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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...

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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...

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28 February 2019 Executive Summary Sapienta Country Analysis Cyprus

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...

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30 November 2018 Executive Summary Sapienta Country Analysis Cyprus

The following is a shortened version of the executive summary in the subscription product. Contact us for a free trial. POLITICAL ANALYSIS AND OUTLOOK: There are few indications that negotiations to solve the Cyprus problem will resume in the coming weeks or months. Questions are being raised about any form of settlement that involves power-sharing and incentives to get started are weak. Early natural gas drilling results could change dynamics but we believe that some Greek Cypriot players may want to bolster geopolitical partnerships first before coming to any deals. STRUCTURAL REFORMS AND NATURAL GAS: Preliminary results of Exxon’s first well in Block 10 could be known in the first few days of January and Turkey still intends to drill in the Republic of Cyprus Exclusive Economic Zone (EEZ). Political agreements have reportedly been made on the East Med pipeline, although costs and schedules are highly ambitious. Private hospitals and doctors continue to raise concerns about the forthcoming National Health System (GESY). FISCAL PERFORMANCE AND FORECAST: Cyprus will undergo another EU in-depth review in 2019, partly owing to the impact on statistics of special purpose entities (SPEs), but we expect the outcome to show an improvement relative to 2018. Revenue growth remains high but has been slowing. The debt/GDP ratio should drop back below 100% of GDP in 2019. BANKING SECTOR: Bank of Cyprus reported a small profit in the third quarter and does not appear to need any equity capital in the short term. The bank expects to see a significant reduction in non-performing exposures (NPEs) after the Helix loan-sale is finalized. Parliamentarians are pushing for state support for even performing loans, which could prevent an increase in already high housing NPEs. Non-performing loans (NPLs) in the Turkish Cypriot banking system remain low but continue to rise in absolute terms. MACROECONOMIC TRENDS AND FORECAST: Real GDP slowed slightly in the third quarter partly owing to tourism and retail sales. The current-account deficit narrowed in January-June largely owing to strong re-exports, while available data suggest that foreign direct investment in real estate rose in the same period. We have kept our real GDP forecast unchanged at 3.8% in 2018 and 2.6% in 2019. The weak lira has hit tourism and inflation in northern Cyprus. For more information about Sapienta Country Analysis Cyprus and a sample visit...

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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...

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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...

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