Filenews 1 May 2022
By Panicos Charalambous*
With the war in Ukraine entering the third month and its impact on the world economy increasing, especially when we are witnessing new negative developments every day (e.g. closing gas valves to Poland - Bulgaria), the Cypriot economy cannot be an exception. But how much will it be affected in the end? What is the cost in gross domestic product? How deep will the Cypriot taxpayer feel in his pocket? Personally, I will not try to answer the above questions, but I will try to quote data and convey to the reader some pieces of a very large puzzle, which can hardly be assembled.
The first fact
Where things are directly measurable is tourism. As I have mentioned in a recent article, 800 to 900,000 will be lost this year - arrivals of tourists (up to 800,000 from Russia and 100,000 from Ukraine), with a parallel loss of revenue of about € 550 million. Factors in the tourism industry are raising the indices more, noting that they also expect indirect losses of an additional 100,000 tourists from other countries, due to the economic impact on local communities. At the same time, they refer to reduced revenues due to two factors: a) the increased operating costs of hotel units and accommodation and b) the reduced prices on the packages they offer, in order to secure customers from other tourist markets.
The positive in the case of tourism is that there will be increased arrivals from the UK, Germany, France, the Scandinavian countries and the Arab countries. However, what remains as a question mark is whether these arrivals will fill the gap from Russia and Ukraine in order for 2022 to be better tourist than 2021, both in arrivals and in revenue. We see...
Second fact
The second thing that can be taken for granted is imported as well as domestic inflation. Already, since the third quarter of last year, there have been significant increases in consumer goods and fuels, which are already significantly affecting the incomes of Cypriot households. Fuel prices are up by about 30% and according to international analysts oil prices in international markets are expected to move around $100 a barrel in 2022.
According to the Statistical Service, the Consumer Price Index in March 2022 increased by 1.94 points to 107.78 points, compared to 105.84 points in February 2022. Inflation in March 2022 rose at a rate of 7.1%. The largest changes in the economic categories, compared to March 2021, were recorded in Electricity with a percentage of 31.9%, in Petroleum products with a percentage of 27.3%, and in Agricultural Products with a percentage of 18.2%.
Third fact
There will also be a negative impact on the construction sector, at least as far as luxury real estate is concerned. This particular subsector of construction ha,s in recent year,s been oriented towards the Russian market. As the vice-chairman of the board of directors of Cybarco, Marios E. Lanitis, said in a recent interview with "F", "without being able to estimate the true magnitude and end of this conflict, it will definitely affect us. We estimate that the Russian market has been lost for the foreseeable future, perhaps for the next two years." Mr. Lanitis also mentioned that there is a stock in the market that is designed for the Russian market, adding that, "it is different to address an English or Russian or German customer".
However, the internal market also faces a problem, mainly because of the increased cost of building materials. The price problem that was recorded due to the pandemic now, due to the Ukrainian one, has worsened. According to the Statistical Service, the Index of Prices of Construction Materials for the month of March 2022 stood at 125.65 points, recording an increase of 2.22%, compared to the previous month. Compared to the same month last year, the index recorded an increase of 19.08%. By main product category, increases were recorded in metal products (31.60%), wood, insulation, chemical and plastic products (20.87%), electromechanical items (14.79%), minerals (7.38%) and mineral products (6.68%).
Banking sector
The banking sector does not seem to be directly affected by the crisis in Ukraine, as after 2013 a gradual de-dependence on Russia began. The Central Bank has announced that it is monitoring the developments and that "the necessary preventive measures have been taken in order to limit any impact on the Cypriot financial system".
At the same time, KT notes that, thanks to the efforts of recent years, the Cypriot banking sector now has an increased capacity to absorb any shocks. As stated, "capital adequacy levels, as assessed through the Common Equity Tier 1 Ratio, stood at 17.2% in September 2021, strengthening the ability of the domestic banking sector to absorb unexpected losses and continue providing financing to the real economy"."
A similar assurance was given by the President of the European Central Bank, Christine Lagarde. "Cyprus has the potential to cope with the effects of the current global economic crisis caused by the war in Ukraine," Ms Lagarde said during her visit to Cyprus on March 30th.
A typical announcement by the Bank of Cyprus is also characteristic. In it he noted that he "has no banking activities in Russia or Ukraine." Also that it "has no exposure to Russian bonds or Russian banks subject to sanctions" and that it "has limited direct exposure to loans involving Russia, Ukraine and Belarus, amounting to about 0.4% of total assets or about 1% of total net loans."
But there is a risk to the banking system
It should be noted, however, that there is a risk to the banking system. And he comes both from within and from the outside. Internally it concerns the general impact on the economy of the crisis and, by extension, of economic activity. This can mean reduced revenues and profits and at the same time a possible increase in non-performing loans. External risks relate mainly to revenues and entitlements from the international banking sector.
Explanation of the following tables:
Stock exchange by country in Euros
The columns with years - the first two relate to Externally, and the last two to Internally in Cyprus
The first column shows - Europe, America, Africa, Australia and immediate area, Asia and Unallocated.
Then selected countries - UK, Germany Luxembourg, Greece, The Netherlands, Russia
The second table - Deposits in the Financial System - all December, with the last two being January 2022 and February 2022, with the first column down Cyprus, Europe, Third Countries, then Total
The question of Foreign Direct Investments
One of the key questions of the crisis is the effects, indirect and direct, of foreign investment, inward and outward. Cyprus, according to the data, is among the countries with the highest Foreign Direct Investments to and from Russia. And these come mainly from Russians who maintain economic relations with Cyprus. According to data from the Central Bank of Cyprus, the stock of Foreign Direct Investments from Cyprus to the Russian Federation in 2019 amounted to €142,997.3 million. and from Russia to Cyprus at €105,340.3 million. However, as UNCTAD (UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT) observes, Cyprus should not be considered one of the countries with the really highest investments in the Russian Federation.
According to UNCTAD, between 30% and 50% of FDI pass through so-called "pipeline" countries. It is added that neither Cyprus, nor the Netherlands, nor Bermuda were the largest foreign investors in Russia. The amounts of investment listed as having a source in these countries are considered to actually come from Russian businessmen who have chosen to operate through third countries, UNCTAD says.
The impact on GDP
According to a recent report by the International Monetary Fund (IMF), despite the decline in its exposure to Russia, Cyprus remains "extremely vulnerable" to the economic fallout from the war in Ukraine. The IMF forecasts growth to slow to 2% in 2022 from 5.5% in 2021, mainly reflecting the impact of the war and sanctions on exports of services and the negative trade shock from higher energy and food prices.
* Journalist
