Download Managing the Cyprus Economy towards sustainable growth

Managing the Cyprus Economy
towards sustainable growth
Praxoula Antoniadou-Kyriacou
Minister of Commerce, Industry & Tourism, Cyprus
London School of Economics
Friday, 10 February 2012
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Structure of Cyprus economy
before the financial crisis
• A small open economy
• with services sectors
acquiring greater importance over time
• At earlier stages, overdependence on tourism
• Later, overemphasis on financial sector
• Construction a main growth sector all along
• shipping gaining growing importance
• Heavy dependence on imports of oil, burdening
the current account, inflation and the environment
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Way crisis affected
the Cyprus economy
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No initial exposure to toxic instruments
Fall in external demand for goods & services
Tourism initially dropped (2008-09)
Fall in FDI -purchases of 2nd homes
Adversely affecting construction sector
Gradually feeding in on Domestic demand
Drop in real growth
Gradual increase of Unemployment
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Tight credit conditions
• SMEs turned to banks for financing to
wither the crisis
• Unfortunately money remained tight
at this crucial initial stage,
where accommodation of requirements
could have made a difference
• At a time when the ECB was lowering interest
rates and pouring liquidity into the system
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Bank Liquidity
• Banks which were loaded with liquidity
turned to investment abroad
• And to those sovereign bond instruments
which bore the highest return
• Hence exposure of part of the domestic
banking system to Greek debt increased.
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Cyprus
Macroeconomic Profile
2007 2008
2009 2010 2011
GDP real growth %
5,1
3,6
-1,9
1,1
GDP-PPS -% EU27
92
99
100
99
Inflation %
2,2
4,4
0,2
2,5
3,5
3,7
5,3
6,2
9,3
11,8
15,6
10,7
9,9
10-11
3,5
0,9
-6,1
-5,3
-6,0
48,9
58,5
60,8 67-68
Unemployment %
Current Account
deficit %
Fiscal balance %
Fiscal Debt %
+ve
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Way out of Recession
• Cyprus at the border of a world of recession with
a world of rapid growth
• Hence E possibility to return to sustained
+ve growth more quickly than rest of Europe
• Capitalise on pockets of increasing external
demand
• Encourage domestic demand
• Plan responsibly the way of building the new
Long Term,
• incorporating prospects created in Energy
sector but maintaining diversification at the same
time, ie keeping focus of other sectors where we
also have a competitive advantage
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Energy
novel opportunity
• Medium term benefits: building of
infrastructure
• Long term benefits:
revenue from sales of hydrocarbons
• Short Term: Investors flowing in to position
themselves at the beginning of the new
era for Cyprus & the area
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Long Term Benefits (continued)
• Revenue from exports of hydrocarbons
benefiting current account and GDP
• Use of natural gas initially in electricity
production
• Reducing CO2 emissions
• Causing costs & prices to fall –increase in
competitiveness
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Human Capital
• Education system needs to develop &
broaden to encompass skills and fields of
study that will enable a greater proportion
of the local population to partake in
economic activity in new sectors
• Strengthening of domestic labour force
• Avoid brain drain and retain youth in the
country
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In meantime
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Fiscal discipline is not sufficient
In the ST to MT need to create & sustain growth
Some personal suggestions
Combined tourist destination –Eastern
Mediterranean
Reduce capital gains tax on property sales
Reduce liquidity ratio on resident bank deposits
Enhance air & sea communications with rest of
world
Move on implementing digital agenda
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Enhancing energy security of
Europe
• At a time when Europe is actively seeking
for new sources of natural gas
• After shift in energy mix
• And as a bridging solution until
renewables can assume a significant
share of energy generation
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Challenge ahead
• Policy making by visionary leaders should
concentrate on utilising new variable
(energy) in the equation of the Eastern
Mediterranean in a way that will contribute
to the sustainable attainment of peaceful,
productive economic cooperation that will
benefit both the peoples of the area as
well as those of our wider European
family.
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