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The outlook of the Cyprus
economy
First
of all, let me thank the organizers “Invest Cyprus” for hosting this event
and for providing me with the opportunity to present the economic outlook of
the Cyprus economy. In these very demanding and challenging times, the
promotion of our country as an attractive investment destination is a key to
enhancing the recovery and the resilience of our economy.
Let me
also extent my greetings to all participants and to my esteemed fellow
speakers.
Without
doubt, the COVID-19 pandemic has posed unprecedented challenges for all
countries around the globe, with severe socio-economic consequences. In
Cyprus, we implemented bold and strict measures of containment, in order to
effectively protect our citizens and the public health system. To alleviate
the negative economic consequences, the Government responded in a timely
manner, by adopting a comprehensive and generous fiscal support package in
order to assist businesses and prevent, to the extent possible, job
losses. The measures are temporary and include financial support to the
health sector, subsidized wages to keep employees on the payroll in case of
suspended business operations, income support for small businesses and the
self-employed, tax relief measures, as well as targeted support to help the
tourism sector. A series of measures were also taken to support enterprises
by enhancing their liquidity.
The
positive fiscal performance of the last few years prior to the onset of the
pandemic, played a significant role in allowing the Government to respond in
a timely manner and address the negative effects of the pandemic on the
economy, adopting a generous fiscal package without risking the long-term
sustainability of public finances.
As
regards the economic outlook of the economy, following an unavoidable
significant contraction of activity in 2020 which is expected to hover around
-5.5%, a rebound is expected to materialise in 2021, of the magnitude of
around 4.5%. I have to emphasise though that forecasts in such turbulent
times are accompanied with a great level of uncertainty connected to the
pandemic evolution.
In the
labour market, the level of unemployment increased in 2020 given the
recession, but the increase was less than initially anticipated and is
expected to be around 8% of the labour force. With the resumption of economic
activity in 2021, unemployment is expected to start declining again to round
7% of the labour force.
As
regards public finances, there has been a significant deterioration in 2020,
given the slump of economic activity and government revenues, together with
significant increase of public expenditure in order to assist the economy. As
a result, there has been a significant increase of public debt, which
increased to 120% in comparison to 95.5% in 2019, due to additional bond
issuances in order to increase the state’s cash buffers during these
turbulent times. Even though borrowing was the correct approach under the
circumstances, we have set a ceiling for public debt at 120% of GDP, taking
into account that the markets consider it as a benchmark for the sustainability
of public debt. Our policy is to place it on a declining trend as of 2021
onwards, expecting public debt to decline to around 98% of GDP by 2023.
As regards the banking sector,
our goal is to tackle the remaining challenges including “legacy” NPLs, but
also new challenges that may arise due to the pandemic and the repercussions
to the economy. As regards “legacy” NPLs, there has been substantial
reduction up until the latest available data (September 2020) with the ratio
of NPLs to total loans dropping to around 21%, mainly through restructurings,
debt to asset swaps and sale of loans. These figures include the recent
package of NPLs sold by the Bank of Cyprus, in the context of the project
“Helix 2”.
In particular, since the end of
2014, there has been a significant reduction of the NPL ratio by around 78%.
We acknowledge that the ratio of NPLs is still high and in this context the
Government has prepared an action plan to address the remaining stock of non
performing loans. Peak of NPLs was recorded in 2014 at 28 billion euros,
equivalent to 45% of loans. Latest available data of September 2020 indicates
a stock of 6,3 billion euros, equivalent to 20% of loans. In 2021, we
expect a further reduction to be recorded.
Ladies
and Gentlemen,
Despite
the pandemic setback, our policy priorities remain the same, that is
achieving macroeconomic stability, implementing prudent fiscal policies,
ensuring financial stability and establishing a competitive,
business-friendly regulatory environment of high standards.
In
this context, the Government's broader strategy for economic recovery
includes the implementation of much needed structural reforms for the
development of key sectors, fully exploiting newly established European
mechanisms known as “the “Recovery and Resilience Facility”. This instrument,
which will provide a mix of grants and loans to member states, is expected to
be instrumental in the revamping and the resilience of our economy, including
actions related with green and digital economy. We believe that the
additional funds, up to 1.0 billion euro allocated to Cyprus, will be the key
for our economy to become more competitive in the global economic stage. To
this end, we are currently preparing our Recovery and Resilience Plan
following extensive consultation with all involved stakeholders. This Plan,
will basically constitute the blueprint for our growth policies for the next
years, includes a combination of investments and reforms. It takes i nto
account the need to mitigate the economic and social effects of the current
economic crisis and the need to strengthen the resilience and the
competitiveness of the economy, through a new growth model based on green and
digital transition.
In
fact, having a competitive economy is a catalyst for attracting corporations
and investors that are looking for investment destinations which can provide
high returns on their investments. And it goes without saying that in today’s
challenging economic environment, foreign investments are all more important
for the overhaul of our economy.
As
part of a package of incentives to promote the island’s economic recovery,
investors are able to take advantage of a favourable environment towards
investments and a Fast Track Business Activation Mechanism for setting up a
business in Cyprus by third-country nationals, approved by the Cabinet in
September 2020. This framework aims to facilitate businesses to re-locate or
expand in the country, allowing company registration and incorporation to be
completed in seven working days. Moreover, investors and businesses looking
to set up European headquarters in Europe, can enjoy Cyprus’ competitive
advantages, which include transparent and modern legal system, based on
common law, a highly trained workforce of lawyers, accountants and corporate
service providers, excellent telecommunications, transport and logistic
infrastructure and a favourable tax environment. In fact, there are currently
numerous opportunities for investments in Cyprus, including g reenfield real
estate projects in hospitality and tourism, higher education and healthcare.
Ladies
and Gentlemen,
It’s
up to us to modernize our economy and enhance its productive base in
admittedly very difficult economic times.
In
this effort, it is imperative that we work together combining our forces, in
order to restart the Cyprus economy in the post COVID-19 era. I am confident
that we will deliver.
Let me
conclude by wishing you success to this event.
Thank
you.
(MG/ECHR)
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