The Financial Mirror spoke to seven economists and financial analysts who shared their views on Cyprus returning to the investment fold and what the future holds for the country’s economy. Despite the positives, high private and public debt, trade wars, the Cyprus problem and regional instability all pose risks to a brighter investment outlook (Part 1).
Cheaper funding from ECB
Ioannis Tirkides
Economic Research Manager of Bank of Cyprus’ Finance Division
The upgrade of Cyprus’ sovereign rating to investment grade by Standard and Poor’s is a very positive development that comes after considerable effort on the part of the government and the banking sector to restructure and consolidate.
The upgrade reflects a positive growth outlook over the medium term, and the latest developments in relation to the resolution of the Cyprus Cooperative Bank and the sale of a package of non-performing loans by Bank of Cyprus. Fundamentally, the underlying dynamics for both the public debt and the non-performing loans have reversed toward stability.
The upgrade itself reinforces the stabilising dynamics for public debt and non-performing loans. Cyprus banks can now have access to cheaper funding from the European Central Bank and the government can access international debt markets on better terms. These developments will lead to further reductions in interest rates at home both for loans and deposits.
Read more opinions in Part II http://www.financialmirror.com/news-details.php?nid=35892
Cyprus’ standing internationally improves which reinforces its attractiveness as a destination for foreign direct investments.
An improved business climate and rising investments will enhance the economy’s growth potential and improve its resilience.
Disorderly Brexit and Cyprus problem pose risks
Fiona Mullen
Director of Sapienta Economics
In practical terms, it means lower borrowing costs for the government, which should translate into lower costs for the banks and hopefully, if the banks pass it on, lower costs for businesses.
I think it will also be important for the growing Cyprus investment funds sector. Some big international pension funds will only put money in investment-grade countries, so we now have an opportunity to market that status to the rest of the world.
There are two big risks facing Cyprus right now and S&P did not mention either of them, at least not in its press release.
The first is the risk of no-Brexit – meaning Britain crashes out of the EU on 29 March 2019 without any deal at all. We know from the documents published by the European Commission that this literally means planes cannot fly, because there will be no licenses, no legal basis.
So, there would be no tourists from our biggest market, which accounts for one-third of all tourists. You can imagine it would take them a few weeks to put something together to fix this. Based on my calculations I estimate that it could cost Cyprus €820 mln in lost tourism revenue (that is 27% of all tourism revenue) and potentially 12,000 jobs.
The second risk is if the US carries out its threat to veto the renewal of the UN Peacekeeping Force in Cyprus (UNFICYP) and the UN has to leave. No one seems to have noticed the Secretary-General report in July saying that there were 207 military violations in the buffer zone in January-June 2018 and there are more than 2,000 unauthorised civilian activities every year.
Without the UN quietly calming things down, these things are bound to escalate. We could slide back to the bloodshed of 1996 and this would have a massive impact on tourism and the wider economy.
More money to invest in growth
Michalis Antoniou
Director General, Cyprus Employers and Industrialist Federation
We perceive the upgrade as a very important development, signifying the end of an era during which Cyprus did not carry the best of names in order to be able to attract foreign investments. Cyprus is re-joining the list of countries which are considered to be safe destinations for investment.
With this development the government, but also banking institutions will now be able to draw in more funds, paying a lower interest rate.
We know that the government has issued a ten-year bond with much better terms, thus leaving the space to invest in projects which will bring development and growth. This would mean more projects for businesses and more jobs . This could lead to an overall reviving of the economy.
The psychological aspect of the upgrade should also be taken into consideration. Just the fact that our bonds are not classified as “junk” creates prospects and add a dynamic to our efforts. We are now seeing our efforts and sacrifices paying off which gives us even more strength to continue to reach our goals.
Of course, the road is not a bed of roses. We still need to address the issue of the banking system’s NPL portfolios without hyperboles, I must add, in order to do away with the biggest threat facing our economy.
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