The Business Observer

INTERVIEW

Issue 65

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December 1, 2016

Distributed with Times of Malta

Malta last in insolvency rankings

NEWS Banks are being criticised for dragging their feet over the opening of new accounts but the president of the Malta Bankers’ Association, Mario Mallia, said companies should understand that they want active relationships. see page 3 >

Vanessa Macdonald Malta has the most inefficient insolvency proceedings of all the EU member states, a damning report by the European Commission has revealed.

The report coincides with new EU rules on business insolvency, aimed at increasing the opportunities for companies in financial difficulties to restructure early on so as to prevent bankruptcy and avoid laying off staff.

At present, many viable companies in financial difficulties are steered towards liquidation – which the EU report described as “the most likely outcome” in Malta – rather than early restructuring, with too few entrepreneurs getting a second chance.

Indeed, there does not seem to be much chance of a ‘second chance’: Malta is one of eight member states where bankrupt entrepreneurs cannot shed their ‘bankrupt’ status as no discharge exists, while 11 countries have a discharge period of three years or less.

The report estimates that Malta could increase its SMEs by five per cent if it were to offer a discharge period of three years, creating 428 jobs.

The impact could be significant: Malta is one of nine member states where SMEs account for over three-quarters of employment.

SMEs in only just over half of member states can achieve bankruptcy in three years or less, and only half of member states treat restarters on an equal footing with new start-ups.

Second change policies laid out in the Small Business Act have been implemented in less than half the member states – and has

e head of the Eurogroup, Jeroen Dijsselbloem, has clear – and frank – views about populism, Brexit, the US regulatory regime and insolvency. see pages 10 and 11 >

NEWS

“In Malta, only 40.7 per cent of secured creditors recover their debts following insolvency, compared to 65 per cent in the EU”

been the principle showing least progress since 2008.

The report shows that the average length of insolvency proceedings in Malta is three years, compared to the EU average of two years.

This all has a spill-over effect on the rest of the economy. In Malta, only 40.7 per cent of secured creditors recover their debts following insolvency, compared to 65 per cent in the EU.

Conrad Portanier, a partner at Ganado Advocates, who has lobbied for changes to Malta’s insolvency proceedings, said that these statistics, although alarming, were not surprising.

“I will mention one case with significant commercial ramifications where the First Hall of the Civil Courts decided (swiftly and ably) that a large company owing millions to Maltese creditors is Continued on page 6

For over a year, Jankarl Farrugia has been mulling the idea of a Valletta brand for boutique hotels but with Mark Weingard now also on board, that proposal might just become a reality. see page 5 >

STOCK MARKET REVIEW ere will be winners and there will be losers but dollar/euro parity might just become a reality.

Edward Rizzo analyses the factors pushing it one way or the other. see pages 18 and 19 >

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NEWS

Accounts easier for companies with substance Companies which have economic substance in Malta would find it much easier to open accounts, the chairman of the Malta Bankers’ Association Mario Mallia said, responding to criticism that companies were finding it too hard to open accounts.

“Where there is a rationale for a corporate to open an account in Malta, then it makes it all the easier for banks to consider. Obviously, when you have a client that has no link with Malta, then we have to ask questions. What is economic substance? Trading with Maltese companies, trading with foreign companies out of Malta, having a back-office operation here, having a headquarters in Malta – and not just a brass plate but one with people working in it…” he explained.

“What we are after is a relationship with a client, not a one-off transaction.”

He said that commercial banks had to fit new clients into their risk appetite and that those who were licensed by Maltese regulators – such as the Malta Financial Services Authority or the Malta Gaming Authority – would also be more likely to find a bank willing to take on their business.

Banks are also accused of being xenophobic about companies from particular countries but Mr Mallia explained that this was absolutely false, as judgments are not based on race – or any other discriminatory criterion – but on the EU’s international classification of jurisdictions.

“Countries range from low risk such as EU member states, the US, Australia, Canada, Japan – ‘EU equivalents’ as we call them – all the way to ‘no go’ jurisdictions – like North Korea,” he said.

“There is no discrimination as this established list is based purely

on risk, reflecting the stability and level of development of the jurisdiction, its justice system, and the stability of its financial markets.”

Although the list is just a recommendation, he stressed that the Maltese commercial banks had long ago taken a decision to take a wiser, long-term view rather than to take on business that might turn out to be toxic.

“The directions are there for guidance and you are not prohibited from taking on high-risk business – but then you have to shoulder the responsibility, not only as a bank but also as a country. All it would take is one scandal and it would leave us all high and dry…

“When the Cyprus banking crisis broke in 2013, there was consensus between the commercial banks, the Malta Bankers’ Association and the Central Bank of Malta that we would not be taking business coming out of Cyprus unless it fitted within our local risk appetite,” he reminded.

“Banks have to keep the local financial sector stable and clean: we cannot afford to allow ourselves to be exploited by criminals.”

The overwhelming due diligence required by regulators is one of the reasons that correspondent banks have terminated services to smaller banks where the cost of providing the service and the risk of getting it wrong is rarely justified by the transaction volumes.

“It is not a problem for sterling transactions as the regulation is not as onerous, but it is with the US, especially for jurisdictions where there is gaming. But this is where that all-important word – relationship – cannot be stressed too much. Even small banks

need to show the correspondent banks that they are serious about fighting financial crime and money laundering, as they will treat them accordingly. It is important to invest in your track record…

“And the jurisdiction needs to showcase the levels of due diligence that is done by the Malta Gaming Authority as this will also put their minds at rest.”

The MBA is meeting the Finance Ministry and the Institute of Financial Services Practitioners to discuss these concerns, and he said that there was understanding.

“No one would turn away business capriciously but the dialogue is getting results, although there is no solution as yet,” he said.

The situation for bankers has become ever harder since the financial crisis, squeezed between ever-increasing compliance and low to negative interest rates.

The long delays in opening accounts were also to some extent due to the extra due diligence mandated by regulators, which was introduced before the banks had had time to boost their resources.

But Mr Mallia reassured that local banks had made considerable investment to catch up.

“No one would turn away business capriciously” “The Maltese economy grew and internationalised at a very rapid pace and banks had to catch up on their resources to fight international financial crime.

“I am aware that investment in both human resources and in IT is currently being made by local banks as well as by other service providers – that banks might outsource to – in order to strengthen our anti-financial crime systems,” he reassured.

With regards to interest rates, the situation is out of the hands of banks – and Mr Mallia stressed that the MBA anticipates that low to negative interest rates would continue for the long term, especially in the case of the euro.

“There is some movement in the US where the Fed recently gave signals that the rates might be going up. But with the euro, we do not see much movement over the medium term.

“The longer this lasts, the harder it is for banks because the

core income of local commercial banks is the interest margin and obviously when the interest rate is low, margins naturally get squeezed.

“That is one aspect of the problem. The other is the negative rates being charged on liquidity parked at the European Central Bank. Obviously, the aim there is to encourage banks to divert funds into lending and thereby the real economy. But this is taking its toll on banks because the economy in Malta is performing so strongly that huge volumes of liquidity are being generated, outstripping the demand for credit.

“That liquidity has to be deployed somewhere and in accordance with the risk appetite of the individual banks. Obviously if it is deployed in high quality assets then you get either zero or negative interest rates, which is another burden on profitability on banks,” he lamented.

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A ‘brand’ new association Two entrepreneurs have been working behind the scenes to persuade boutique hotel owners in Valletta to join forces – and are now ready to get things going.

Jankarl Farrugia and Mark Weigard, who have both got significant investments in the hospitality industry in Valletta, are well aware of the economies of scale that work against boutique hotels, particularly when it comes to marketing. This is why they came up with the idea of forming a voluntary association which could participate at fairs and conferences, particularly international ones.

“The association would achieve two aims: it would allow boutique hotels to promote themselves as a group – which would be prohibitively expensive for them to do alone, given the limited number of rooms.

“And it would also allow them to host small groups, rather than to cater to individual customers, by offering them accommodation spread across more than one hotel,” Mr Farrugia explained.

They have been working for the past year to gauge interest in forming the association, with Mr Weingard willing to put up the initial cost. To make it work, they believe that other stakeholders need to feed into the association, such as restaurants, theatres, museums and conference halls.

He said that the Mediterranean Conference Centre had already expressed interest, and they plan to engage with V18, the Malta Tourism Authority and even

BOUTIQUE HOTELS IN VALLETTA OFFER A UNIQUE EXPERIENCE.

Is-Suq tal-Belt, which also plans to host exhibitions and events.

“We could collaborate with the film and fashion industry, concert organisers, destination management companies, wedding planners… the list is quite long and there are obvious bilateral synergies.”

Apart from working to create a pipeline of possible guests for its members, the association could also act as a lobbyist.

“There are numerous restrictions on construction work in Valletta, as you would imagine given its World Heritage status – all of which increase costs and reduce viability. But we would be able to lobby more effectively with the authorities for flexibility if we could speak with one voice,” Mr Farrugia said.

“We will clearly be happy to work informally with the Malta Hotels and

Restaurants Association, but the idea is to be independent, as what we are after is to create a Valletta brand.”

The idea of an association comes at an opportune time as there are around 20 boutique hotels planned for Valletta within a few years – in fact, when Mr Farrugia first came up with the idea 18 months ago, there was little interest from the few operators at the time.

To be concise, at the moment, few boutique hotels are actually entitled to use the name, as under the current Malta Tourism Authority categories, only premises with a restaurant can be called a ‘hotel’ – which means they are technically guesthouses. However, Parliament will soon be changing the legislation, adding more categories and labels to reflect the diversity of accommodation now on offer.

“There was clearly a niche for which there was demand. But it is a problem to go from hardly any to so many. The last thing we would want is to get into the ‘rate game’, as cutting rates to compete eventually forces the hotels to cut service. We should avoid getting into a situation of ‘survival of the fittest’ which we can do by putting up a common shout for Valletta.”

An information meeting is being organised in the coming weeks. Any entity interested in more information may e-mail vallettahotelsassociation@gmail.com

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NeWs ??

Every year 200,000 SMEs go bankrupt Continued from page 1 now insolvent since it was unable to pay its debts.

“The company has now appealed, as is its right under law, and the creditors need to wait for three to four years just for the Court of Appeal case to be appointed for the first hearing.

“I will not venture into proposing amendments. There are structural problems which necessitate a comprehensive national strategy to address the underlying problems in the medium term. Unfortunately, piecemeal tweaks to the system do not address the root of the issue. Lack of decisive action will lead to making Malta less attractive for investment, at a time when many other competing jurisdictions have made radical overhauls to their systems and laws,” he warned.

The Finance Ministry did not respond to questions sent by The Business Observer.

The European Commission’s annual report for SMEs for 2014/2015 stressed that many start-ups fail in their early years and that public policies offering a second chance would improve the environment.

“Often a business cessation is involuntary and results from creditor action to recover partially and fully debts owed to them,” it said.

“Bankruptcy procedures and similar involuntary business cessation procedures provide the legal framework for winding down such failing business.

“The characteristics of the bankruptcy regimes vary considerably in terms of how punitive the regime is for honest entrepreneurs whose business failed and went bankrupt … Economies with more punitive bankruptcy regimes forego the value-added and employment which would have been created by the business and which would have been created by entrepreneurs actually deterred or prevented from doing so.”

If all the member states where the discharge period exceeds three years reduced it to three years, the EU’s GDP would be one per cent higher each year, in the long run.

Although this figure cannot be precise, the EU said that it nonetheless highlighted the fact that the opportunity cost, in terms of foregone output and employment, of punitive bankruptcy regimes was “far from insignificant”.

EU SMEs seem to be recovering from the fallout of the financial crisis and value added grew for the second year in a row, reaching 5.7 per cent in 2015, while employment grew by 1.5 per cent.

In 2015, there were just under 23 million SMEs in the EU, which generated €3.9 trillion of value-added.

They employed 90 million people – two out of every three – with growth in 27 out of the 28 member states, almost all of which was due to an increase in the number of SMEs. Nevertheless, every year, 200,000 firms go bankrupt, resulting in over 1.7 million people losing their jobs.

“Lack of decisive action will lead to making Malta less attractive for investment, at a time when many other competing jurisdictions have made radical overhauls to their systems and laws”

What will the new rules improve?

The situation today in Malta

With the new rules

In restructuring proceedings, companies and entrepreneurs are prevented from controlling their own assets and the dayto-day operation of their businesses.

✓ The companies and entrepreneurs will be in control of their businesses which will avoid unnecessary costs and better ensure the continuation of the business. An insolvency practitioner will be appointed when necessary.

Access to restructuring procedures is too late, leading companies into formal insolvency proceedings.

✓ Viable enterprises in financial difficulties will have access to restructuring tools at an early stage where their chances of survival are higher.

A “breathing space” from enforcement of actions is automatically provided to the debtor, but it is too long (12 months with two possible extensions of two months).

✓ Viable companies in financial difficulties can have access to a time-limited “breathing space” from enforcement actions of no more than four months, renewable until a maximum duration of 12 months under strict conditions. This will not only facilitate negotiations and reduce the length of procedures, but also provide further predictability and legal certainty for creditors.

New financing for companies in the process of early restructuring is not sufficiently encouraged or protected.

✓ Access to fresh money is vital for the rescued company. New financing will be specifically protected increasing the chances that restructuring will be successful.

The framework of debt discharge does not provide for a time limit, thus lacking legal certainty.

✓ Honest insolvent entrepreneurs will have access to a full discharge of their debt after a maximum period of three years, without prejudice to adequate safeguards put in place to prevent possible abuses.

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INDUSTRY FOCUS

Challenging year predicted A number of major projects – such as the logistics hub and the Mediterranean oil and gas hub – should take off in 2017 creating opportunities but there are also challenges.

Express Trailers Franco Azzopardi Chairman and CEO The logistics hub should be awarded in the first quarter of the year. What should the new operator do to make the most impact?

Express Trailers believes the logistics hub could possibly correct the growing imbalance between imported and exported cargo, thus absorbing the costs of carrying empty trailers burdening our national supply chain. The proposed project could bring further economic value to our island, by creating more investment and employment. Hence, the project should be commended by all. However, the critical success factors of such a project point at a number of realities that need to be addressed.

The new operator will need to understand the limitations on our island in terms of entry and exit. Basically we have the Freeport, the Luqa air terminal and Lab Wharf as conduits in and out of Malta. The operator will have a volume of 400,000 cubic metres. The effective storage space volume multiplied by the number of times the warehouse will be turned around will return the volume of cargo that will be imported and exported in a year. The operator will need to assess whether our conduit infrastructure can handle that movement to give the return that makes economic sense from a commercial viewpoint.

The operator may also want to assess the domestic capacity in terms of logistics. The strain on local hauliers like us in terms of additional investment in equipment will depend on the volume of cargo that will hit the roads. The operator will need to encourage the propensity to invest and gear up for this increased activity.

One should probably not undermine the additional stresses on further space required for trailer parks. Additional

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INDUSTRY FOCUS/NEWS

investment in equipment needs significant open parking space.

From a demand management perspective, it is a given that the operator will already have the volumes of west-bound cargo to be ‘hubbed’ from the Far East through Malta, northward to Europe or south to North Africa via the Freeport.

All told, the viability of ‘hubbing’ needs to remain conscious of the physical limitations and on further investment in our terminals, remaining also sensitive to our environmental obligations.

recent project, 89 Wine Pressers Wharf at the Valletta Waterfront, is the living testament of this. We converted a 17th century vault into an office block while maintaining all the antique vaults’ original features and incorporating into this over 1,400 square metres of office space apart from common areas, underground parking and a beautiful roof garden overlooking the Valletta Grand Harbour. Our secondary objective was to make the building more eco-friendly and economical to run, which we did through thermal insulation VRF cooling, energy efficient lighting, and the use of recycled grey water in sanitary facilities.

Triton Group Paul Vella General consultant Environmental NGOs and a considerable number of people have become very negative about development. How does that affect future projects?

Negativity towards grand scale projects has always been present; nowadays it is more evident due to the social media boom and increased exposure to the public in general.

The public is not against holistic architecture, and “green” building techniques are the way forward. These mean giving major importance to aesthetics, new and innovative building techniques, modern electrical engineering as well as eco-friendly materials being used – and last but not least, the social responsibility of the building contractors involved.

Within our organisation, we give a lot of importance to building holistically and our most

Betsson Group Ulrik Bengtsson CEO and president Betsson has called on the government to lobby for the gaming industry’s access to other jurisdictions – do you foresee any progress in 2017?

It is not only about “access to a jurisdiction”; it is the continued implementation of local gaming legislation in various member states that is in breach of EU law. This is beyond access; it is about fundamental EU principles and rights.

The Malta Gaming Authority is already doing a great job but this needs to be raised to the highest political level, as it is important for the future of Malta.

I do think the responsible ministers are well aware and I anticipate this will be part of discussions when Malta takes the Presidency of the EU in 2017.

Italian referendum to have modest impact Isla Binnie and Rahul Karunakar Victory or defeat for Italian Prime Minister Matteo Renzi’s constitutional reform referendum will hit financial markets only modestly, a Reuters poll found, with analysts split on how serious a “No” vote would be for the future of the euro.

Renzi has said he would resign if he loses the Sunday, December 4 ballot – an outcome all opinion polls say is the most likely – on his plan to drastically reduce the role of the upper house Senate.

The Reuters survey of 32 analysts showed investors expected to demand an extra 25 basis points in yield to hold Italian debt over its German equivalent if the reform were rejected, with the euro dipping 1.25 per cent.

Similar moves in the other direction are expected if voters approve the reform at the ballot box, which Renzi is presenting as a chance to speed up lawmaking and stabilise government.

While the poll consensus shows only muted reaction to either outcome, the European Central Bank said the risks were rising to eurozone financial stability

and it would react to any “economic shock” from the vote. The most pessimistic view in the poll was for a 70 basis point premium on the Italian/German yield spread and for the euro to fall as much as 10 per cent.

Half the analysts polled see a “serious” blow to the euro project if Italians reject the plan, which those opposed to it say will over-centralise power and make Italy less democratic. The other half said the blow would not be serious.

Italy’s chronically stagnant economy is struggling to post convincing growth and its debt pile, one of the world’s biggest, keeps it under close investor scrutiny.

Many in the financial markets worry that, if Renzi resigns, the anti-euro 5-Star Movement could come closer to power.

“The ‘No’ scenario opens up a very volatile phase,” said Intesa Sanpaolo fixed income strategist Sergio Capaldi.

“In case of Renzi’s resignation there is no clear path for the formation of a new government. A short-term government could just approve an electoral law for the Senate and announce early elections.” (Reuters)

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INTERVIEW

Seeking a stronger union of banks

EUROGROUP PRESIDENT JEROEN DIJSSELBLOEM. PHOTO: CHRIS SANT FOURNIER

Apart from being the Dutch Finance Minister, JEROEN DIJSSELBLOEM has been the Eurogroup president since 2013. He spoke to Vanessa Macdonald about some of the issues facing the financial sector and how the Banking Union would help.

I was fascinated by your recent comment that the “road to populism was paved with paralysed politicians”.

How worrying in the context of all that has already happened around the world and what might happen soon!

There are two reactions that I am seeing: some simply get paralysed and don’t want to do anything in case they anger people who then vote for populists. The other is ‘Let’s all become populists and start promising things that we can’t deliver. Forget about the facts and simply tell people what they want to hear…’

Both of these are very worrying and certainly where the economy of the eurozone is concerned, we should keep pushing the reform agenda, even though it is not popular. We need to go further to become more competitive. And the only way to create jobs and growth is by getting more competitive.

You are actually quite an optimist and said: “Thanks to the decisive steps we took, all European economies are growing in the third quarter, unemployment falling, deficits reduced” and so on.

All these figures are facts. I don’t make them up. Growth has returned to all eurozone countries…

It could be in spite of politics, rather than because of it…

Politicians throughout Europe have been taking difficult steps to sort out their fiscal problems and their budgets, modernising their pension systems, reforming markets and creating new business opportunities.

I think politicians in Europe deserve more credit than they get but it has been very hard on citizens as unemployment has been very high – and still is.

The results – in economic terms and social terms – are starting to show and growth in Malta is at five or six per cent, while Ireland, Spain, the Baltics are doing very well at three or four per cent. Other countries like The Netherlands are growing by around two per cent. Even the two large countries that are dragging behind – Italy and France – are still growing by approximately one per cent.

If you look at the countries that are doing best, they are the ones who have done the most difficult stuff: huge reforms took place in Spain, Ireland, and the Baltics and The Netherlands and they are now showing strong growth. Of course, the populace will tell you that it was all due to the euro but I do not think that is the right analysis at all. I think the crisis in some of our countries was caused by overblown housing markets, instable banking sectors, the rising costs of an ageing

“ere will be hindrances, there will be tariffs in some cases. is is one of the factors considered by companies who want to invest” population and healthcare. Populists through Europe will tell you that these are not issues to worry about, that pensions should rise, that there is no problem with ageing populations, that we do not need to modernise our welfare states and that we are fine.

That is just not a realistic – and therefore not a fair – perspective.

I am absolutely sure that this is not going to be the outcome. The outcome will be that the UK is outside the internal market. Of course we can design new agreements to allow them to enter the internal market and to allow trade to continue. We have to do that.

But it will not be as easy or as cheap as it is now.

One of the most obvious examples of populism was Brexit. You said Boris Johnson’s vision of Brexit was “intellectually impossible”, that it would take longer than two years, and that it would be a “lose-lose situation”. Very dire predictions…

He is telling the British people that everything is going to be hunky dory and that it will be a win-win situation where we will all be better off.

But that will also work against the EU. The EU also trades with the UK… The majority of their exports and trade is with the EU. Britain is, of course, an important trading partner but the trade is much smaller than the other way round.

How much of what you say is posturing to make sure that other countries do not decide to follow suit and leave the EU?

The economic reality will be that if you are not fully part of an internal market then you will have extra costs to do business. There will be hindrances, there will be tariffs in some cases. This is one of the factors considered by companies who want to invest. Companies in the UK are already asking whether the UK is still the best base for them from which to service all of Europe – should they simply be on the continent and serve Europe from there?

These decisions are being taken.

I am not saying this to threaten the UK as the Dutch are – like the Maltese – great friends of the British.

We are, after the Irish, their second trading partner in terms of volume and value. So we have absolutely no interest to damage this trading relationship.

But it is a fact of life that if you are outside a club, you are no longer a member and won’t have the perks and prerogatives that members have.

This is what Boris Johnson should tell the British people: that they will lose growth, they will lose jobs, and that there will be an effect on their

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INTERVIEW

brought in. Banks are being sold and restructured, mergers are taking place.

Jobs are being lost in the sector because of new technology so there is a lot of dynamics but some of the big issues in banks have been postponed and need to be addressed.

The guiding principle will be bailin which will also have a preventive effect because investors will think carefully and a lot more critically before they put their money in a bank. This will in turn put pressure on banks not to hide their problems and not to postpone dealing with their problems. Investors will only come back to you once you sort yourself out.

wealth but that as a result, as a proud people, they can choose for themselves, that they have their sovereignty.

That would be the fair trade-off.

Sovereign linkage to banks is a loop that you have been trying to break. Maltese banks hold a high percentage of government paper.

Will you establish a threshold?

I don’t think so. I think that over time, it will be sensible for banks to be less dependent on the amount of sovereign bonds that they hold, certainly of their own sovereign.

It simply makes sense in terms of risk mitigation not to have too high a level of concentration of one asset.

That is just sound policy.

So you will allow banks to self-regulate?

The Basel Committee is discussing whether there should be a risk weight for sovereign bonds and whether there should be a limit on concentration levels in your own sovereign bonds. So we will await the outcome of Basel and then discuss it at a European level.

Banks should use the time available to reduce those kinds of risk. I think in the future there will be a risk weighting for bonds but we are not there yet.

Insolvency reform is a key element of the Banking Union. The European Commission issued its new rules last week which said that rescued companies should have ‘new financing’.

Who is going to provide that? If a company is not doing well, how can you force a bank to pour good money after bad?

When I said new finance I did not mean it should be for companies that are already defaulting on their loans.

The whole issue of non-performing loans requires some action. You can wait for a long time and hope the economy will recover so these loans will be paid off. And for some, this could work. But the rest of this portfolio will at some point need to be written off.

You need to either start building provisions or taking your loss, so you would need fresh capital for

those provisions. If you do not do that, then basically your whole portfolio is locked up as it is simply not performing, and there is simply no space for new credit to be given out to new companies – which is where growth is going to come from.

Writing off a portfolio will require capital and the only way to get that would be if your investors believe you are really clearing out and that the bank is again viable with a good return on profit.

Banks really need to act. The legal frameworks are now there.

But it worries me as in the same speeches you talk about bail-in where investors would pay up. So their risk is much higher than it used to be in the past…

The risk was the same but it was covered by governments. We have seen this throughout Europe where governments had to spend huge amounts of taxpayers’ money bailing out banks – which was really bailing out investors and saying ‘you will get your money back’.

If you are an investor in a bank you have to have a fair assessment of what the risks are. Risk is fine as long as it is priced in a fair way. Bailin is a fine economic principle if you invest your money in a bank: you take out profits in good times but if there is a loss, you also carry some of that loss. That is the risk/return trade off.

The government guarantee that has implicitly been there on banks and on investors will go away. I don’t

see why ordinary taxpayers should cover for the losses of investors.

But what are the unintended consequences of this? Banks need to raise capital. Isn’t the risk that smaller banks will not find investors and isn’t that what you wanted to avoid, having banks that were ‘too big to fail’?

I don’t think that this is an issue of large or small banks. We have some large banks which really need to do a lot of work in terms of profitability, restructuring and reducing risks etc., but lots of small banks which are very sound and well capitalised.

Europe has to a large extent been postponing the sorting out of the banks. The US did it very quickly after the financial crisis in 2008/2009 and forced them to recapitalise and to sort out some of these problems. The banks were open for business in the US again quite quickly.

The reason that Europe dragged its feet is because it is a difficult process. You need to write off some of your non-performing loans, your portfolios, and to downgrade the value of some of your assets, and you need to convince investors that from now you are back in business and will show them a return on profits. It is still a major restructuring issue for a number of banks.

The positive side is overall European banks are already in a much better position since the Banking Union. They have been recapitalising and a lot of new capital has been

An external factor having an impact on banks is the regulatory fines from the US. Have we seen the worst of it and how do you see things going forward under Trump, given indications that he might review this regime?

It is very difficult to predict. Many of the fines do not come from the financial regulators but from the courts and civil procedures, and very often from settlements even before it goes to court.

I cannot predict whether we have seen the worst of it and I am not standing up for the banks that have been involved in fraud, Libor fraud and so on.

They should be sanctioned.

But the size of the sanctions is huge and it is eating through the new capital: what was brought in to European banks, the American legal system is pulling out again! $14 billion for Deutsche Bank is a huge setback for a bank which is in the process of restructuring, cutting costs and becoming more efficient.

I have expressed my concern about this to the American authorities and of course, quite rightly, they said that it was in the hands of the legal system and that the politicians do not control the legal system. But I think that there is a major issue here.

An issue that is having an impact on Malta is the dearth of correspondent banks, which is also tied to the regulatory regime in the US. Is there a solution going forward?

It is difficult to say. We regulated heavily, of course, after the financial crisis. But there comes a point when we need to stop and look back on what we have done and ask ourselves whether we need all these rules and regulations.

And I think that there will be more comfort for politicians but also for the public at large if banks are again in a sound position. That is the right moment to start looking back and say that we can perhaps take away some of this regulatory burden.

Some say that this time has already come; some say that we are almost there. Last week the Commission came out with global rules about solid banks, tackling all the legacy issues to do with capital requirements.

I think we have covered a lot of ground in creating solid banks and the time may have come to look back and ask whether we need all the rules and regulations.

Preferably, we would do it with the US as there is a big difference in regulatory standards – what the Americans require, what the Europeans require from banks – and these should converge.

This brings us back to populism.

I strongly believe in international and economic cooperation. I still think that trade deals between the US, Canada and Europe are of great value for economic prospects and part of those talks should be on whether we can converge –perhaps to a lower level – some of these very heavy rules and regulations for our banks, because doing business is becoming pretty tough.

It is the same for Dutch banks which are becoming so nervous about American rules and regulation, supervisors, fines and so on that they are withholding doing business in the Middle East, in Africa, because there are so many risks.

We talk to the Americans about this and they always say that they are prepared to help – but they cannot seem to take away the threat of sanctions.

That is one of the topics that we should talk about and work on in the G20 and G7 context.

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CASE STUDY

Workforce to be reckoned with Databyte managing director Frederick Micallef has decades of experience in the software industry so you can imagine how surprised he was to learn that two product sectors he thought were saturated were actually ripe for new approaches: human resources and managed warehousing.

Five years ago, when the company was celebrating its 25th anniversary, the other founder – Joe Ross – decided to retire from the business, keeping a non-executive position on the board. They decided to bring on board Kenneth de Martino, with whom Databyte had collaborated on other business, and Kevin Camilleri, a lawyer who had moved to IT. The time had come for the company to reinvent itself, helped by an advisory committee made up of specialists.

“We could see that the future was going to be Cloud – so we set about creating a Cloud infrastructure,” he explained.

It was not an easy decision. It took five man-years to get the infrastructure set up, and there were times when as many as four people were working on this – ultimately – non-productive work, so sales went down.

“It was a struggle to maintain our cash flows,” he recalled.

However, he believes that taking the long-term view was the right thing to do, as the company is now poised to launch both HR and managed warehousing software, with products that are scalable enough to reach international audiences.

Not that long ago, going global would have seemed a bit of a dream… The company first made

its mark providing software for local clients. Up to 15 or 20 years ago, clients had no option but to go to a software provider. However, the scenario today is completely different, with an abundance of software available ‘off the shelf’, typically as volumedriven packages with a very competitive price tag.

“The dependence of clients on tailor-made applications started to shrink, which was a concern for us – but also an opportunity because the clients who did want our services had very sophisticated requirements. Instead of providing mainstream products like inventory and accounting, which is what we did for our first 10 years or so, we started developing very specific products which were not available on the market,” he explained.

“Taking the long-term view was the right thing to do, as the company is now poised to launch both HR and managed warehousing software...”

One of the first sectors where Databyte made a name for itself was managed warehousing software for clients who stored third party inventory. They started off with a hospital in Libya who had not been able to source their requirements from anywhere in the world. In 2008, Databyte provided them with a system which managed the blood laboratory, integrating all the diagnostic equipment. Mr Micallef sees great

potential in this sector: “I was at a logistics fair two years ago and went to see what was available on the market. I found two applications, which were more than 15 years old! If we have an application on the Cloud, then we could certainly do something with it internationally.

“And there is a pro-logistics sentiment in government which is permeating down to industry. We are already talking to someone

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CASE STUDY

who is preparing to invest in a 10,000 square metre warehouse, and we would be the IT foundation for this organisation.”

With HR, the missing factor in existing systems was integration: most companies have payroll systems and leave systems – but they do not always talk to each other. The solution was to build a system of pickand-choose modules, all of which can plug in to one underlying layer.

“As things stand at the moment, there may be a person who applied for leave but the company would not know whether he or she should punch in or not as the two systems do not talk to each other. On the other hand, with out system, if your name is spelled wrong in one, then it will be spelled wrong in all of them!” he smiled.

The company identified eight modules, four of which will be rolled out this year, with the others planned for next year – all under the brand name of Workforce.

“We visited companies in the 150-250 employee range and they expressed interest, mostly in the online leave system, which allows people to plan their own leave, see their colleagues’ bookings and so on. I have never in 30 years had a product where eight out of 10 expressed interest and we then actually sold to six of them. That is a very good hit rate!

DATABYTE MANAGING DIRECTOR FREDERICK MICALLEF. PHOTO: STEVE ZAMMIT LUPI

“I am very enthusiastic. And I want to send a sign of positivity across the company” “The other challenge was putting HR – which by its very nature is so confidential – on the Cloud. Five years ago, eight out of 10 clients that we spoke to were not willing to put their HR systems on the Cloud.

Today, six out of 10 have no objection whatsoever,” he said.

The company tested its Cloud infrastructure with a simple app: a visitor registration system.

“It tracks who has visited your company, rather than asking them to sign an ugly copybook! But there are benefits like knowing when they

last visited, who they spoke to, who is on the premises in case of an emergency… even who parked badly!” Mr Micallef explained.

Success brings with it attention that is not altogether unwelcome – including investors willing to share it.

Mr Micallef admitted that Databyte has so far financed everything internally – which takes its toll on financial performance. The time has come to consider other options, although he stressed that the company – which currently employs 12

people – was keeping an open mind, ranging from mergers to joint ventures and product take-overs. A public offering is also possible, thanks to the Malta Stock Exchange’s product for small businesses, Prospects.

“Prospects is more in reach of companies our size. But we need to understand the dynamics of these financing options. At the moment, we are more focused on the technology and the deliverables and there is no particular urgency to go to the market. I would rather do so once we have successfully made some headway,” he pondered.

In the meantime, the Cloud version of their payroll module is in the final stages of rigorous testing by accountants and auditors.

“This is the fourth version of our payroll system. Many companies have a high turnover in payroll departments so you do not want a system which has a lot of clutter but rather something which is easy to use and intuitive.

“We were never strong on audit trails but these are now very topical as people want to know if an entry has been changed and by whom and when. We may actually have gone over the top with this but I would prefer to have too much than too little!”

It is also launching a time and attendance system using bio-

metric recognition devices – fingerprint, hand geometry and face recognition. Next year it is going to launch an extension to the HR database where one can store certificates and qualifications, disciplinary warnings and some medical information for emergencies such as next of kin. It also has rostering and scheduling modules, and a performance appraisal module, which he described as the biggest challenge.

“We have already been asked to develop more modules for HR – such as recruitment, as this is becoming very complex especially for companies which need to start the process internally before going externally.”

It is, however, hard to keep your feet on the ground when there are investors knocking on the door – the latest a German investor who was intrigued by the warehouse management system.

“Probably because of our size, we tend to get a little bit cautious with investors, let alone if they are foreign. But when you look at the sheer size of the market, things start to make sense. We may be small but our functionality is enormous.

“I am very enthusiastic. And I want to send a sign of positivity across the company: that is how you gain ownership, commitment and motivation of the team.”

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e Business Observer is Malta’s leading business newspaper distributed with Times of Malta every fortnight.

Editorial Vanessa Macdonald, Assistant editor, Times of Malta.

EDITORIAL

Avoiding empty promises Economy Minister Chris Cardona has fallen into the trap of making an empty promise, reassuring the 200 workers that will be laid off from Actavis that the government “guaranteed” that none of them would spend a single day on the jobless register.

It is an extraordinary statement for a minister to make, especially when the statement included a proviso that this did not mean the workers would be taken in by the government.

Both parts of the statement deserve comment. Start with the second part: that a minister even needs to clarify that the government would not be taking the workers on to their own books. This government has managed to swell the public sector by almost 3,000 employees since the election, which is perhaps eclipsed by 22,000 more private sector jobs, so that the percentage of the public sector workforce of the total has dropped, from 26.9 per cent to 24.8 per cent. But all the arguments that these were needed to bring education and health levels up to scratch ring hollow, with dozens of unjustifiable appointments undermining the hundreds that were justified.

The numbers of unemployed are the result of both the new jobs being created that siphon people off the register, and the ones being driven off it by schemes to prevent the status quo of benefits becoming the default option.

The problem has always been expectations – actually fulfilled or not – that government would be the employer of last resort, whether when textile industries shed almost a thousand workers overnight, to when the Drydocks shed thousands through early retirement schemes. There is still the perception that Air Malta workers will be ‘taken care of’ if the worst came to the worst.

The first part of Dr Cardona’s statement was his reassurance that not one person would spend a day on the unemployment register. This

ridiculous claim was preceded by the announcement that a task force had been set up to find alternative employment, and that the government agency had crunched some numbers and found 120 vacancies. So far, so good. He should have stopped there. That is exactly what you would expect: that in an economy that is bursting at the seams, other companies would snap up experienced workers, filling vacancies that they were having trouble filling. And this is precisely what JobsPlus is there for, to guide the 200 as regards to openings.

There is a good chance that many of the people being laid off by Actavis will find work but not all of them will and not all of them will move straight from one job to another the very day they walk out of the door at Ħal Far. There are 50 operators, 50 lab analysts and others in IT and human resources. Saying that pharmaceutical companies need staff is trite: the list of vacancies would cover dozens of different skills, not all of which would match those of the Actavis ones.

Why, then, did the minister feel the need to make such an empty promise? It would be far more beneficial to look carefully at this sector, which was spawned by the 2003 Bolar exemption on generics and which needs to constantly reinvent itself.

This government is riding on a feel-good factor at the moment. But it is crucial that any manufacturing closure is carefully analysed to ensure that Malta still has a competitive advantage as, if not, other companies will follow in Actavis’ steps. After years adding pharmaceutical courses to our educational system to feed insatiable demand, we may find ourselves with workers whose skills are no longer required all from the stroke of a pen made somewhere on the other side of the world, Life Sciences Park notwithstanding.

vanessa.macdonald@timesofmalta.com Publishers Allied Newspapers Ltd. Content House Group Ltd.

Advertising Enquiries Tel: 21 320713 Email: info@contenthouse.com.mt Advertising Sales: Matthew Spiteri Head of Sales Amy Schembri Advertising Sales Executive Lindsey Napier Marvic Cutajar Advertising Sales Coordinators

Printer Progress Press Ltd.

BUSINESS OPINION

Vehicle taxation in Malta: worst in Europe

Alfred Farrugia When it comes to vehicle taxation, Malta’s remains the worst in Europe as a percentage of total taxation, according to the 2016 edition of “Taxation trends in the European Union” published by the European Commission.

In 2014, the first full year of this administration, vehicle taxation in Malta as a percentage of total taxation was 3.5 per cent, while the EU 28 average was 1.3 per cent. The eurozone average was just 1.2 per cent! This means that vehicle taxation in Malta is almost three times as much as the eurozone average.

The lowest rates were in Estonia and Lithuania where vehicle taxation was 0.2 per cent of total taxation. This means that vehicle taxation in Malta is 17.5 times as much as that in Estonia and Lithuania.

In 2005, the European Commission had actually proposed the abolition of vehicle registration tax, and a number of EU member states did remove it. In Austria, Bulgaria, Czech Republic, Estonia, Lithuania, Luxembourg,

“Vehicle taxation in Malta is almost three times as much as the eurozone average”

Poland, Slovakia, Sweden and the United Kingdom there was no registration tax in 2012.

Vehicle taxation in Malta has been the worst in the EU for several years, having been 6.7 per cent of total taxation in 2003. Over the past 10 years, the rate admittedly went down practically every

year, with the exceptions of 2011 when it remained at 4.2 per cent as in the previous year, and 2014, when it remained 3.5 per cent as in 2013.

In real terms, however, the total amount of motor vehicle registration tax and annual circulation licence fees (taxes) increased from

€81.9 million in 2013, to €94.5 million. It is clear that the ratio between vehicle taxation and total taxation only remained the same as in 2013 because total taxation had increased.

The Malta Automobile Club launched a petition to reduce vehicle taxation in Malta in October

2013, but it is evident that this petition has fallen on deaf ears!

Given that the economy is doing so well, what is keeping the government from reducing vehicle taxation? In addition to vehicle tax, the government is collecting more than €140 million in duties and taxes from petrol and diesel this year. And to add insult to injury, the government is allocating a very small percentage of vehicle taxation to investment in road construction and improvements.

We do not need the Spanish consortium INECO-Systematica to tell us how much investment in road building and improvements is needed to decrease traffic congestion.

In 2017, the government estimates that it will collect €116.6 million in revenue from vehicle taxation, €8.6 million more than 2016. On the other hand, it is estimating an expenditure of only €14 million in road construction and maintenance in 2017, just €1 million more than 2016.

What is the government doing with the balance of €102.6 million that it is collecting from the Maltese consumers? Maltese drivers and car owners need to wake up and realise what is the root cause of the current situation.

Perhaps the time has come for our Cabinet ministers and parliamentary secretaries to start paying for vehicle taxation from their own pockets to realise how high vehicle taxation is in Malta!

Alfred Farrugia is the president of the Malta Automobile Club.

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APPOINTMENTS

New contact centre appointments New CEO at Prohealth Peter Apap, co-founder and director of Prohealth Ltd, has been appointed chief executive officer.

Prohealth has imported and distributed leading pharmaceutical and dermo-cosmetic brands since 1995.

The other co-founders and executive directors John Jaccarini and Andrew Paris have responsibility for export business development, and procurement and regulatory affairs respectively. Joseph FX Zahra, who has been a consultant with Prohealth for the last two years, chairs the board of directors in a non-executive capacity.

The company also announced the appointment of Andrew Spiteri Willets as financial controller.

These changes are aimed at growing the company’s market share in Malta, by consolidation of its brands such as La Roche-Posay, Vichy, Ursapharm and Kin, as well as the introduction of new products, and continued rapid growth of its more recently established medical devices division.

This restructuring will enable Prohealth to embark on a more aggressive drive to develop business in new export markets in addition to its established Libya market.

Medserv director steps down Charles Daly has informed Medserv that he has decided to resign from his office as director of the company and other companies forming part of the Medserv group for personal reasons, with effect from December 31, 2016.

In view of Mr Daly’s membership on the audit committee and remuneration committee, Medserv said it would consider the cooption of a further non-executive director to replace Mr Daly.

Maltapost CFO Maltapost has appointed Neville Chappell as chief financial officer, replacing Carmen Ellul who is being appointed chief officer for internal audit with effect from March 1, 2017.

At a time of sustained growth in staff numbers and call volumes, the HSBC UK Contact Centre (UKCC) Malta welcomed Angela Brown to the role of recruitment manager and Christine Borg as the new people experience manager.

Ms Brown joined HSBC in Edinburgh in 2006 and moved to Malta

ANGELA BROWN (LEFT) AND CHRISTINE BORG

in 2009. Since her arrival at the UKCC Malta, she has held the positions of academy mentor and academy manager where she was responsible for managing teams of new recruits through their

induction period. Ms Borg started working at HSBC UK Contact Centre Malta in 2012 as a customer service representative. By 2015, she was selected for the role of team manager.

Eight directors for six BOV seats Eight nominations have been cast for the six seats on the Bank of Valletta board, which will mean several new faces. Incumbents Helga Ellul and Mario Grima will not be contesting, but James Grech, Alfred Lupi and Joe Zrinzo are on the candidates’ list.

The candidates are Stephen Agius, Alan Attard, Paul V. Azzopardi, Joseph Falzon and Robert Suban.

Antonio Piras has been nominated by the second largest shareholder UniCredit. The government nominated Taddeo Scerri as chairman replacing John Cassar

White, who signalled that he would be stepping down, and Anita Mangion, currently a board director at Malta Industrial Parks and the head of business development of IT company Nextec, as director. George Portanier resigned last September and was not replaced. His selection last year was mired in controversy after he was deemed unfit for the post following an internal exercise, but later given the green light by the Joint Supervisory Team.

The directors will be elected at the annual general meeting on December 16.

Maltese president for FECMA Josef Busuttil has been elected president of the Federation of European Credit Management Associations.

FECMA consists of 17 national associations of credit management. Mr Busuttil, the director general of the Malta Association of Credit Management said: “One of the main concerns of people managing businesses in Europe is late payment, despite several initiatives of the European Commission in this regard. It is my intention, as FECMA president, to promote best practices in credit management and to lobby for a better credit environment in Europe. Educating and setting high standards in the field of credit management should result in better cash flow and long-term profit for the European business community.”

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December 1, 2016

STOCK MARKET REVIEW

Will the dollar and the euro reach parity?

One of the most surprising developments across the financial markets in the immediate aftermath of the result of the US election was the sharp movement in the US dollar.

Edward Rizzo In the early hours of November 9, as it became evident that Donald Trump was in the lead, the dollar weakened to $1.13 versus the euro.

However, within a very short time after Hillary Clinton conceded defeat, the dollar began to strengthen once again and ended the day at a level of $1.09.

Last week, the dollar strengthened to $1.05 against the euro.

This is the lowest level for the euro against the dollar since March 2015. Over the past two years the euro has traded within a 17 per cent range from around $1.2569 to $1.0456 against the dollar.

In essence, the sudden movement in the foreign exchange market in November 2016 took place as attention turned towards the main policies of the US President-elect. Trump pledged to cut taxes and deliver a package of infrastructure spending – thereby raising hopes of faster economic growth and potentially higher inflation.

In anticipation of higher levels of inflation and, therefore, a quicker path for interest rate hikes by the US Federal Reserve, the price of US government bonds declined and yields climbed. Meanwhile,

“Investors seem to be switching out of the euro in favour of higher yielding currencies”

although yields across the eurozone also edged higher, the spread between German and US government bonds has widened to more than two per cent – the largest spread since March 1989.

As a result of the yield differential between US Treasuries and German Bunds, the euro has weakened suddenly against the dollar.

In effect, investors seem to be

switching out of the euro in favour of higher yielding currencies such as the dollar and sterling.

Following this sudden turn of events, one of the most popular topics across the international financial media is whether the dollar could strengthen further and reach parity against the euro within the next 12 months. Should this materialise, it would be the first

time since 2002 and it would represent a significant change compared to the level of $1.6038 in July 2008.

Since the result of the US election, the market seems even more convinced that the Federal Reserve will hike interest rates in December and continue to tighten monetary policy during the course of 2017. Recent economic data further supports this stance with

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STOCK MARKET REVIEW

US Dollar per 1 Euro

for the period 31 December 2015 to 28 November 2016 1.16

1.14

1.12

US Dollar

1.10

1.08

Oct-16

Sep-16

Aug-16

Jul-16

Jun-16

May-16

Apr-16

Mar-16

Feb-16

1.04

Jan-16

1.06

Dec-15

unemployment and inflation improving in line with expectations.

Another factor contributing to the weakness of the euro is the increasing political risk in Europe with a number of different political events starting off with the Italian referendum next Sunday. Apart from the Italian referendum, Austria may elect a new right-wing president also on Sunday. More importantly, the ECB is widely expected to maintain its current extremely loose policy stance well into 2017 by either expanding or also extending its QE programme beyond March 2017 at its next meeting on December 8.

The increase in interest rates in the US on the one hand and an extension of the QE programme by the ECB, as well as the heightened political uncertainty across Europe on the other, could easily lead to a continued widening yield spread between the eurozone and the US resulting in further depreciation of the euro versus the dollar.

One investment bank in particular believes that the euro will weaken towards parity in the runup to the French presidential election in late April or early May next year. Another economist at a leading European bank also predicted a 12-month rate of $0.95 for the EUR/USD. Other factors that may currently be overlooked but which may dictate currency movements throughout the course of next year are the repatriation of sizeable US earnings by large US multinational companies as well as possible further bond-buying by the ECB well beyond the current extension likely to be announced on December 8.

So, what are the implications if the euro continues to weaken against the dollar? Investors must take note of this sudden change in the exchange rate since it may have wide implications across various companies within their portfolios.

A stronger dollar makes US exports more expensive which may lead to a decline in revenue and profits across some of the large US exporters. Many of the US multinational companies generate sizeable profits from overseas so a stronger dollar is not generally a positive sign.

By way of example, Apple generates two-thirds of its sales outside the US and therefore a stronger US dollar will impact the company’s profit margins. Simi-

“European companies that export to the US willl find the recent currency movements to be beneficial since sales generated in the US will translate into higher revenues denominated in euros” larly, companies such as Procter & Gamble, which manufactures consumer goods such as Pantene, Gillette and Oral-B generates more than half its sales from outside the US and therefore this company will also suffer. Likewise, clothing companies such as Puma, Nike and Adidas are also negatively impacted since their contracts with Asian suppliers are all denominated in dollars.

Meanwhile, European companies that export to the US will find the recent currency movements to be beneficial since sales generated in the US will translate into higher revenues denominated in euros.

The share prices of some of the larger European car companies such as BMW and Daimler have in fact improved in recent weeks following the weakness in the euro against the dollar.

Investors who do not have any exposure to companies listed on international stock exchanges

and who invest solely on the Exchange have a limited impact to such currency movements. FIMBank, which reports in dollars but incurs significant costs in euro due to its head office based in Malta, is indeed a beneficiary of recent currency movements.

Medserv also benefits from a strengthening dollar against the euro following the purchase of METS earlier this year. The reporting currency of METS is in dollars and this subsidiary is a major contributor to overall group revenues. Another company that is likely to be marginally positively impacted is RS2 Software plc which generates a portion of its revenue in dollars.

Although many financial journalists are mentioning euro/dollar parity as one of the key themes for 2017, some economists argue that since the markets are generally forward-looking, the evident divergence in monetary policy stances

in the eurozone and US may indeed already be factored in. Should this be the case, a partial reversal of the recent upward trend in the dollar may materialise.

These economists claim that if Trump’s declared policies turn out to be milder after he assumes the Presidency on January 20, then investors should expect a readjustment across financial markets with the yield between the German bund and the US Treasury likely to narrow again, leading to a weaker dollar and a stronger euro.

Furthermore, some financial commentators believe the ECB cannot maintain its QE programme at current levels indefinitely – although core inflation in the eurozone is continuing to disappoint central bankers. During the course of next year, the ECB may be compelled to reduce the volume of QE purchases. Such a decision should support the euro going forward.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report. © 2016 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved

Currency movements are more often than not extremely hard to predict as was evident over the past 12 months. In fact, one of the main themes at the end of last year was that the euro would reach parity against the dollar during the course of 2016. This did not materialise as the Federal Reserve was not as aggressive in raising interest rates as initially expected.

Various factors affect currency movements. However, the political developments across Europe in the near-term, as well as in 2017, are likely to largely shape foreign exchange movements in the months ahead. Investors therefore need to be continuously on the lookout for any developments likely to affect the value of currencies and, as a result, the value of their investment portfolios.

Edward Rizzo is a director at Rizzo, Farrugia & Co (Stockbrokers) Ltd.

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BUSINESS UPDATES

Omega: Planet Ocean Deep Black collection In our universe, the earth’s oceans are naturally linked to the moon in our sky. For Omega, the connection can also be found in the latest ceramic collection.

From the Speedmaster Dark Side of the Moon that was first released in 2013, Omega has evolved its ceramic expertise to produce the Seamaster Planet Ocean Deep Black.

Unleash the lease on your balance sheet Jonathan Dingli, director, Advisory Services, KPMG The new accounting standard relating to leases has now been with us for nearly a year. Of particular interest are the words the International Accounting Standards Board (IASB) chose as a heading to its press release announcing the issuance of IFRS 16 on January 13 this year: “IASB shines light on leases by bringing them on to the balance sheet.” The latter part of the heading is very true; lessees will have to bring all leases on balance sheet as the standard comes into force in reporting periods commencing in 2019. I hold my reservations on ‘shines light on’ as, 11 months down the line, there are still some important questions for which lessees are still seeking answers.

In a nutshell, the two lease classifications – finance lease and operating lease – allowed under the extant standard, will be a thing of the past. Instead, a single lease accounting model will be implemented.

Lessees will be recognising a right of use (ROU) asset, denoting the lessee’s right to use a particular asset, and a lease liability representing the obligation to pay future lease payments to the lessor over the lease term.

But I suspect this is no longer news for those who are reading this piece.

Lessees are more preoccupied by the practical implications that the abolition of the operating lease model and the recognition of a new asset and liability on balance sheet will bring. Some still question the measurement of the lease liability. As the lease liability

at inception includes the present value of lease rentals over the lease term, the determination of the lease term is key. It includes, of course, the non-cancellable (di fermo) period, but would also consider optional renewals or termination if the lessee is reasonably certain to avail himself of these options – a judgemental determination in itself.

The pattern of expense recognition in profit or loss may also change significantly. While lessees are used to straight line expense recognition in P/L for their operating leases, the total expense that will be recognised for a similar lease under the new standard will be higher in the earlier years, when interest cost on the liability will be at its highest, and lower in later years. EPS will therefore decrease in earlier years.

Certain financial ratios may be impacted significantly. EBITDA will increase due to the new ‘geography’ of lease expenses – ROU amortisation and interest expense below EBITDA, rather than the ‘old’ lease expense on a straight-line basis above. Total assets will increase due to the new ROU asset recognised and gearing increases due to the increase in lease liabilities.

Other ratios are likely to decrease. Net assets will decrease since each individual lease is a net liability for most of its life as the ROU asset decreases faster than the lease liability. Interest cover and asset turnover are expected to decrease as well.

When the impact of the above is significant, lessees are left with no option but to bring the lease-versus-buy decision back to the drawing board.

This time, the craftsmanship has gone much further.

These four remarkable 45.5mm timepieces are the combination of a GMT model and a diving watch.

The true technical challenge was to produce a diving watch made entirely from ceramic and ensure that it could withstand the pressures of the ocean at a depth of 600m

(60bar). However, the goal has been achieved, and the result is a state-of-the-art creation that stands alone in the industry.

The OMEGA Seamaster Planet Ocean Deep Black will be available from Diamonds International at Portomaso, Valletta and Pjazza Tigne as from January 2017. For more information, please call +356 2203 5201.

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December 1, 2016

BUSINESS UPDATES

Progression and tracer studies by PKF Malta PKF Malta has recently carried out a progression and tracer study on former Mcast students, as part of its Social Corporate Responsibility Framework for this year. To this end PKF collaborated with Mcast in a project that spanned over the last four months and utilised PKF’s in-house expertise from the statistical, economical, mathematical and legal faculties.

The main objective of the tracer study was to determine from an available sample of former Mcast graduates who had succeeded in becoming gainfully employed in fields relative to their chosen area of study and who were engaged in further or higher education.

The target population for this study comprised all students from levels 1 to 6 who left Mcast in July 2015, and considered all Mcast institutes including Gozo. Out of a total population of 870 students, a total of 328 students (163 males, 165 females) provided complete and valid replies, leading to a very satisfactory and representative overall sample size of 37.7 per cent.

Data collection was carried out through telephone-based surveys and online streams, with all responses being treated with the utmost confidence.

The progression study delved into the learning pathways of Mcast students during the past five academic years, namely 2011-2012, 2012-2013, 2013-2014, 2014-2015 and 2015-2016 to check if these are furthering their studies, and if so, within which institution.

The methodology followed a standardisation of available data into predefined classifications. Once standardised, such data was then given various representations, placing an accent on the various aspects tackled such as whether students remained in the same field upon progressing or not, how many students enrolled and exited Mcast in the span of a year and so forth.

For further information or to be become better acquainted with our projects we invite you to kindly contact Marilyn Mifsud on info@pkfmalta.com

THE MTA CHAIRMAN GAVIN GULIA (RIGHT) AND THE CEO PAUL BUGEJA (LEFT) PRESENTING THE CERTIFICATE AND PLAQUE TO ONE OF THE QA RESTAURANTS.

It’s all about quality With almost 150 businesses certified across the Maltese islands, including restaurants, visitor attractions and destination management companies (DMCs), the Malta Tourism Authority Quality Assured (QA) seal is becoming a recognised brand associated with quality in tourism.

The QA seal is a voluntary scheme which was first developed for DMCs and was later extended for visitor attractions and restaurants.

The aim of the QA seal is to encourage best practice and recognise those establishments that consistently deliver a quality product. The criteria are updated regularly and we constantly ensure that any changes to the scheme criteria are in line with current consumer trends and feedback.

All QA-awarded businesses have undergone the necessary process of application, assessment and awarding. The assessment consists of a third-party mystery guest visit for restaurants, an audit for DMCs and an announced visit for attractions. In each case, an independent monitoring committee takes the final decision based on the recommendations following assessment.

To view the quality assured establishments or to find out more we invite you to visit our dedicated website at www.qualityassuredmalta.com. A printed annual guide with all the QA businesses is also available at any of our 11 tourist information offices across the Maltese islands.