Overview 28 February 2019
- Political analysis and outlook. There has been modest progress on issues relating to the Cyprus problem, probably owing to pressure from the UN Security Council. However, there are signs that a fundamental re-think of settlement design is under way, with ideas ranging from a decentralized federation, to two separate states within the EU, possibly combined with a “step by step” approach to reunification.
- Structural reforms and natural gas. ExxonMobil’s discovery of an estimated 5 to 8 tcf of natural gas in Block 10 is reasonably large but not enough to be a game-changer in the region. Meanwhile, Turkey’s foreign minister has said that Turkey still intends to drill close to Cyprus. Parliament is due to vote on a narrowed down version of the hydrocarbons fund law. The government has made changes to the citizenship by investment scheme after criticism from abroad. The new GESY healthcare system will start on time but will have teething problems.
- Fiscal performance and forecast. Cyprus has issued its first-ever 15-year international bond, of €1bn at a yield of 2.758%, and will use the proceeds to repay older debt. Available data suggest that there was a budget surplus in January. We expect new social insurance and healthcare payments will boost revenue in the short term. In northern Cyprus, a number of initiatives are under way to modernize the electricity production and supply system.
- Banking sector. Bank of Cyprus has found a resolution to the “Helix” deal to sell €2.8bn in mainly non-performing loans. It will comfortably meet regulatory capital requirements. Hellenic Bank’s €150m capital increase to fund its acquisition of the most of “good” part of the Cyprus Cooperative Bank (CCB) is due to be completed on 18 March. Data show that new loans have been declining.
- Macroeconomic trends and forecast. Fourth-quarter figures suggest an annual real GDP growth rate of 3.9% in 2018. External demand seems to be behind the uptick in the fourth quarter, as other sectors have been slowing and inflation may have been eating away at real earnings. The current-account deficit narrowed in January-September and foreign real estate investment rose. Northern Cyprus inflation picked up again in January.