Worsening environment squeezes trading margins
Initial results from the Chamber’s 2005 Trading Conditions Survey indicate optimism in some sectors of the economy, though both the retail and wholesale sector take a bleaker view of prospects. The survey was sent out in January as the Chamber wanted to poll its members on conditions across the whole of 2005.

Responses to date have been high and all sectors have been well represented. The response rate so far has been 30 per cent, although some later submissions are expected. It will take some time to analyse all the results but the headline results are already in.

On the business outlook for the next 12 months, respondents were broadly favourable, believing that trading conditions are likely to remain the same or be an improvement on 2005 (see chart). Respondents in the finance sector were most optimistic about the outlook, with bankers being the most bullish about the year ahead. Those in the insurance sector were also pretty positive. The Rock’s property sector is likely to take heart from the optimistic responses from the construction sector. Respondents operating in this sector were split evenly, but believed that the prospects for the year ahead would remain the same as 2005 or see an improvement.

Tough trading for retailers and wholesalers
Views among Gibraltar’s retailers and wholesalers were less cheerful. The survey received responses from many operators across these two sectors. Responses from individual retailers or individual wholesalers have been collated separately from those firms operating in both. What is noticeable among these two interlinked sectors is that the majority of the respondents believe that 2006 will be the same or worse than 2005. We know from anecdotal evidence that last year was a tough one for retailers in Gibraltar. A relatively small proportion – less than a fifth of those retailers responding – thought that this year would be better than last.

This continues a theme from the previous surveys, although the increase in costs on all businesses last year coupled with a worsening trading environment has squeezed margins in these two sectors more than others. Competition in this sector, particularly from across the frontier, means that retailers cannot pass on these cost increases as easily as other sectors.

Longer term outlook
When respondents were asked about how they thought trading would be beyond 2006 there is perhaps greater cause for concern. Retailers and wholesalers are broadly pessimistic about the longer-term prospects for their sector. Only those in the finance sector - bankers and insurance, the construction sector and the legal sector are optimistic about the future of their business. It is notable that the hotel and catering sector sees poorer prospects beyond 2006 and it is perhaps surprising given that hotels have seen occupancy levels continue to rise in recent years.

Private sector raises issues for forum talks
With “substantial progress” continuing to be made in the tripartite talks between Gibraltar, Spain and Britain (the so-called “trilateral forum”), agreement on the shared use of the airport could be reached as early as the end of April.

Through the MoD’s recent decision to increase landing charges by 8 per cent had been as much a surprise to him as it had to the airlines, Trade & Industry Minister Joe Holliday does not think it will affect Spain’s approach to sharing the airport, he told B2B. But it could affect hopes for a greater use of the airport- particularly by the budget airlines, he admitted.

Following the last round of MoD talks with Holliday, the commander of British Forces in Gibraltar Commodore Allan Adair stressed that the airport remained a military base which cost £10 million a year to run.

“We have to recoup some of that money,” he said at the time. “I am not here to run a civilian airport but to run a military airport… People must be aware of this but we will bend over backwards to help the Government of Gibraltar in their plans to increase use.”

If the MoD can be persuaded to reduce its high levels of charges for use of the facility, sharing with Spain eventually could lead to 30 or even 40 flights a day to and from the Rock. Lower landing and take-off charges could also rekindle the interest in the Rock as a destination of low-cost airlines such as EasyJet and Ryanair

Chief Minister Peter Caruana emerged from February talks at Chevening, the British Foreign Minister’s grace and favour country home, in bullish mood. And his optimism is echoed by Trade, Industry and Communications Minister Joe Holliday who told B2B:

“Good progress has been achieved in the trilateral forum on joint use of the airport – as well as other matters…and there’s a long list of things on the agenda – and the Chief Minister is optimistic that agreement on a variety of issues will be reached by the end of April.”

These included telephone numbering and the flow of traffic at the frontier as well as the airport question, and both he and the Chief Minister were “confident that we will see solutions soon.” However, “nothing will be agreed until all is agreed and any set-back on one of these main issues could affect the other issues,” Holliday warned.

“People should also remember that the tripartite forum is not just to resolve the four main issues – the airport, Spanish pensions, telephone numbering and frontier queues – it is an ongoing process and there will be other issues which are laid on the table in the future,” Holliday added.

The private sector in Gibraltar had raised other ideas and issues with him, and some of these were matters which would be addressed by the forum.

When sharing of the use of the airport – over Gibraltar which will still retain control – IS agreed a transitional period will be needed during which facilities would be upgraded to meet the anticipated demand. This would include switching the approach to the frontier and the airport buildings via a road under the airfield at the eastern end, he added.

Sponsors invite local shareholder participation
In the 1960s as Britain divested herself of more and more of her African colonies, the newly independent nations invariably opted for two symbols of their “freedom” – a national flag and a national airline. The flag was an understandable choice…though on at least two occasions (in Zambia and Swaziland) the flags were so unfamiliar to the soldiers handling them that - as the strokes of midnight heralded independence – when the Union Jack was hauled down and the new symbol of nationhood was broken out, it was flown upside down.

There was less justification for the establishment of national airlines and often these were set up as a matter of prestige and the African equivalent of keeping up with the Joneses. The yen for an airline stirred first by Ghana’s Kwame Nkruhma, a succession of new African leaders followed suit. At the independence ceremonies of tiny Swaziland – only a couple of hours drive from major international airports of Johannesburg and Lourenco Marques – a senior cabinet minister acknowledged: “We don’t really need an airline…but we have to have one. Everyone else has…”

For some of the world’s smaller offshore financial centres a bourse or stock exchange seems to fill a slot similar to that of those African airlines – symbol of their standing rather than a necessary arm of their financial services. And, if all goes according to plan, by March next year Gibraltar will have joined the small bourse brigade.

Shareholders called for
Local financial institutions have been invited to become shareholders in GibEX, as the local bourse will be known, joining the scheme’s sponsors – local international lawyers Hassans, the Austrian-based Bank Medici, and the Vienna Stock Exchange. The Vienna Stock Exchange also will provide technical assistance and the know-how drawn from its own experience as a small but successful bourse.

This is not the first time that a local stock exchange has been proposed. But plans put forward by a group of foreign investors a decade or more ago were scuppered when the Bossano government insisted that the building which was to be built to house the exchange and trading floor should also provide low cost housing.

“Can you imagine the impression this would have made on visitors to the bourse… all that washing hanging from window racks and balconies,” a senior figure in the Rock’s finance sector remarked some years ago when he told me about the failed project.

This version of events is probably apocryphal; and a more likely and practical reason for the failure was that a decade ago our finance centre lacked the skills it can offer today; Nor at that stage did we enjoy the right to passport banking, insurance and other financial services into the EU; and our sound international reputation as a jurisdiction better regulated than most had still to be won.

Since the days of brass plate companies our financial services sector has developed and reached a level of mature sophistication that makes feasible the concept outlined at a high-powered breakfast gathering of the Rock’s leading financial players in February.

And the three men and a woman who are in the driving seat hope that the Caruana Government - which has given its blessing to the project - will take a small financial stake in the project, so adding to GibEX’s international credibility, according to former Trade & Industry Minister Peter Montegriffo who is now a senior partner in Hassans.

Government investment?
“EU passporting has transformed the position of Gibraltar and we are now able to curtain-raise the project,” Montegriffo said. And though a handful of the businessmen and financial players - among the hundred or so who tucked into the ham, salami, croissants and tepid coffee – doubted the need for a local bourse, most were enthusiastic and already several have inquired about investment opportunities as possible shareholders, I understand.

Draft legislation providing for the establishment of a local exchange is already in the pipeline and the plan has been given a cautious go-ahead by Government.

Several of the smaller offshore financial centres have established reasonably successful stock exchanges, while both Malta and Cyprus – which, with Gibraltar, form the trio of nations comprising the Chief Minister’s suggested Mediterranean economic “bridge” - have flourishing bourses.

Insurance firms a possible target?
Clearly, success will hinge on the type of business a local exchange can attract. A few local equities seem feasible and GibEX might persuade the gaming companies which have gone public to seek partial listings here. Similarly a local bourse could attract some insurance business – though the international insurance market is already served by the big exchanges and some of the Caribbean operators. A possible niche could be in the field of trusts or funds – particularly high investment trusts which, in most jurisdictions, require less stringent reporting – and some of the smaller bond markets.

Mrs Sonja Kohn, chairman of the Vienna-based Bank Medici - who along with Levy and the bank’s local general manager Moe Cohen have spearheaded the proposal - argues that GibEX could attract listings not only by some of the international firms which already have a presence on the Rock but also companies in China, India and South America which are seeking European investors. It could also encourage some of our bigger firms – a bus company, say, or the communications or utilities players – to seek local listing, according to Montegriffo.

“We believe that Gibraltar is a ‘sleeping beauty’, a sleeping lion with a high potential,” says Mrs. Kohn. And she adds that Gibraltar is “an ideal door to Europe” – something she always stresses when “taking the message of Gibraltar to the Arab emirates and China” …both areas where Bank Medici does extensive business.

There was a global trend to conduct business in Europe, she added and, in the same way that Vienna had formed a bridge between the emergent economies of Eastern and Central Europe and the economic powerhouse of Western Europe, so Gibraltar could act as a bridge to Europe for countries like China and the nations of South America.

“Gibraltar has the opportunity to add a new dimension to financial services all over the world,” Mrs Kohn said.

The proposed participation of the Vienna Stock Exchange and the interest of the Bader Group (currently the biggest market-maker in Germany) along with the backing of Bank Medici and Hassans added weight to the scheme, while the Government’s expression of interest in taking a “small stake” added to its credibility, Montegriffo believes.

Many opportunities?
Stressing that Gibraltar is one of the few major financial centres which does not yet have an exchange, Montegriffo argues that the more sophisticated of our investors and financial services players “need an exchange and facilities for listing.” In the past six months three of the Rock’s major gaming companies have been listed in the UK, but had there been a local exchange they would probably have sought to go public here.

“There are in fact a multitude of opportunities for a plethora of companies to seek a Gibraltar listing,” Montegriffo said. “We are unique in straddling both on-shore and off-shore business” and GibEX would be “strategically placed to pick up work from both sides”. Gibraltar already had a track record of handling debt instruments; and there would be the need for “mezzanine finance” among e-com companies.

External reviews are a bit like one’s in-laws – always welcome…but you just wish they didn’t visit so often.” The words are those of local Financial Services Commissioner Marcus Killick, and he is referring to this month’s visit to Gibraltar by a team from the International Monetary Fund who from March 1st - 17th checked our financial regulatory system. In the process their efforts will have cost the FSC hundreds of man-hours which many believe could be better spent on the real work of the Commission – particularly as they covered ground that they and others have already combed.

This month’s checks followed an IMF review carried out less than five years ago at the invitation of the Gibraltar Government and which – after what was then one of the most rigorous the international body had conducted into a finance-dominated jurisdiction – not only gave the Rock’s regulatory structures a clean bill of health but also lauded it as being in the forefront of best practice.

And an equally comprehensive review was carried out by the Pratt Commission whose report was similarly favourable, while many of the recommendations it contained have been implemented or are in the process of being taken on board by Government and the FSC.

When the Pratt review – appointed by the Governor Sir Francis Richards – was announced, it was welcomed by Killick who said at the time: “We constantly look at ways to improve our regulatory approach. Therefore we have welcomed and continue to welcome independent reviews of the way in which the Commission performs its task and the recommendations they bring. We would not be operating an equitable regime if we conducted on-site inspections of our regulated firms, yet were unwilling to undergo such inspections ourselves.”

In fact this pursuit of transparency and a determination to submit the FSC to the scrutiny of its “stakeholders” (as the Commissioner likes to describe Gibraltar’s voters and financial sector players) has been a hallmark of Killick’s tenure at the helm of the FSC.

But as the Rock’s financial community faces a growing number of Euro-Directives, pressures to tighten KYC (“know your customer”) procedures and the snow-storm of additional paperwork these involve, he also accepts that there is a danger of over-regulation. And though Killick is too practiced a diplomat to criticize the IMF – and particularly on the eve of a visit, I suspect that he shares at least some of the views of the Governor of the Bank of England, Mervyn King.

Those who work closely with King point out that for some time he has regarded the IMF’s annual meetings as little more than talking shops which gloss over the real issues and problems facing the world economy. But in February he aired them publicly for the first time – a clear sign that he believes the basics of the international economic system are not working, or – as he described it – that “the invisible hand of international capital markets has not successfully coordinated monetary and exchange rate policies”.

For too long the IMF has glossed over the growing imbalances that have developed between the world’s economies. While countries such as the US and UK have built up massive levels of domestic debt and current account deficits, the IMF “has spent more time harassing developing countries to reform their economies.”

It’s a situation to which Killick alludes in an article in the current issue of Offshore Investment. He also points to the cost in man-hours and effective working of some demand of organisations such as the International Monetary Fund when that body dons its supervisory hat.

The sharp sense of humour and a wit - at times verging on the mordant – which distinguish Killick as a public speaker are used to good effect in the article. It takes the form of an imaginary conversation between Killick and Rodrigo de Rato, the managing director of the IMF.

“I got a phone call recently from the Managing Director of the IMF”, the article begins.. “ ‘Marcus’ he said, ‘we have been assessing all the work that the IMF, Financial Stability Forum and others have been doing on offshore financial centres,’

‘As you know we had been worried that offshore centres were the sinkholes of depravity, non-cooperative, full of money launderers, badly regulated, lousy corporate governance etc. We therefore wanted to sort them out. Obviously we needed to establish the truth though, hence the decision by the IMF board to follow the recommendation of the FSF and establish a programme to assess all offshore finance centres.’

Still talking in the dream-world guise of De Rato, Killick points out that this has been going on for nearly five years during which time the IMF has visited “pretty much every offshore centre” being extremely thorough and carrying out specific analyses, with on-site teams carrying out a Module 2 assessment or one under the Financial Sector Assessment Program or FSAP. (The FSAP is the one the IMF uses to check the economies of onshore jurisdictions.)

“We’ve checked them against banking standards, insurance standards, investment standards, even their anti-money laundering systems. To ensure transparency we have even persuaded virtually everyone to publish the results of our visits…’ Killick imagines De Rato to say.

“What we found was that many of the larger centres we visited are actually pretty well run, they comply with the major international standards. Sure they have some weaknesses and areas they should improve, but so does practically every finance centre. Indeed in the last report I got from my Monetary and Financial Systems Department it said that compliance with standards in OFCs was, on average, better than in other jurisdictions assessed under the FSAP.”

“So, what’s your problem Rodrigo?” I replied, “Seems to be that you can chalk this one up as a job well done. Keep an eye on the basket cases, provide technical assistance where needed, write a report saying how much things have improved since you got involved. Quick bit of mutual back slapping, talk about the world being a kinder, better place as a result of your work and move on.”

And against this background, Killick advances the not-so-tongue-in-cheek suggestion that the IMF’s decision to carry out a second round of visits could be a waste of time and cash.

“But why another round?” Killick asks. “Do you realise the amount of work it takes to prepare for one of your visits, the amount of regulators’ time used up during the visit itself and in responding to the numerous drafts that come out before the report is finalised. You visit some pretty small jurisdictions; don’t you think their time might be better spent actually regulating? After all you have reported that supervisory deficiencies were most frequently found to result from inadequate resources and skills and your visits soak up resources”

“Hang on, we have stated that during the second round of assessments, priority will be given to assessing (1) progress in addressing weaknesses identified in the first round of assessments; (2) relevant areas not previously assessed; and (3) cooperation and information sharing arrangements. Surely that is perfectly reasonable and focused?” De Rato replies in Killick’s dream.

“On the face of it yes, but you are still effectively undertaking a complete reassessment rather than just an update,” Killick tells him. “You may be prioritising these areas you mention but you are still covering a number of the areas you covered last time. Is such a wide ranging on site inspection really the best use of your and our resources?

“Please don’t get me wrong, we all support the IMF in what it is trying to achieve, better global cooperation and less systemic risk are in all our interests, I am just not sure you are doing it in the most efficient way for either you or us”

“But you forget, participation in the programme is voluntary, a jurisdiction can always choose not to participate if it feels we are wasting their time,” says De Rato.

“It depends on your definition of voluntary. A failure to participate for whatever the reasons is bound to have reputational consequences as people would believe the jurisdiction has something to hide. I also note that the FSF have stated that OFCs will be incentivised to participate in the second assessment process by the fact that participation itself draws attention to their willingness to co-operate. I had always thought that the level of cooperation was assessed in respect of assistance between jurisdictions on such matters as money laundering and regulatory issues, not that we were to be judged by our level of cooperation with an assessment process.”

“But Marcus, there are still worries; poor regulation in an offshore finance centre might cause problems for the rest of the financial world. Offshore is seen by some as a home for scandal.”

“Hang on; look at the evidence of the last five years, virtually every scandal so far this millennium has been onshore. Enron, Worldcom, Parmalat, and now Refco to name but a few. These have shown deficiencies in onshore supervision, accounting or corporate governance, not offshore.”

Similarly the money laundering problems exposed have been almost exclusively onshore ones, Killick points out. In fact the most recent US Department of State International Narcotics Control Strategy Report recognises that money laundering concerns are global, and includes France, Italy, Spain, the UK and USA in its list of “jurisdictions of primary concern”. The only EU nations not listed as being of concern but are simply being monitored are Denmark, Estonia, Finland, Lithuania, Malta and Slovenia ”

The fact that some of the onshore scandals had offshore elements is understandable for we live in a globalised financial world, Killick points out. And everyone is concerned about systemic risk because the failure in one jurisdiction can affect many others.

“But just because subsidiaries in an offshore jurisdiction were being abused to hide losses off balance sheet, does not divert the fact that the actual fraudsters were operating onshore, under onshore scrutiny. To claim this as an offshore problem would be a bit like blaming the Swiss if a fraudster used a Mont Blanc pen to sign his dodgy cheques.”