecting (much larger) international markets. We can only hope that our virtue as a relatively stable, low-indebted economy will bring its own reward. But, FDI notwithstanding, this country would be wise also to prepare for the turbulence to become worse before it gets better.