09 Oct 2016 Enigmas in Cyprus’ global rankings

In 2015, the Cyprus economy clambered out of recession, the long-awaited foreclosure law was finally passed and the government submitted its proposals for public-sector reform to the Attorney-General. The start-up scene has also been busy, with initiative such as the IDEA programme sponsored by Bank of Cyprus and Chrysalis Leap.

Yet somehow this was not enough to change business perceptions which form an important part of the Global Competitiveness rankings of the World Economic Forum (WEF).

Cyprus’ score dropped just 0.23 points to 4.0 from 4.23 in the previous year, but this was enough to knock it down 25 places in the global rankings to 83 in 2016-17, from 58 in 2015-16.

Cyprus scored worse in pretty much every category, from the quality of institutions to the state of the financial market.

A large part of the rankings comes from an annual survey of senior executives carried out in April each year. According to the rules, 75% of the executives must be the same each year.

Somehow they were more depressed about the general situation in April 2016 than in April 2015, despite the fact that Cyprus had just exited the bailout programme, they had lived a full year without capital controls and the economy had returned to growth.

This underlines the problems of surveys that rely on perceptions. More public officials have been prosecuted or jailed for corruption since the crisis than at any previous time. This is ultimately good for governance, but it also raises publicity for the crimes, which in turn could be affecting executives’ perceptions.

There is a lot of research these days about how our brains automatically give greater weight to more recent information (the ‘availability heuristic’).


Macroeconomy worse?

More puzzlingly still, Cyprus’ absolute score was worse for the macroeconomy than in the previous year. The macroeconomic indicators are based on actual outcomes rather than perceptions.

Here the information provided seems to be false. Assuming that the data refer to the most recent full year, the WEF reports that there was an increase in the general government budget deficit in 2015. However, this is not the case.

The deficit for the latest rankings is reported at 1.7% of GDP. The actual outturn in 2015 was only 1% according to Eurostat data, and was zero if you exclude the €175m bailout of the cooperatives.

In the previous year, the WEF reports the deficit at 0.1% of GDP. The actual outturn was a huge deficit of 8.9% of GDP according to Eurostat. This is because the Eurostat definition includes the €1.5bn bailout of the cooperatives in that year, which was financed with troika funds. The budget deficit in 2015 was a smaller deficit of just 0.3% if you exclude the cooperatives.

Whichever way you look at it, however, the fiscal balance was better in 2015 (the most previous full year) than in 2014, yet the WEF rankings say the opposite was the case.

Another anomaly is that the country credit rating was also given a worse score in the 2016-17 report than in the 2015-16 one. This is just plain false. Cyprus was upgraded by all three ratings agencies in the second half of 2015, so there was plenty of time to update the score for this year.

That is not to say that Cyprus does not suffer from competitiveness issues. It does. Productive investment has shrunk dramatically and the economy is at risk of using the same old trick of concrete-pouring, via the cash for passports scheme, to get it out of an immediate hole.

At the same time, however, issues that are plain false need to be looked at. Moreover, as Kemal Baykalli also notes in his comment this week, whether they are true or false, business perceptions matter and this affects investment decisions.

The only path for both government and parliament is to keep on reforming and for businesses to keep on innovating.