UK operators who would no longer be able to operate freely in the EU would seek to establish a more physical presence in a member state and Malta could very well be a country of choice for such operators, according to Kenneth Micallef, the president of the Institute of Financial Services.

He was cautiously optimistic, stressing that while it was still very early for anyone to identify the exact consequences of Brexit, some aspects “would definitely require close monitoring”.

“Over the years Malta has attracted a number of foreign operators, including those of UK origin, to establish a presence on the island. How these will be affected by Britain’s exit from the EU still needs to be established,” he said.

The financial services centre of the UK, London, is still reeling after the shock decision taken by voters in last week’s referendum to leave the EU, but it is still not clear what the long-term impact will be on that sector and in turn, how it would affect Malta, whose financial services sector accounts for around 12 per cent of GDP.

Even though the UK was outside the eurozone, it was ‘allowed’ to handle euro-based business as a member state but it is not clear that the European Central Bank would be happy for this to continue once it left the bloc. Frankfurt is already courting many big banks, insurance companies and financial services institutions to lure them to relocate – but Malta Financial Services Authority chairman Joe Bannister thinks that Malta’s targets would be set much lower.

For example, Malta is waiting to see how the future of Gibraltar and the Channel Islands will evolve after Brexit, with the MFSA “ready to discuss cooperation”, he told The Business Observer.

“The reality is that most of the big companies already have a base within the eurozone, so what you are looking at is a change in operational structure, rather than a wholesale departure,” he said. “They would still retain a presence in London, to deal with non-EU trade.”

That does not mean that Malta could not see some activity drift here, however, as the attractiveness factors which have already brought so many smaller operators, particularly asset managers, here would only be enhanced by Brexit.

Prof. Bannister said that the impact on Malta could largely be contained when it comes to financial services as there is not much cross-border passporting – but when it comes to insurance, the situation is a bit more sensitive.

There are other ways in which services could be offered to a non-EU country

“However, there are other ways in which services could be offered to a non-EU country.

“There is no reason why agreements could not be reached,” he said.

Together with member states such as the Netherlands, Cyprus and Luxembourg, Malta is one of the countries which is expected to be mostly affected by the exit vote. According to a recent report issued by Fitch, Malta’s exports of goods and services to the UK amount to nearly eight per cent of GDP.

“This is quite a significant dependency which makes it imperative that we immediately identify the factors which form part of this exposure, understand the possible impacts of Brexit on them individually and agree on a work around plan with the objective of mitigating the possible negative consequences,” Mr Micallef said.

Apart from financial services, the most important economic sectors expected to be directly affected by Brexit are tourism and trade.

“Some argue that the effects on these important economic pillars would not necessarily be negative – but if some initial effects, for example the strength of the euro against sterling, is sustained for a long term, then this might pose a negative effect on tourism from the UK to Malta,” he said.

The exchange rate could also have an effect on the level of trade between the two countries, although he pointed out that the diversification from being an economy dependent on manufacturing to a services oriented one has already considerably mitigated the possible impact.

Some of the impact would be less tangible, Mr Micallef stressed.

“The UK is an important collaborator for Malta sharing very similar views on certain aspects of the economy which are essential to make Malta lucrative for foreign businesses. These include the harmonisation of a tax regime across the EU and the imposition of tax on financial transactions which will definitely have negative implications on our financial services industry if they are introduced.

“Then, there are other aspects of our life which could also be affected and which we also need to understand, such as the free movement of citizens between the two countries. There are thousands of Maltese who live or work in the UK and we depend on the UK for certain health-related matters,” he said.

According to the IMF, the value of all imports from the UK is equivalent to 27.3 per cent (21.1 per cent services and 6.2 per cent goods) of Malta’s GDP – the highest for any member state. Big Four firm PwC said in a note on Tuesday that the UK’s departure from the EU could lead to higher import costs in the form of tariffs thus pushing up prices for Maltese consumers. On the other hand, this may be mitigated by the appreciation of the euro against the pound.

However, a cheaper pound will make Malta’s exports to the UK more expensive.

“The effect on Malta’s balance of payments will ultimately depend on the price elasticity of demand of the exported goods and services. Tourism may be a vulnerable product to such a currency depreciation, given its relatively high price elasticity,” authors Joe Muscat and Michael Ganado said.

According to the IMF, Malta is the second most exposed member state (after Cyprus) in terms of services exports to the UK. Meanwhile, Malta exports the equivalent of two per cent of its GDP of goods to the UK, which would be adversely impacted by the depreciation of the pound, again depending on how price sensitive UK consumers were.

Credit rating agency Standard & Poors had earlier already flagged that Malta was on the front line of economies susceptible to trade aftershocks from Brexit, with foreign direct investment from the UK into Malta amounting to 6.3 per cent of Malta’s GDP, again the highest figure of all member states, along with Cyprus.

“How adversely affected such flows will be now that the UK has voted to leave the EU depends on the degree of integration that the UK will negotiate with the EU,” the PwC report also warned.

Operators were clearly preparing for the theoretical impacts of Brexit and trying to assess the impact on their specific sector. QROPS specialist Sovereign Group, admitted that they did not really think that voters would choose to leave the EU – but explained that companies rarely had all their eggs in one basket.

“But for many months we have been looking at what repercussions this might have for our pensions business in particular. We do not think it has any. Sovereign is licensed in many different jurisdictions around the world both inside and outside the EU. It will probably be some time before the full implications of Brexit are understood but whatever they are, we are ready and prepared.

“We have a licensed pension operation in Malta which remains within the EU. And we have a licensed pension operation in Gibraltar which was in the EU but will leave when Britain leaves. UK nationals and residents will either be able to use Malta or Gibraltar. We have also recently acquired a UK self-invested personal pension operation so we think we have covered all bases irrespective of what happens next.”

The impact of the exchange rate for tourism and trade might depend on elasticity of demand, but it also affects currency providers like the Alpine Group. For chief investment officer Nicholas Zahra, Brexit was a momentous event on par with the day Lehman Brothers failed.

“We can think of a currency as being representative of the issuing county’s value. Looking at it from this angle, it is hard to see how a Brexit could possibly lead to sterling’s appreciation, even over the long term. For starters, inward investment into the UK in property and as a commercial platform within Europe will definitely be hit.

“The likeliness is that unwinding the UK’s EU membership will take a long time, meaning that the period of uncertainty will also be long. Even if the UK government decides not to restrict EU citizens’ right-to-work immediately, the lack of growth in investment alone is bound to keep them away, further contributing to a long-term weakening of the economy as it begins to shrink.

“The EU itself is also at a crossroads, because this event will encourage other politicians with similar political agendas to push harder for a similar outcome in their domestic country, which may lead to more members leaving the EU. If a euro member leaves the EU, and assuming that its first action would be to ditch the euro, what happens next is easily predictable. If the departing country’s central bank has a strong balance sheet, like Germany, they would revert to their old currency which would immediately appreciate against the remaining eurozone countries.

“If the departing country was a weak one, such as Italy, Greece and Spain, the opposite would happen. We have already seen a very similar situation in January 2014 when the Swiss Central Bank abandoned its peg to the euro, causing the franc to appreciate by 20 per cent almost instantly,” he warned.

The Association of Car Importers Malta is also bracing itself for the impact of weaker sterling, which – along with other factors – had since 2006 prompted a massive influx of second-hand cars from the UK. The trend only recently started to reverse and recent statistics showed that, for the first time in years, the majority of local drivers (51 per cent) were choosing new cars – a welcome shift from the 40 per cent of just a short while back.

ACIM chairman Joseph Gasan said it would be too soon to assess what would happen.

“Obviously, we will be monitoring the situation and will keep our members updated,” Mr Gasan shrugged.

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