Malta, Libya's Neighbor, Is Bouncing Back

The island of Malta is having a rocky spring, as the conflict in nearby Libya has hurt Maltese companies that invested in the North African state. The five-star, 300-room Tripoli hotel owned by Malta's International Hotel Investments, for example, now caters to a few dozen reporters. "The instability doesn't help," says Finance Minister Tonio Fenech.

Yet Malta is well-positioned to weather the turbulence. Its economy grew 3.7 percent last year—the fastest rate in the euro region, which it joined in 2008. The International Monetary Fund is predicting gross domestic product will grow 2.5 percent in 2011, more than the 1.6 percent predicted in the euro zone. In the capital of Valletta, tourists still fill the cafes that line the waterfront beneath stone bastions.

Officials now have visions of turning Malta into a gateway between the Arab world and Europe. Malta's low-tax, no-red-tape approach to foreign investment appeals to both regions. Fareed Abdulrahman, a businessman from the United Arab Emirates, is completing Smart City Malta, a high-tech business park that will include Cisco Systems (CSCO) and Hewlett-Packard (HPQ) as tenants. The project's initial cost is $300 million, the largest outside investment the island has ever seen.

The government's most ambitious plan is to double the size of financial services to 25 percent of GDP within two years. One attraction is commercial rents, 80 percent cheaper than London's. Malta also hopes to lure money managers with a 15 percent top tax rate. After 164 years of British rule that ended in 1964, English remains an official language. Residents also speak Maltese, derived from Italian, Sicilian, Arabic, and English.

In 2009, with global markets melting down, financial services in Malta still expanded more than 20 percent, and growth returned to precrisis levels of 30 percent last year. "I think Malta has had a good crisis in that there hasn't been one," says Alan Richards, chief executive officer of HSBC Bank Malta (HBC). "The banks are very well capitalized, very liquid. There hasn't been a housing crisis, banking crisis, or a sovereign bond crisis." Deutsche Bank (DB), one of the newest arrivals, gained a license in December to serve as a fund custodian. It's positioning itself to profit from European Union legislation on "passporting"—granting money managers with funds in one EU country semi-automatic approval to market products across the region.

Malta's small size—the main island is 95 square miles—helps. Says Kenneth Farrugia, chief officer of Valletta Fund Services, "We have foreigners coming here, they can meet their lawyers, meet their service providers, and possibly play a game of golf in a single day."

The bottom line: A bright spot on the edge of the Libyan war zone, Malta offers low costs and a strategic location for investors.

    Before it's here, it's on the Bloomberg Terminal.