Gold Magazine January - February 2014, Issue 34 | Seite 53

opinion

No Easy Road to Recovery
The economic outlook for Cyprus in 2014
is pessimistic.

T

he events of last March have
created many problems for
the Cyprus economy, as we
are all painfully aware. The
austerity measures imposed
by the Memorandum of
Understanding (MoU) and
the prolonged loss of confidence in the banking
sector have led to a huge deterioration of macroeconomic and other economic indicators. Unemployment has skyrocketed, surpassing 17% in October 2013. Compare that with a rate of 3.7% in
2008, and the magnitude of the problem is clear.
Real GDP growth is projected to be negative and,
in another recession year, to contract by almost
8%. Recent estimates show that it contracted by
5.7% during the third quarter of 2013 over the
corresponding quarter of 2012. The public debt
was 98.3% of GDP by the third quarter of 2013,
continuing its rising trend since 2008 (when it
was 48.9% of GDP), while the budget deficit is
projected to be close to 6%.
All of the above present – unfortunately – a
very pessimistic outlook for the economy in
2014 but there is no easy route to recovery.
The economy needs to go through a harsh but
necessary adjustment before we see better days.
Thus, we need to continue implementing all the
reform measures outlined in the MoU, i.e. to
restructure the banking sector, to correct fiscal
imbalances and to implement long-standing
structural measures. And we certainly need to
keep our public debt under control and within
sustainable levels or it will be extremely dangerous
for the future prospects of the economy. At the
same time, we need to put measures in place
to compensate for the negative effects of the
MoU and to promote growth following specific
intermediate plans.
What might some of those measures be? For a
start, there must be more emphasis on innovation
and entrepreneurship (we can learn a lot in this
area from our neighbour, Israel). We should also
cut bureaucracy that deters the inflow of foreign
investment. We should diversify into other
areas of employment (can we finally have that
technological park?!). Obviously, we are relying
a lot on the prospects for energy sources such as
natural gas and oil but we should also move fast
with the establishment of casinos that will provide

There must be
more emphasis
on innovation and
entrepreneurship

By
George
Theocharides

substantial and much-needed revenues to the
economy.
The services sector – especially banking – needs
to regain its lost confidence and credibility with
investors/depositors. The commercial banks – and
even the Central Bank of Cyprus (CBC) – need to
improve their corporate governance practices and
there must be greater CBC supervision. Improved
confidence in the system would improve the
liquidity problem and attract foreign investment.
The latest figures show that withdrawals fell to
€47.31 billion in October (compared to €47.47
billion in September).
The second major problem facing the banks
concerns their non-performing loans (NPLs)
which have a serious negative effect on their
liquidity and capital adequacy (recent statistics
show the NPLs for Bank of Cyprus, Hellenic
Bank, and Cooperative Central Bank as 48%,
43.6%, and 40%, respectively!). One way of
tackling this issue is to create a special unit within
the bank that has the necessary expertise in project
financing and can distinguish between viable
and non-viable projects. Those deemed to be
viable should be restructured, either through an
extension of loan repayments or even a gradual
reduction of the interest rate. As for non-viable
ones, the banks should take all the available
measures to recover what they are entitled to,
while protecting the first place of residence. The
biggest obstacle to recovery is finding the necessary
funding. We need to develop alternative forms
of funding, such as specialized funds (UCITS,
Venture Capital Funds, etc.) for which we can
offer administration and even management
services. We should also make better use of EU
structural funds, especially in support of SMEs (a
recent loan agreement between the Government
and the European Investment Bank is a step in
the right direction but more is required).
I expect 2014 to be another difficult year in
which unemployment will continue rising
to almost 20% and real GDP growth will
remain negative at just below 5%. However,
if we implement all of the above measures and
suggestions, receive further upgrades from
the credit rating agencies and attract foreign
investment, then by 2015 we may be able
to return to low, but positive growth and
unemployment will finally start to fall.

info: George Theocharides is Associate Professor of Finance and Director of MSc in Finance & Banking at the Cyprus International Institute of Management (CIIM).

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