Gold Magazine December 2013 - January 2014, Issue 33

Is the country so resilient or is there worse still to come? There are arguments on both sides Even the rapid rise in unemployment points to few structural impediments to business. And the absence of social unrest suggests that the unions are far weaker than we thought they were. Individuals also appear to be adapting fast. It is only anecdotal but the man who prints my business cards says that he has been busy since April doing PR material for people who have been laid off and are setting up their own businesses. A second likely reason is stores of hidden wealth abroad. This is partly the by-product of armed conflict at home and the love affair with tertiary education abroad. But money abroad is also a perverse consequence of older capital controls, the last of which were only lifted upon EU entry in May 2004. A third possible reason relates to the deposit base and what Alex Michaelides has called Cyprus’ “social capital”. Although overall deposits in the banking system are still €16 billion less than overall loans, when it comes to domestic resident households, this is not the case. Total domestic resident household deposits were €23.1 billion in October, compared with domestic resident household loans of €21.8 billion (and falling). The depositors are unlikely to be the same as the borrowers, but they may well be from the same extended families, who may also be guarantors. The fact that these loans have been declining may be an indication that careful grandparents are bailing out not-so-careful grandchildren. Businesses are not in such good shape, however. The €17.8 billion gap between deposits and loans of domestic resident nonfinancial corporations suggests that we can expect many more business closures. This brings us to the arguments that the worst is yet to come. First, Bank of Cyprus cannot survive unless it aggressively pursues non-performing loans. This will inevitably lead to the insolvency of some household names, negatively affecting business and consumer sentiment. Second, early retirement or lay-offs in the well-paid banking and the public sector are not yet over. Given the economic uncertainty (and perhaps the need to bail out grandchildren), those leaving their jobs are likely to save, rather than spend, their severance payments, with a further downward impact on private consumption (some two-thirds of GDP). Third, the government will take another big swipe at spending next year. Since government consumption accounts for 20% of GDP, this will have a significant negative impact on economic performance. All of this will be taking place against a backdrop of businesses being unable to obtain new credit and capital controls that still prevent healthier banks from attracting new customers and, therefore, expanding their business. This is why my forecasts continue to say that next year will be worse than this year. But every month I am less and less sure. Maybe thousands of years of invasions have made the Cypriots way more resilient than anyone, including me, has given them credit for. The Cypriots do make a big noise when they are pushed around. But then they get up, dust themselves off, give a finger to the foreigner and get on with their business. comprehensive, concise and up to date analysis of the politics, policy and economy of Cyprus. www.sapientaeconomics.com the international investment, finance & professional services magazine of cyprus Gold 43

Gold Magazine December 2013 - January 2014, Issue 33 | Page 43