Posts by Sapienta Economics

01 Aug 2019 Cyprus macroeconomic highlights 2012-18

2012: back into recession. The year in which Cyprus slipped back into its second recession since 1974 (the first was in 2009), as the financial crisis loomed. Real GDP shrank by 2.9% as tourism slowed, retail sales contracted and construction collapsed. The government’s budget deficit was running at an alarming 5.6% of GDP and Laiki bank ran into severe liquidity problems as deposits fled. 2013: crisis. The year of the banking crisis, the unprecedented bail-in followed by the international bail-out, in which every key sector of the economy, with the exception of the communications and information sector, declined. However, the first signs of the Cyprus economy’s resilience were also evident: predictions that the economy would shrink by more than 10% were not realized. Nonetheless, real GDP declined by 5.8% in 2013—the worst performance since 1975—the unemployment rate soared to 15.9% and youth unemployment peaked at just under 41%. 2014: The first signs of stabilization. Tourism and manufacturing were the first sectors to start recovering from the crisis. Tourism arrivals rose by 1.5% in 2014, having declined in 2013 as international media attention at the height of the crisis probably deterred tourists. Manufacturing grew by 2.4%, thanks largely to an upturn in the manufacture of pharmaceuticals, and Bank of Cyprus raised €1bn in private-sector capital. Not including the troika-funded €1.5bn recapitalization of the co-operative bank, the general government budget was almost in balance, recording a deficit of 0.2% of GDP, and Cyprus returned to the capital market in June. 2015: The return to growth. Just two years after the crisis, Cyprus recorded real GDP growth of 2%, thanks to a strong year for tourism, a broader recovery for manufacturing including halloumi, positive growth in the legal and accounting professions, and a milder contraction in construction. The unemployment rate fell for the first time since 2007, but at 14.9%, was still high. Public finances continued to improve and the government issued its first 10-year bond since 2004. 2016: The peak of the recovery. A return of consumer confidence helped by falling unemployment, record tourism arrivals and a construction sector expanding at double-digit rates, thanks largely to the citizenship for investment scheme. Real GDP growth peaked at 4.8%, its fastest pace of growth since 2007, just before the global financial crisis. 2017: Growth continues at a fairly rapid pace. All sectors grew apart from financial services and agriculture. Construction growth peaked at 27.5% and tourism enjoyed another record year. NPLs started to drop consistently for the first time, albeit at a gradual pace. Real GDP grew by 4.5% and unemployment dropped to 11.1%. 2018: Legacy bank issues come to the fore. GDP finally reaches its pre-crisis levels in absolute terms and growth begins to slow, to 3.8%. EU regulations forced parliament to address weaknesses in framework for addressing non-performing loans, ultimately leading to the closure of the co-op and the absorption by the state of €7bn in bad loans, or around 40% of the total. The move pleased credit rating agencies and Cyprus was returned investment grade in the fourth quarter of the year You are welcome to use or translate this article as long as you cite the source as Sapienta Economics Ltd and provide a link to this article. For a more in-depth analysis of the Cyprus economy, fiscal stability, the Cyprus problem and natural gas, check out Country Analysis...

Read More

04 Jun 2019 Our latest Cyprus analysis

In our latest Sapienta Country Analysis Cyprus authored by @FionaMullenCY we update our debt forecast and analyze ability to service debt in the short to medium term. We analyze Bank of Cyprus’ latest results, including trends in net interest and non-interest income. We take a closer look at Hellenic’s latest shareholding structure. We analyze the latest macroeconomic data to assess the direction the economy is heading. We look at the Republic of Cyprus’ challenges in preventing Turkey’s natural gas drilling, as well as its impact on the prospects of a solution of the Cyprus problem. We look at Cyprus’ latest gas export and import plans and the new National Health Service (GESY). We analyze politics and economy of northern Cyprus and assess how the weak Turkish lira is affecting the Turkish Cypriot economy. We are convinced that no other organization can match the breadth and depth of our on-the-ground, independent analysis of Cyprus. Sapienta Country Analysis Cyprus subscribers include big oil/gas, banks, hedge funds, embassies, international institutions, big four accounting firms and others. To join our growing list of prestigious subscribers check us out...

Read More

11 Mar 2018 Can a Cyprus solution fix the bank NPL problem?

This is the English version the article published in Greek in Politis on Sunday 11 March 2018.  If you read between the lines of what Danièle Nouy, the Chair of the Supervisory Board of the European Central Bank (ECB), said during her visit in February, the banks have only a short period in which to take major steps to fix their €21 billion problem with non-performing loans (NPLs). The European Commission is currently examining the proposed ESTIA programme, that is designed to help pay off some of the loans, but it is not yet clear if it will pass state aid rules. Even if it does, it is expected to handle only €1 billion of bad loans. Other drastic measures will need to be taken. Fears about what those might entail have already led to a small bank run in January. Yet there might be a simple solution to the NPL problem that would relieve borrowers of their bad debts without killing bank balance sheets. It lies in a federal settlement of the Cyprus problem. Below I explain how it might work. There are currently around 188,000 hectares of private Greek Cypriot property in northern Cyprus and approximately 330,000 hectares of Greek Cypriot private property in the south (plus another 52,000 hectares of Turkish Cypriot private property). In 2012, the Land Registry valued the Greek Cypriot private property in the south for tax purposes at €150 billion. From this figure, we can infer that the medium- to long-term value of Greek Cypriot property in the north (meaning after it is operating in a normal market) is €85 billion. Earlier studies by the University of Cyprus put the value, based on a different methodology, at €65bn for the period 2009-11. In the latest round of negotiations, there were hints that the property settlement will be carried out on the basis of the “one-third” rule: one-third reinstated, one-third exchanged for Turkish Cypriot property in the south or for alternative property, and one-third compensated. This means that, with a federal settlement of the Cyprus problem, Greek Cypriots will be getting back, either directly via reinstatement, or indirectly via exchange, around 125,000 hectares. Inferring from the Land Registration valuations above, there will suddenly be around €55 billion in property collateral that did not exist before.   Up to €23 billion in available assets How much of this €55 billion will be held by borrowers in arrears? The banks probably have this answer, but as a rough guide, I refer to two statistics. First, research carried out by Djordje Stefanovic (Saint Mary’s University, Canada), Charis Psaltis (University of Cyprus) and Neophytos Loizides (University of Kent) in 2016 showed that, while 19.8% of the adult population had been personally displaced in 1974, a much larger proportion of 51.52% had been either “displaced themselves or through origin or through property ownership”. In other words, half of all adults probably have property in the north. The second statistic is that 52% of all households have bad debts. So at a rough guess, maybe around half of the property that will be returning, or around €23 billion, is owned by borrowers in arrears. This amount is already larger than the total NPLs in the banking system. Borrowers in trouble could be offered the option of using some of that property to conduct what is termed “debt-for-asset swaps”—just as many large companies have recently been doing. Alternatively, since borrowers would now have a larger stock of assets (property), they could keep the land that has been returned to them and swap other property instead. Whichever way it works, it...

Read More

17 December 2017 Addressing Cyprus’ international reputation

This article first appeared in the print edition of Phileleftheros on Sunday 17 December 2017 Addressing Cyprus’ international reputation By Lefteris Adilinis and Fiona Mullen This year has not been a good one for anyone involved in trying to improve Cyprus’ international reputation for probity. International media outlets have zoned in on the relationships of various personalities with Russian business, and more often than not have found a link with Cyprus. Moreover, they continue to describe Cyprus in unsavoury terms. Just to give the most prominent examples, the description of Cyprus by the New York Times, when writing about the Russian links of the former vice-chairman of Bank of Cyprus, Wilbur Ross, was that it is “long regarded as a favorite financial haven of wealthy Russians”. Similarly, the US-based The Atlantic said Cyprus “was a favoured destination as a tax haven”, when writing about the financial activities of the former campaign manager of the US president, Donald Trump, adding that Manafort had “laundered money through shell companies and foreign bank accounts in Cyprus”. Bloomberg said that “Passports for sale lure rich Russians” and said Cyprus was a place where Russians are “hiring sham employees for the investment vehicles they set up on the island”. Only as recently as October, the Financial Times called Cyprus “a popular tax haven favoured by Russian oligarchs and businesses”. It is not just the English-language press. Investigations into suspected Russian interference in the presidential election of France and into a former Austrian finance minister on corruption charges also found a financial trail through Cyprus. Last but not least, of course, the activities of the de facto second in command at the Legal Services of the Republic have also drawn the world’s attention.   The public and business are concerned Cypriots are also concerned about probity. A survey of Cypriot residents (93% of whom were Cypriots), published by Eurobarometer on 11 December, gave Cyprus the (joint) second highest corruption score with Spain. Only Greece was considered to be more corrupt. In the Eurobarometer survey, 57% of respondents said that the problem of corruption is “very widespread” in Cyprus, compared with an EU average of just 26%. Another 37% respondents in Cyprus thought it was “fairly widespread”, compared with an EU average of 42%. The total (very/fairly widespread) was therefore 68% in the EU and an astonishing 94% for Cyprus. Cyprus was among only five countries that scored more than 90% for corruption. The others were Greece (96%), Spain (94%), Croatia (92%), Lithuania (92%) and Portugal (92%). In another blow, Cyprus came bottom of the class of the Eurobarometer survey when people were asked whether corruption has deteriorated. Some 68% of respondents said corruption had worsened, compared with 63% in Greece (the second worst score). Businesses are also worried. In the World Economic Forum Global Competitiveness Index, corruption climbed from the 11th most “problematic factor” for doing business in 2006-07 to the second most problematic factor in 2016-17. It did improve in the most recent 2017-18 report, however, as other issues, such as red tape, infrastructure and access to financing, overtook corruption as primary concerns. The score for judicial independence has also been worsening. In the Global Competitiveness Report it dropped from a peak score of 5.5 in 2010-11, when it was ranked 22nd best in the world, to 4.7 in 2017-18, when it was ranked 40th.   Frustrated professionals Accountants, bankers and lawyers working in the professional services sectors are understandably frustrated by the international press coverage and the public opinion surveys. After all, they have spent the best part of the past four years...

Read More

02 Sep 2017 The Turkish Cypriot property dilemma

If my hunch is right, then Turkey’s ‘Plan B’ after the collapse of talks in early July to solve the Cyprus problem involves four key steps. The first two are to offer permanent residence to the Maronites in their traditional villages and to open up Varosha to its original inhabitants (under whose control seems to be still under discussion). The third step would be to speed up compensation for Greek Cypriot dispossessed owners in the Immovable Property Commission (IPC), while a fourth step could conceivably be to offer other displaced Greek Cypriots to be able to reside in northern Cyprus permanently. These four steps would remove much of the litigation risk faced by Turkey, thus ‘normalizing’ the permanent partition of the island. Speeding up compensation payments at the IPC is not straightforward, however. So far, Turkey has paid £238.6 million (it pays in sterling) in compensation for 1,028 cases. However, payments have slowed down because the Turkish Cypriot administration reportedly spent the money from Turkey on 13th salaries instead of on the IPC. Turkey is now pushing for other ways to fund the compensation. The primary idea is that those who obtain ‘clean title’ to the properties they are currently using, should pay. In my view, this is perfectly justifiable, since ‘Greek titles’ in northern Cyprus are sold at a discount to ‘Turkish titles’. This is because the market recognises that there is a legal impediment, even if the Turkish Cypriot authorities treat both titles the same. As soon as the current user obtains clean title, therefore, the value of the property will rise. It seems only fair that those who benefit should pay the difference, rather than Turkish taxpayers. This is, of course, politically unpopular for two reasons. First, it seems that many mainland Turks who came in the 1980s received this property for free, and second, because Turkish Cypriots probably received more property in the north in than they had left in the south. There are 1.4 million donums of private Greek Cypriot property in the north, compared with only 0.4 million donums of Turkish Cypriot property in the south. Even if there is an agreement that the current user should pay, the IPC also needs a considerable increase in resources if it is to compensate every single Greek Cypriot dispossessed owner. To date, the IPC has only concluded cases on 30,572,567 square metres (22,849 donums). That is just 1.6% of the 1.4 million donums of Greek Cypriot private property in the north. Even if you take the most productive year (2015) in which the IPC concluded 2.4 million square metres of cases, I calculate that it would take the IPC over 400 years to process every single square metre of Greek Cypriot private land in northern Cyprus. If there is indeed a ‘Plan B’, therefore, it is going to take years to roll out. That leaves a very small opportunity for those who still want a federal solution to keep trying. By Fiona Mullen, Director, Sapienta Economics...

Read More