In terms of potential to attract Foreign Direct Investment, Malta ranked fifth and fourth in the world for 2006 and 2007 respectively according to the 2008 World Investment report issued by the UN Conference on Trade and Development.

In 2007, Malta ranked fourth in the world, coming behind the likes of the Chinese territory of Hong Kong, Bulgaria and Iceland. The Bahamas, Jordan and Singapore followed Malta and to give comparable example, Cyprus came in 18th place.

In 2006, Malta was in fifth place. The report states that Malta registered FDI inflows of e459m in 2005, followed by e1,269m in 2006 and e652m in 2007.

Given Malta’s size, FDI outflows were small with e14m, e0.7m and e13m registered in 2005, 2006 and 2007 respectively.

The report states that the tax policy of several developed countries was made more favourable to foreign investment. In Denmark, the Netherlands, Hungary, Malta and Poland, various corporate tax rates were cut or tax incentives introduced, it said.

Malta’s FDI inflows as a percentage of gross fixed capital formation stood at 58.7 per cent, 150 per cent and 69.3 per cent in 2005, 2006 and 2007. Malta’s inbound FDI stocks as a percentage of Gross Domestic Product stood at 18.9 per cent, 61.3 per cent and 100.7 per cent in 1990, 2000 and 2007 respectively.

The 411-page report mostly focused on the sub-prime, credit-crunch and global economic slowdown, with ample reference throughout. In fact, the report states that the financial crisis did not have much effect in 2007, but will “start to bite” in 2008.

The problems related to sub-prime mortgage lending and their fallout in the United States since the latter half of 2007 have disrupted financial markets, with broad impacts on the United States economy as a whole, the report said.

It said the resultant liquidity problems have extended to some European countries as well. These, along with long-term effects in terms of difficulties and higher costs of obtaining credit, are also affecting FDI flows.

Such effects can be discerned at the micro (or firm) as well as macroeconomic levels. The degree of the impact depends on the extent to which the sub-prime fallout affects lending to the corporate sector and other foreign investors (e.g. private equity funds). In most sectors, transnational corporations (TNCs) have ample liquidity to finance their investments, as shown by the high corporate profits reported, at least until 2007. In the UNCTAD 2008 survey of large TNCs, about one third of respondents envisaged negative impacts on FDI flows in the short term, but about half of them suggested no impacts.

At the macroeconomic level, the economies of developed countries could be affected by the slowdown of the United States economy and its subsequent impact on the most important financial centres, affecting bank liquidity and credit supply. It has led to a decline in issuance of corporate bonds, while credit available for investment has fallen not only in the United States, but also in several European countries. Both FDI inflows and outflows to and from these countries may therefore slow down.

The question is whether such effects are also being experienced in developing economies, in particular those where there is strong and growing demand for FDI. The fact that economic growth of these economies has remained resilient suggests that this may not be the case. Overall, both microeconomic and macroeconomic impacts that might affect the capacity and willingness of firms to invest abroad were limited, at least in 2007.

To date, the financial crisis has mainly affected North American and European commercial and investment banks, whereas the negative effects on the Asian financial system have been fairly limited.

Asian banks, and especially Chinese banks, have gained strength recently. In both 2006 and 2007 three Chinese banks (ICBC, CCB and Bank of China) were among the top seven banks in the world in terms of the value of their market capitalisation. In contrast, many banks in developed countries had to bear substantial losses in the market value of their equity. Banks that were able to ride out the crisis without suffering large losses are seeing an opportunity for (cheap) investment in banks that were severely hit, and the equity prices of which fell sharply, by 40 per cent to 60 per cent. Chinese banks have started to acquire larger stakes in the banking and other financial industries of developed countries.