A No-Deal Brexit Will Impact Maltese Economy – But How?

Rebecca Anastasi - 30th March 2019

The effect of the UK crashing out of the EU without a deal would result in greater uncertainties for the Maltese economy, but the extent of the damage is still hard to quantify.

A no-deal Brexit would be a blow to diverse sectors of the Maltese economy, with the extent of its impact difficult to determine at this stage, leading economic and business experts have said in comments to this newspaper.

The effect of the UK crashing out of the EU without a deal – what Stefano Mallia, Chairman of the European Economic and Social Committee’s (EESC) Brexit Group, called the “worst-case scenario,” particularly in light of recent developments – would result in greater uncertainties for the Maltese economy.

In his reaction to the current state-of-play in Britain and the EU, Mr Mallia noted that industries which sell goods and services to the UK market were, perhaps unsurprisingly, most likely to be affected. He also expects manufacturers which source their materials and components from the UK to feel the repercussions of Britain crashing out of the zone, since they would be faced with tariffs and hence an increase in costs.

Moreover, the degree to which a no-deal Brexit will affect the buoyancy of local markets, in general, is dependent on the consequences it would have on the EU economy as a whole, Mr Mallia explained. “If Brexit were to spark off a negative downward spiral in, for example, EU consumer sentiment, then this could have an indirect ripple effect on the Maltese economy, even vis-à-vis goods and services sold to continental Europe,” he noted.

However, the extent of the fallout from Britain’s exit from the bloc depends heavily on the form it will eventually take. Mr Mallia remarked that the ability of individual companies in sectors such as tourism, the food industry and pharmaceutics to weather the storm is dependent on “any actions already taken by the firms to reduce the expected negative impact.”

Indeed, the Malta Chamber of Commerce, Enterprise and Industry reiterated its call to all businesses to be prepared for any eventuality, especially given the constant changes and fluid situation. “As a Chamber, we encourage our members to keep in constant contact with their suppliers or business partners in the UK and seek alternatives to their normal import and export routes,” Kevin J. Borg, Director General of the Malta Chamber said.

Mr Borg recommended that businesses keep in touch with the Chamber, the Customs Department and other relevant authorities to keep abreast of developments and it pledged to remain vigilant on the latest twists and turns in the Brexit process. He added that businesses should “consider seeking assistance from relevant authorities such as Malta Enterprise (ME),” and looking into the ME’s Brexit-assistance scheme.

Brexit

Antonella Lia, Accounts Director of E&S Group, a firm which specialises in providing corporate, tax and advisory services, echoed many of these thoughts and noted that since, in the event of a no-deal, the UK would be considered a third-country overnight, there would be little to no time, for businesses to adjust to the change. “This would cause significant disruption in light of the uncertainty faced,” she added.

While enterprises operating in the tourism sector, financial services, IT and gaming, as well as companies that trade with the UK, might feel the greatest impact when Britain leaves the bloc, Ms Lia said that the repercussions of a no-deal Brexit were wide-ranging and included an impact on the local workforce, with the possibility of Malta losing out on invaluable human resources, “along with the talent and skills they have, in the eventuality that UK expats would need to relocate,” she asserted.

Ms Lia also pointed to Malta’s historical connection with Britain, which resulted in the island having a “powerful ally at EU level”, since the two countries saw “eye-to-eye on a number of matters, including taxation,” a reference to the current EU discussions on tax harmonisation across the bloc, which Malta has been fighting against. “Once Brexit goes through, Malta will lose the backing support of such an important ally, which may have an impact on Malta in the long-term,” she said.

Kenneth Farrugia, Chairman of Finance Malta, also underlined the need to be vigilant and stated that a no-deal Brexit would “be detrimental to both the UK and the EU,” with Malta standing to be affected as a consequence. “A no-deal is neither in the interest of the UK nor in that of the European Union,” since it will create “greater uncertainties” and will be harmful to both parties, he affirmed. However, he stressed that, until an agreement is reached, any predictions were premature.

Yet, the adverse effects of Brexit could even be noted now, in the short-term, the Chairman pointed out, saying that the extension was “heightening and prolonging the current level of uncertainties impacting the exchange rate and the cost of doing business.” In the long-term, Britain leaving the EU – as well as the customs and single markets – will undoubtedly impact “the passporting of products from Malta to the UK” and “UK products and services currently passported to Malta.”

Meanwhile, leading economist Gordon Cordina said it was essential to look at the UK leaving the bloc as “a three-pronged event” consisting of the current phase of uncertainty; the initial months and years during which economic, social and political relationships are redefined; and the long-term situation “where new normals are established.”

The events, he stated, were interdependent. “For example, the prolonging of the current period of uncertainty may impact, positively and negatively, the subsequent phases,” he explained. The consequences of Brexit on Malta, in his view, will depend on the inherent characteristics of the country – “would our small size insulate us from the shock or compound its potential effects?” – as well as its economic policies and business stance. These, he said, will determine whether our competitive position would enable us to reap opportunities or succumb under the pressures created by Britain’s exit. “In terms of budget effects, we would be well-insulated through our strong fiscal performance,” he said.

This was substantiated by EESC rapporteur Mr Mallia, who stated that since the Maltese economy is “currently in a healthy position, it should be able to absorb any negative shocks from Brexit.” He noted the productive work done by the Malta-UK trade promotion task force over the past 18 months, which has implemented numerous initiatives to attract new Brexit-induced business to our shores.

“The most visible move we have seen is the transfer of one of the largest betting firms to Malta but there have been other movements, which may not be so visible but which, when added together, could represent something important to our economy.” And, while it was exceedingly difficult to quantify the direct inward movement, as a result of Brexit, what is certain, in Mr Mallia’s view is that “there has indeed been movement.”

FinanceMalta’s Mr Farrugia also sounded a more positive note, noting Malta’s proposals to UK-based financial service operators to help them sustain their business in Europe through a co-location arrangement, stating that Malta might see “companies which decide to co-locate or others that might decide to completely relocate.” At any rate, he expressed confidence that the very strong ties between Malta and the UK will not be negatively impacted in the medium to longer-term. “To the contrary, I believe that the UK’s exit from the EU should give both countries the scope to strengthen existing ties also by way of Malta being a member of the Commonwealth alongside the UK.”

The full version of this article appeared in The Malta Business Observer


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