The free flow of goods in import-competing sectors such as agriculture implies unrestricted access for Maltese products to EU markets, while allowing reciprocal access to imported products. This represents both an opportunity and a threat, however, so that it should be met with appropriate restructuring of the sector so as to enable it to face foreign competition. In this regard Malta can obtain considerable market and development assistance from the EU for the agricultural and fishing sector, including for processing activities. As an EU Member State, Malta can also benefit from programmes aimed at promoting industrial restructuring, particularly with regards to SMEs. The freedom of movement of capital which Malta is experiencing as a Member State of the EU has significant implications. For one, it signals to investors that Malta is a developed market economy with a well regulated financial system where financial resources can find profitable employment. This contributes to the development of the sector, including of its intermediation function of transforming savings into productive investment. It also encourages the inflow of capital from abroad. For these same reasons, however, international investors will maintain a close scrutiny of developments in the local economy, and move capital according to their evaluation of prospective risks and returns. Freedom of movement of capital thus implies the need for more vigilance by the Central Bank of Malta not only to protect the exchange rate but also to preserve financial stability.
Chart 1 Outstanding Notional Amounts of Derivatives $ 700  Interest rate contracts Foreign exchange contracts Credit default swaps  600  Equity-linked contracts  500  Commodity contracts Unallocated  400 300 200 100 0  98  99  00  01  02  03  04  05  06  07  Source: BIS. •  The credit default swap (CDS) component has experienced explosive growth. The outstanding value of CDS contracts has surged to more than five times the outstanding principal of global corporate bonds by the end of 2007. Yet only three years’ ago, at end-2004, the CDS market was only some 85% of the size of the corporate bond market. The CDS market is now by far the more liquid market for trading credit risk. •  The outstanding value of commodity derivatives outstanding has risen from around $ billion in 1998 to $ trillion at the end of 2007. •  Options markets have also grown very strongly. For example, the outstanding principal of interest rate options has increased from $ trillion to $ trillion in the past decade. •  Innovation and the removal of barriers to cross-border activity has spurred global capital market integration. For example, turnover in foreign exchange markets has tripled since the BIS survey in 2001. And cross-border asset holdings have outpaced the strong growth in the global stock of financial assets. •  Markets offering investors ready-made portfolios rose very rapidly in advance of the credit crisis.