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Malta Business Review

Malta Business Review EU/EP Size of Parliament to shrink after Brexit The European Parliament should shrink from 751 to 705 MEPs when the UK leaves the EU, whilst leaving room for possible new countries joining in the future. • MEP numbers to be cut from 751 to 705 after Brexit • 46 of the 73 UK seats freed up by Brexit available for possible EU enlargement • 27 UK seats to be shared out among 14 under-represented EU countries Besides reducing Parliament’s size from 751 to 705 elected representatives, a proposed re-distribution of seats, approved by the Parliament as a whole on Wednesday, would also place 46 of the 73 UK seats to be freed up by Brexit in a reserve. Some or all of the 46 seats in the reserve could then be reallocated to new countries joining the EU or preserved to keep the institution smaller. New allocation of seats among 27 member states The remaining 27 British seats should be re-distributed among the 14 EU countries that are slightly under-represented, to even out current inequalities in their representation in the House, say MEPs. They also stress that this allocation would apply only if the UK actually leaves the EU. Otherwise the current arrangements would stay in place until further notice. Pan-European electoral lists A proposal by the Constitutional Affairs Committee calling for a number of MEPs to be elected from an EU-wide electoral constituency, was rejected by the full House. The proposal for a European Council decision was approved on Wednesday by 431 votes to 182 with 61 abstentions. Quotes Co-rapporteur Danuta Hübner (EPP, PL) said: “In times when Member State democracy as a system is called into question, it is our duty to re-ignite citizens’ passion for democracy. I hope we can take a step in the right direction by approving a distribution of the European Parliament’s seats that is fair, that follows objective principles, and that respects the EU’s Treaty.” Co-rapporteur Pedro Silva Pereira (S&D, PT) said “This vote is an important step forward for European democracy. The new allocation of seats means that we will reduce the overall number of MEPs from 751 to 705 while ensuring no loss of seats for any member state. Currently under-represented countries will get 27 of the 73 UK seats available after the UK leaves the EU. This will make the European Parliament a fairer reflection of the citizens it represents”. Current distribution of seats New Distribution Difference Germany 96 96 = France 74 79 +5 United Kingdom 73 - -73 Italy 73 76 +3 Spain 54 59 +5 Poland 51 52 +1 Romania 32 33 +1 Netherlands 26 29 +3 Greece 21 21 = Belgium 21 21 = Portugal 21 21 = Czech Republic 21 21 = Hungary 21 21 = Sweden 20 21 +1 Austria 18 19 +1 Bulgaria 17 17 = Denmark 13 14 +1 Slovakia 13 14 +1 Finland 13 14 +1 Ireland 11 13 +2 Croatia 11 12 +1 Lithuania 11 11 = Slovenia 8 8 = Latvia 8 8 = Estonia 6 7 +1 Cyprus 6 6 = Luxembourg 6 6 = Malta 6 6 = TOTAL 751 705 Roberta Metsola (EPP) said: "The change in the distribution of seats in the European Parliament after Brexit is one of the critical issues we face in the coming months. My position in these debates is to defend the interests of Malta and Gozo and to ensure that they are protected. One of the ideas proposed is the so-called transnational list that will surely affect disproportionately small member states. This list weakens the direct link citizens to their representatives and strengthen populist sentiments as well as the criticism that the EU is rresponsabli. I am against transnational list. I think we should focus to eliminate the democratic deficit in which citizens have the best possible access to their representatives. " Next steps Now that this legislative initiative has been approved by the full House, it will be put to the European Council (EU heads of state or government) for a unanimous decision, and then returned to Parliament for a final yes/no vote. The composition of the European Parliament for 2019-2024 is one of the topics expected to be debated by EU leaders during the informal EU summit later in February. Background According to Article 14(2) of the Treaty on European Union, the number of Members of the European Parliament cannot exceed 750, plus the President. It also requires representation to be “degressively proportional”, with a minimum threshold of 6 members per member state, and states that no member state is to be allocated more than 96 seats. In simplified terms, “degressive proportionality” should meet two requirements: 1. no smaller state shall receive more seats than a larger one, and 2. the population/seats ratio shall increase as population increases, before rounding to whole numbers. MBR All rights reserved - Copyright 2018 48

Malta Business Review DBRS Upgrades Republic of Malta to A (high), Changes Trend to Stable DBRS Ratings Limited has upgraded the Republic of Malta’s Long-Term Foreign and Local Currency – Issuer Ratings to A (high) from A and upgraded its Short-Term Foreign and Local Currency – Issuer Ratings to R-1 (middle) from R-1 (low). The trend on all ratings has been changed to Stable from Positive. The rating upgrade reflects DBRS’s assessment that the trajectory of Malta’s public debt has improved considerably. Since DBRS’s latest review, the projection of the general government debt ratio has been materially revised downwards due to more favourable growth prospects and stronger primary balances in coming years. The debt-to-GDP ratio is now forecast to decrease to 41.2% of GDP by 2022, almost seven percentage points less than previously anticipated. In 2017, the government is expected to have exceeded its fiscal objective and reduced its debt ratio thanks to stronger-than-expected revenues. Improvements in the “Debt and Liquidity”, “Economic Structure and Performance”, and “Fiscal Management and Policy” sections of our analysis were the key factors for the rating upgrade. The rating is supported by Malta’s Eurozone membership. This ensures reliable access to European markets, fosters strong and credible macroeconomic policies and makes available financial facilities from European institutions. Malta’s strong external position and low reliance on external financing help mitigate the vulnerabilities linked to its small and open economy. The public-sector debt’s long average maturity, primarily denominated in euros, and high domestic ownership help shield the debt ratio from interest, currency or financial markets contagion risks. Also, households’ strong financial position enhances private consumption resiliency. Malta nonetheless faces some challenges. Malta’s contingent liabilities, stemming from its large state-owned enterprises and concentrated financial sector, remain a source of vulnerability. Malta’s small and open Continued on pg 53 economy with some sectors highly dependent on foreign demand, such as tourism, exposes the country to external developments. Pressures from rising age-related costs, if unaddressed, could pose a concern for the pension and healthcare system. THE MALTESE ECONOMY CONTINUES TO POWER AHEAD The Maltese economy continues to surprise on the upside and remains one of the top performers in the euro area. Recent economic performance has been remarkable, with 6.4% average GDP growth during 2013-2017 tripling the 2.1% average rate in 2004-2012. While remote gaming was a determining factor, other sectors such as tourism which is a major source of income and employment in Malta and financial and business services also contributed to the outperformance. A highly elastic foreign labour supply and a rising share of less capitalintensive service sectors, have prevented very high growth rates leading to overheating pressures in the economy. DBRS expects GDP to continue to expand at an annual average rate of 5% between 2018 and 2020, and to gradually converge to its long-term growth potential of just above 3%. Increasing labour force participation and addressing emerging infrastructure bottlenecks are expected to help Malta’s GDP per capita, at EUR 22,724, to continue to converge to EU average levels of EUR 29,148 both in 2016. Malta’s small and open economy, the smallest in the Euro area, is vulnerable to external oscillations. However, a more diversified economic base and Malta’s low reliance on external financing help mitigate these risks. In DBRS’s view, downside risks to the outlook largely stem from a downturn in Malta’s main export markets and policy uncertainties related to the post-Brexit arrangement and US policymaking. In the longer term, corporate tax reforms at the EU level and in the US, could diminish to some degree the attractiveness of several jurisdictions, including Malta, for multinational companies. Also, the gaming industry in Malta could be impacted by regulatory changes at the EU level. On the domestic side, higher wage increases could put upside pressure on GDP growth, while delays in construction projects or increasing physical bottlenecks could constrain growth. GROWTH CONTINUES TO SUPPORT PUBLIC FINANCES Malta has significantly improved its fiscal management and performance. The adoption of the 2014 Fiscal Responsibility Act has been crucial in strengthening its fiscal framework and ongoing spending reviews are helping to improve efficiency in the public sector. Since 2013, Malta has experienced a significant improvement in its fiscal performance driven by: (1) fiscal consolidation efforts, (2) markedly higher GDP growth, (3) lower funding costs, (4) introduction of the citizenship scheme (the International Investor Programme). The general government deficit averaged 1.1% during 2013- 2016 compared to 4.0% during 2001-2012. The structural balance turned positive in 2016. Proceeds from the IIP played an important role in the improvement of the structural deficit, contributing 0.5%, 1.7%, and 2.1% of GDP in 2015, 2016, and 2017, respectively. Related to a buoyant economy and higher thanexpected-revenues from the citizenship scheme, the general government is expected to have overachieved its fiscal targets in 2017. The Central Bank of Malta’s (CBM) latest estimates, show the general government balance at 2.1% of GDP in 2017, well above the budget target of 0.8%. In 2018-2020, the government aims to maintain an average headline surplus of 0.5% of GDP and a structural surplus, supported by prudent macroeconomic forecasts endorsed by Malta Fiscal Advisory Council. Given the volatility and the difficulty in predicting the IIP proceeds, DBRS considers appropriate the authorities’ intention to ensure compliance with the government’s Medium Term Objective (MTO), net of IIP. CONSERVATIVE CORE BANKS AND STRONG HOUSEHOLDS LIMIT FINANCIAL STABILITY RISKS While the banking system is large relative to the size of the economy, 440.7% of GDP in Q2 2017, only the core and non-core domestic banks, with assets 217.8% and 22.2% of GDP, respectively are tightly linked to the Maltese economy. The so-called international banks, with assets of 200.7% of GDP have limited or no linkages to the domestic economy, therefore, potential spillovers to the rest of the system are contained. Core domestic banks’ loan portfolio is concentrated in real estaterelated activities. However, their conservative business model, reliant on retail deposits for funding, mitigates against risks. Core domestic banks’ healthy regulatory Tier 1 capital ratio of 13.4% in Q2 2017, high levels of liquid assets, 49

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