New foreign borrowing in Cyprus continued to race ahead in May, rising by 20.8% compared with the same month of the previous year, according to Financial Mirror analysis, to reach CYP 1.4 bln, or 14.8% of total loans.
In the period January-May 2005, foreign borrowing rose year on year by 21.3%, compared with a decline of 3.1% in the same period of 2004.
Foreign borrowing started to climb last June 2004, one month after the full liberalisation of capital flows allowed Cypriot residents to borrow in foreign currency.
From a small rise of 0.4% year on year in June 2004, the rate of growth accelerated to 23.5% in November, a growth rate that has been more or less maintained ever since.
Borrowing in local currency, meanwhile, has slowed to a trickle. In May new local currency borrowing rose by just 2.7%.
Safe as houses?
One of the reasons why residents are finding borrowing in euros attractive is the lower interest rates on euro loans compared with Cyprus.
Banks have been advertising loans in foreign currency to buy property, which is also continuing stoking the property boom.
Borrowers appear to have low aversion to currency risk, not least because the pound has traded close to its central parity rate of EUR 0.585274 per CYP for over a decade. However, within ERM2, the pound is technically able to trade 15% either side of that rate.
The Central Bank of Cypus, partly in a bid to stem foreign borrowing and to reduce the currency risk of borrowers, has slashed interest rates by 125 basis points so far this year, bringing official Cyprus rates down to 1.25% above equivalent rates in the eurozone.
The last two cuts, of 50 basis points each, took place on May 20 and June 10. It may be next month, therefore, before we see how much impact the interest-rate reductions have had on demand for foreign loans.
For data and a chart showing foreign borrowing since January 2004, visit our Research Centre under “Economic analysis and data, GDP”
Deposit base healthy
Meanwhile, the deposit base of the banking system remains robust. At the end of May, local banks had CYP 8.7 bln in resident deposits and a further CYP 4.9 bln in non-resident deposits. International banking units have an additional customer deposit base of CYP 3.7 bln, while the co-operative credit banks have a deposit base of CYP 4.4 bln. The total deposit base of CYP 21.8 bln is therefore around three times the annual value of GDP, which was CYP 7.2 bln in 2004.
Fiona Mullen
