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Cyprus focuses on new FDI push

By GlobalMarkets
02 May 2017

While the recent performance of the Cypriot economy has been impressive, local economists say that the prospects for longer-term growth and job creation would be enhanced if the island can address the problem of its notoriously low productivity.

Road to Cyprus — a series of articles in the run-up to the 2017 EBRD Annual Meetings in Nicosia
FDI is funding the redevelopment of the historic port city of Famagusta into a modern eco-city

The historical data on pan-Cypriot productivity speaks for itself. According to a report published in 2014 by the Peace Research Institute Oslo (PRIO), growth in total factor productivity has been “only barely positive” in the economy of the GCC (Greek Cypriot Community).

“The ability of the Cypriot communities to catch up with the European average in a way that will be sustainable is under threat unless attention is given to the poor use of existing resources,” says PRIO. “These results are particularly worrying if they are compared with OECD countries. Although TFP varies in the OECD, it is consistently positive and can be as high as 1%.” By contrast, the PRIO report notes that total factor productivity (TFP) in the GCC economy reached a tepid 0.008% between 2005 and 2012.

In order to address the perennial problem of weak productivity, says Ioannis Tirkides, chief economist at the Bank of Cyprus, it is essential that Cyprus attracts more private sector investment — the lion’s share of which will inevitably need to come from overseas. Historically, Tirkides adds, Cyprus’s track record on attracting inward investment has been poor. This, he says, has at least in part been a reflection of investors’ unease about the security situation in Cyprus and in the broader region. In part, however, it has also reflected the government’s hesitancy about encouraging inward investment, and popular opposition to an acceleration in the privatisation programme.

Today, the environment for FDI is improving, for several reasons. First, the solidity of the economic recovery in Cyprus has not been lost on influential observers such as the ratings agencies. In March, for example, Standard & Poor’s upgraded Cyprus to within touching distance of investment grade, forecasting economic growth of 2.7% in 2017 and just under 2.5% in 2018-2020.

Second, productive talks on reunification are reducing misgivings about security on the island and encouraging investors to study the potential of infrastructure and other investment opportunities in Cyprus. “Reunification would certainly give a big boost to foreign investment in Cyprus,” says Marios Tannousis, deputy director general of the Cyprus Investment Promotion Agency. “Some companies are already making enquiries about the opportunities that will arise from a possible settlement.”

As an example of the opportunities for investment that would be prized open by a resolution to the Cyprus problem, Tannousis points to the Famagusta project for renovating the port city into a modern eco-city. Estimates on the total investment required to undo 40 years of neglect in Famagusta vary, but Tannousis says that initial forecasts suggest at least €8bn will be needed to overhaul its infrastructure.

Privatisation progress

A third encouraging pointer towards the prospects for foreign investment in Cyprus is the partial success of the privatisation programme. The sale of a minority stake in the telecoms operator, CYTA, has met with stiff political opposition. But the 25 year agreement signed recently between the government and DP World to operate the multipurpose terminal at the Port of Limassol is seen as a positive indicator of international investors’ long term confidence in the Cypriot economy.

Already, says Tannousis, there is plenty of evidence to suggest that investors have regained confidence in Cyprus’s economy, with the country recording a 9.1% increase in FDI inflows in 2016. “Cyprus achieved a quick and solid economic recovery, and recorded a positive and robust economic growth rate in 2016, which is expected to remain steady for the next years leading up to 2021,” he says.

Tannousis says that an encouraging feature of the recent FDI inflows is that it has been across a well-diversified range of sectors. “Investment in the banking industry has reached over €2bn since 2014,” he says. “Over the same period, assets under management in the investment funds sector have increased threefold from €1bn to €3bn. This trend is expected to continue, given the attractions of Cyprus as a destination for the domiciliation and management of investment funds, together with the further enhancement of the relevant legal and regulatory framework.”

Among other sectors, Tannousis says that tourism and real estate have been beneficiaries of substantial inflows of investment, with new prospects arising from the completion of strategic large scale projects, such as the first luxury casino resort, and marinas in a number of cities.

“Energy as well as shipping certainly represent two of the key sectors attracting international interest, while the diversification of investment flows is expected to expand even further in areas such as ICT, education and medical tourism,” says Tannousis, adding that filming is another sector where CIPA believes Cyprus may have a competitive edge. “Given that Cyprus offers a unique combination of mountains and beaches, the island is like a big, readymade studio for film producers,” he says.

Tannousis adds that newly-introduced tax incentives have recently given strong impetus to start-ups and innovation. So too has the introduction of a new visa scheme, allowing non-EU entrepreneurs with a start-up capital of at least €50,000 to achieve tax residence in Cyprus. Under this initiative, 150 visas will be made available to eligible investors able to demonstrate that they can make a positive contribution to job creation and economic growth.

More broadly, Tannousis highlights Cyprus’s business-friendly, robust and transparent regulatory, legal and tax regime. The island was ranked 45th in the 2017 World Bank Doing Business Index, ahead of Italy, Mexico and Malta, and was singled out in the same report as one of the economies that had simplified its tax payment regime.

This article is the fifth part of a series of six pieces on Cyprus’s economy in the run-up to the 2017 EBRD Annual Meetings in Nicosia.

Click here for part one 

Cypriot economy surprises on the upside February 22, 2017

Click here for part two 

Cyprus — building bridges, not walls March 7, 2017

Click here for part three 

Cyprus’s game-changer: the Mighty Aphrodite March 27 2017

Click here for part four 

Cyprus eyes golden future for tourism industry April 10 2017 

Click here for part five — Accelerating the recovery in Cyprus’s banking sector March 19 2017

By GlobalMarkets
02 May 2017