Cyprus can weather financial storm clouds

3 mins read

Cyprus is heading into an uncertain 2023, but economists argue the economy can remain resilient, as it has proven in the past.

In comments to the Financial Mirror, economist Marios Soupashis said that while high inflation, high interest rates and global risks will persist, Cyprus has its challenges to face, such as the Presidential Elections with all the repercussions associated with it.

“Many adverse consequences of the past year will be spilling over into 2023.

“The new Covid outbreak in China, coupled with China’s zero Covid tolerance policy, is still indicating supply chain disruptions,” said Soupashis.

He added the war in Ukraine and sanctions on Russia have increased challenges to the smooth functioning of global trade.

“Consequently, inflation spiked globally, leading to decisive interest rate hikes from all the major Central Banks”.

Soupashis noted that despite the tough obstacles faced last year, the Cypriot economy has successfully weathered most of the challenges faced.

“In February, Presidential elections will take place.

“Irrespective of the political outcome, the new government should pay special attention to fiscal policy and public debt.

“The first concern should be the public debt, estimated to exceed 105% of GDP.

“Although there has been a steep drop since 2020 when the index was at 115%, it is important that the Republic of Cyprus maintains the existing levels and/or reduces them”.

He added that the affordability of borrowing (lending rate) in the Cypriot economy (in relation to income) is expected at 4% at the end of 2023.

Soupashis said the second factor concerns the fiscal deficit, which recorded “tremendous improvement” during the last two years (-5.8% GDP in 2020 and -1.7% in 2021), while a surplus of 1.2% is expected for the past year.

“After the elections, fiscal discipline will be put under the microscope of the rating agencies, as it proved to be the island’s Achilles’ Heel the last time its economy was downgraded to junk.

“The rise in interest rates, coupled with rising household/government debt costs, household income still at the same levels, high energy costs, are major causes of concern”.

Tax changes

He expects some changes in indirect taxation this year.

“This can prove a critical development as it will impact professional services and foreign investments.

“Professional services are adapting to the new situation, while new financial products, such as investment and hedge funds, are showing growth, keeping the positive momentum.

However, as Soupashis noted, adverse developments in the Crypto-industry and the enhanced scrutiny and supervision from CySEC on existing investment firms are showing signs of fatigue.

“Overall, it should be of utmost importance for the Cypriot economy, which relies heavily on Professional Services, to maintain its competitiveness and positive trend.

“The incentives given for companies to relocate have come at a good time, and there are concrete examples of large companies choosing Cyprus for their operations.

“This has helped other sectors of the economy, such as construction and real estate.

“Moreover, the technology sector and gradually the innovation sector demonstrated significant growth over the past year, while prospects for the new year remain bright”.

Economist Stelios Platis said Cyprus still has a lot of work to clear its name from the stain left by the dubious golden passport scheme to regain foreign investor trust.

“For me, the biggest danger is our country’s bad reputation internationally.

“This prevents us from being able to use our comparative advantages.

“Especially at this time with so many negative developments globally.”

He explained that Cyprus would need to take cautious steps to place itself back on the map as an investment destination.

“Inflation and the increased cost of money will affect the development plans of the private sector.”

He argued that the cost of refinancing maturing government loans is expected to be higher in 2023, “which will certainly impact the fiscal deficit”.

“Increased social inequalities and the unequal effects of the increase in the cost of living may cause problems both in the diffusion and implementation of fiscal policies, but mainly in the smooth functioning of the labour market”.

Platis said the island is not among the EU states that are feeling the brunt of the consequences of the war in Ukraine and sanctions on Russia.

“When it comes to bond yields, states directly affected by the war and sanctions on energy appear to have taken most of the heat.

“The yield curve of most EU member states, with Germany prominent, signal the markets’ expectations for a recession in Europe.”

He explained that this element is important, as a big slice of Cyprus’ tourism is from Germany.

“This being said, the bond yield indices reveal that the market’s expectations for the performance of the Cypriot economy are not as ominous as for other EU states.”

Platis said Cyprus needs to maintain a stable political environment, as rating agencies and the markets have turned their spotlight on the presidential vote.

“Stability is important.

“They will examine whether the new president has the necessary support from parliament to push reforms and steer the economy through the volatile conditions internationally.

“The rating agencies, when analysing a state’s creditworthiness, usually evaluate the political environment, the economic strength in general and the prospects, and the solvency of public finances.

Platis explained that markets and rating agencies would be interested to see a president who can pass and implement reforms but also readjust the course of the economy amid fluid international conditions.

“A prudent and modern fiscal policy is required.

“Markets are particularly tough at such times.

“A fiscal policy that supports the part of society that is affected but also dares to tax where there are significant profits and make savings and cuts.

“Unfortunately, this was not the case with the state budget of the all-important 2023.

“It would seem that whoever of the three main candidates wins will have difficulty forming a majority in the House to pass major reforms.

“This is possibly a first for a Cyprus president.”