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By George Theocharides
Five years have nearly passed since the banking crisis of March 2013 and we are getting close now to the next presidential elections. This is a good time, I believe, to step back and review the economic management of the last five years. What is the current state of the economy and how much progress has been made during this time?
The truth is that the government inherited a very difficult situation that was almost impossible to manage – a country in recession, with a very high level of unemployment, fiscal imbalances, a rising public debt level, prohibitive interest rates to borrow from financial markets, extremely high private debt level, and a banking system in ruins with huge losses for depositors and shareholders. All these have painted a very negative picture for the prospects of our economy. So, how did things progress in the last five years and where do we stand now?
On the macroeconomic front, the statistics look much healthier and this is due to a large extent to the prudent and sound economic policy followed by the government.
Since 2015, we have positive growth rates which are projected to be in the region of 2.5-3% for the next few years. Unemployment is declining steadily and from a level of 16% in 2013, is now down to 11% (May 2017). In terms of fiscal balances, we moved from large deficits to small surpluses with a primary surplus of around 2% expected for the next few years (Moody’s report) which can help lower the public debt. We also had a number of upgrades by the rating agencies since 2013 and we are now one notch below investment-grade category for S&P (BB+), three from Moody’s (Ba3), and three from Fitch (BB-). These upgrades have brought multiple benefits to the economy, a major one being the lowering of the government interest rates to levels below 3%, signaling the confidence placed by international financial markets to the local economy (compare this to a level of 16% five years ago!).
A cause of concern, though, remains the high level of public debt (at EUR 19.3 bln or 107.8% of GDP for 2016) that has slightly increased in the last few years and is higher than the Eurozone or EU average (89.2% and 83.5%, respectively).
Another major concern is the high level of private debt (estimated to be close to 300% of GDP for non-financial companies and households). Of course this was a problem that was created many years ago with banks accepting large deposits (mainly foreign money) prior to the crisis and providing these funds out to companies and households as loans. This practice led to a bubble in the real estate sector at the time with the well known results.
The problem still exists as companies and households were faced with substantial loss of revenues due to the crisis, plus there was the major loss of deposits. The high level of private debt led to the rise of the non-performing loans (NPLs) to extremely high levels (around 50% of the total loan portfolio of the banking sector). This is by far the most important problem faced by our economy, although this level is gradually dropping through the many efforts exerted by the banks (still above 40% though). In my opinion, our lawmakers, political parties, independent government authorities, as well as labour unions need to understand that they should work with the banks and help them address this major problem, rather than putting major obstacles in their way (as were the recent cases at Hellenic Bank and the Co-operative Central Bank). Solving or at least alleviating this problem will be a major boost for the economy.
In terms of structural reforms (privatisation, public sector reforms, etc.), I believe the intention and the effort was there by the current government and its officials; however, they did not have the necessary support by the rest of the political parties (apart from the National Health System). I think part of the blame for this outcome though should go to the Troika as well for not pressing enough on these issues (in a similar way that they did for the other pillars of their programme).
Overall, I would rate highly the economic management of the last five years. Could things have been better for us? Have mistakes been made? Certainly, but we should not forget the situation and problems we faced back in March 2013.
Dr George Theocharides is Associate Professor of Finance at the Cyprus International Institute of Management (CIIM) and Director of the MSc in Financial Services. www.ciim.ac.cy
