Road to Cyprus — a series of articles in the run-up to the 2017 EBRD Annual Meetings in Nicosia
The recent performance of the Cypriot economy has already wrong-footed some international analysts who were pencilling in growth of 1.5% for 2016 little more than 12 months ago. “We have indeed performed better than many economists were expecting, and our internal estimates suggest that growth will reach around 3% in 2016,” says Cyprus’s finance minister, Harris Georgiades. “We expect a similar rate in 2017, but I must emphasise that our objective is to ensure that this is maintained over the medium term.”
The durability of the economic platform that Cyprus has built since its crisis suggests that sustainable growth is well within its grasp. Although much of the recent growth has been driven by a buoyant tourism sector, Georgiades dismisses the suggestion that Cyprus is becoming a mono-economy. “Tourism is doing extremely well, but we know it can do even better,” he says.
“However, growth has essentially been derived from all the key productive sectors of the economy,” Georgiades adds. “Despite the global challenges, the shipping industry is performing strongly. The volume of property transactions is picking up, supporting the recovery of the construction sector, and business services remain strong.”
Perhaps most encouraging, the banking sector is now on a much firmer footing, with non-performing exposures (NPEs) well down on the peaks they reached in early 2015. “The banking sector has been consolidated, and although credit is now cheaper than it has ever been, uncontrolled credit expansion is clearly a thing of the past in Cyprus,” says Georgiades.
More broadly, the prospects for sustainable longer-term growth in Cyprus are buttressed by the government’s commitment to fiscal prudence. “We have achieved a balanced budget, delivering a primary surplus of 2.5%,” says Georgiades. “This is the highest primary surplus of any EU member state for a third consecutive year.”
“Although we have some space in the state budget allowing for limited additional public infrastructure work, we remain committed to a balanced budget and a tight fiscal policy,” he adds. This, he insists, means there will be no changes to fiscal targets over the next 12-24 months, notwithstanding the presidential election due in 2018.
Stronger economic foundations in Cyprus are also being built on rising inflows of foreign investment. “We’re about to license the largest integrated casino resort in Europe, supported by private investors from the US and Hong Kong,” says Georgiades. “Construction work has also started on a new multi-million euro marina project led by an Egyptian group, and new private operators have taken control of the Port of Limassol, so we are seeing rising private investment across a range of sectors.”
Local economists say that attracting an increased inflow of local and overseas private sector investment will be essential if Cyprus is to encourage more industrial diversification. Perhaps more important, private investment is seen as an important means of boosting productivity. This is why Georgiades has been frustrated by the apparent stalemate in the privatisation of Cyrus Telecommunications Authority (CYTA).
“Although we have made good progress in the privatisation of the ports, there has been political hesitation and union resistance to privatisation in the telecoms sector, which I don’t think is justified,” he says. “We see privatisation not primarily as a cash-raising exercise but as an essential component of structural reform which will bring more know-how and technical expertise into the economy.” Georgiades says that he is hopeful that political agreement will be reached on a revised proposal for the sale of a minority stake in CYTA to a private sector investor later this year.
Greater efficiencies in the telecoms sector would certainly be welcomed by the EBRD, which has had a fully-staffed officer in Nicosia since late 2014. The EBRD has already been an important investor in Cyprus, most notably in the banking sector, where it has taken equity stakes in Bank of Cyprus and Hellenic Bank, helping to bring its cumulative investment on the island to €200m between December 2014 and the end of 2016.
Buttressing the financial sector
The EBRD’s stated objective in Cyprus is to strengthen the financial sector and build up resilience and improve governance in the industry; to support the privatisation programme; and to help non-financial companies and SMEs, with an emphasis on investment in the green economy. “The operation of EBRD in Cyprus since 2014 has been extremely supportive of the effort to achieve economic recovery and sustainable growth and especially in the restoration of confidence in the banking sector,” says Georgiades.
Increased investment will also have a critical role to play in underpinning the continued growth that Cyprus will need if it is to chip away at the unemployment rate. “It is true that the labour market remains fragile following the deep recession we have been through,” says Georgiades. “But we are seeing a number of positive indicators, with unemployment down for a second consecutive year in 2016. We ended 2015 with unemployment at 15% and we are expecting the number at the end of 2016 to come in at just above 13%. That is a good reduction, and we expect a combination of labour tax breaks and continued economic growth to bring unemployment down further over the next few years.”
As Georgiades points out, there are two wild cards that may turbo-charge this economic growth over the coming decade, neither of which have been factored into the Finance Ministry’s growth assumptions. While Georgiades says he is confident that newly discovered gas reserves will be a powerful driver of growth and debt reduction, he qualifies this by adding that it is too early to put any numbers on the longer-term impact.
Less certain, he adds, are the prospects for reunification and the longer range economic repercussions this would have for the economy. “Of course we want to reach a deal that will reunify Cyprus in the form of a federation,” he says. “If this is achieved in a manner that creates a business-friendly and competitive environment, it will be another significant boost to our economic prospects. But it is far too early to make any forecasts arising from the impact of reunification*.”
* The prospects for the energy sector and reunification will be explored in later features
This article is the first part of a series of six pieces on Cyprus’s economy in the run-up to the 2017 EBRD Annual Meetings in Nicosia