Download Cyprus Economy Update for 2015

Economics Alert
27 April 2015
Cyprus Economy Update
All of the capital
controls imposed on
Cyprus’ banking
system during the
financial crisis of 2013
have been lifted as of
6 April 2015.
KPMG
Angelos Gregoriades
Chairman
Demetris Vakis
Board Member
Costas Markides
Board Member
Tassos Yiasemides
Board Member
Cyprus economy 2014 fiscal overview
GDP for the year 2014 is provisionally estimated at €17.506,3 mln at
current prices compared to €18.118,9 mln in 2013 and €15.007,6 mln
at constant 2005 prices (chain linking method) compared to €15.353,9
mln in 2013. The growth rate in real terms is estimated at -2,3% in
2014, compared to -5,4% in 2013. The rate of contraction is less than
that expected by creditors (International Monetary Fund, European
Commission and European Central Bank), who estimated that total
recession for the year would reach 4,5%.
The public sector balance for 2014, excluding the equity injection to
restore the capital base of the Cooperative Central Bank (€1,5 billion)
registered a deficit of €43,5 mln, which corresponds to 0,2% of GDP,
much less that the initial projections of the creditors. In 2013 the
Cyprus economy recorded a fiscal deficit of 5,4%.
Excluding the recapitalisation amount, total expenditure decreased by
5,4% (€7.096,6 mln) while total revenue increased by 6,7% (€7.053,1
mln) as compared to 2013 (Source: CYSTAT).
Cyprus’ adjustment programme
The adoption of the insolvency framework by the House of
Representatives and the implementation of the law on foreclosures on
the 17th April has put Cyprus back on track with its adjustment
programme.
Georgia Mouskou
Advisor ΙΙ
The implementation of these laws was a prerequisite of the Troika,
which is expected to return to Cyprus this week to proceed with the
completion of the fifth review of the country’s economic adjustment
programme.
Moreover, following the completion of the review of the country’s
economic adjustment programme, Cyprus will be eligible for the ECB’s
quantitative easing programme. This, together with the reduction in the
yields of Cyprus Government bonds will give the opportunity to the
country to issue public debt in the international markets at lower
cost (Source: www.stockwatch.com.cy).
Cyprus bonds reach a five year low
Following the adoption of the insolvency framework by the House of
Representatives and the implementation of the law on foreclosures,
the yields on the Cypriot bonds have reached a five year low.
According to latest available data, the yield on the Cypriot 10-year
bond (maturing in 2020) in the secondary markets fell below 3,60%.
This decline is connected to the expectation that, following a positive
assessment of the Troika, the Cypriot bonds can participate in the
European Central Bank's quantitative easing programme (Source:
www.stockwatch.com.cy).
Fitch announcement in relation to Cyprus
Fitch Ratings has said it no longer assumes that Cyprus will use the
entire €10 billion of its international bail-out package from two years
ago.
The credit rating agency said that it has affirmed Cyprus’s long-term
foreign and local currency Issuer Default Ratings (IDRs) at ‘B-’ with a
positive outlook. The issue ratings on Cyprus’ senior unsecured foreign
and local currency bonds have also been affirmed at ‘B-’. The Country
Ceiling has been raised to ‘BB-’ from ‘B’ and the short-term foreign
currency IDR has been affirmed at ‘B’.
“The general government debt to GDP ratio is expected to peak at just
over 110% in 2015 and 2016 and will ease to around 90.7% by 2022.
Fitch no longer assumes the full EUR10bn financial envelope of the
EU-IMF programme will be used. The strong budget performance
implies the buffers in the programme have grown close to EUR3bn
(17% of GDP). The underlying trend for public finances has been
positive. The fiscal deficit in 2014 was 0,2% of GDP (8,8% of GDP
including the one-off capital injections to the co-operative sector)
compared with Fitch’s forecast of 3,3% in October. The overperformance reflects a combination of higher tax revenues and lower
than expected expenditure across most items. Fitch expects the fiscal
deficits to average 0,8% from 2015 to 2018”.
However, it also stated that the risks to EU-IMF programme
implementation remain elevated and that there is a significant risk that
privatisation plans required under the programme will not be fully
implemented, leading to further delays to programme reviews.
Fitch also noted that non-performing loans (NPLs) in the banking
sector reached an “exceptionally high” 50%.The removal of the
remaining capital controls in April has led to the Country Ceiling being
raised by three notches to ‘BB-’.
Fitch said Cyprus is among the most vulnerable eurozone sovereigns
to a disorderly Greek exit, as a country still in the midst of a post-crisis
adjustment. Direct linkages between the two economies have been
reduced in recent years and are not large, however, the impact on
depositor and investor confidence is harder to gauge, it said.
It added that economic conditions in Cyprus remain challenging and
the output is projected to decline by 0,8% in 2015, the fourth
consecutive year of contraction.
“The passing of the insolvency law through parliament on 18 April
should trigger the activation of the foreclosure law and pave the way
for further official funding. The law should strengthen the foreclosure
framework and address the high banking NPL problem” the rating
agency stated.
Fitch assumed that there will be no material escalation in
developments between Russia and Ukraine that would lead to a
significant external shock to the Cypriot economy, noting that tourism
from Russia has been rising and Russians account for a sizeable
share of foreign deposits in banks (Source: www.cna.org.cy).
Increase in tourism arrivals
On the basis of the results of the Passengers Survey, the arrivals of
tourists in Cyprus reached 97.479 in March 2015 compared to 77.533
in March 2014, recording an increase of 25,7%. An increase of 35,5%
was recorded in tourist arrivals from the United Kingdom (from 30.368
in March 2014 to 41.149 in March 2015), 50,0% increase from Greece
(from 7.038 to 10.557 this year) and 14,6% increase from Germany
(from 6.496 to 7.443 this year).
For the first quarter of 2015 the arrivals of tourists totaled 189.988
compared to 163.446 in the corresponding period of 2014, recording
an increase of 16,2%. (Source: CYSTAT).
Total property sales
According to the data published by the Cyprus Department of Lands
and Surveys, property sales in Cyprus have been increasing during the
first three months of 2015 compared to the corresponding period in
2014.
The number of deeds of sale for all property types deposited at Land
Registry offices across Cyprus were 1.098 in March 2015, compared
to 948 contracts deposited during the same period in 2014
(increase 16%).
During the first quarter of 2015, 22,8% of total buyers (representing
250 deeds of sale) were non-Cypriots (Source: Cyprus Department of
Lands and Surveys).
Agreement between Cyprus and Egypt on cooperation in
the field of oil and gas
In February 2015, an important agreement was reached between
Cyprus and Egypt that enhances cooperation in the field of oil and gas
and, in particular, in the development and exploitation of the Cypriot
‘Aphrodite’ gas field in block 12 of Cyprus’ Exclusive Economic Zone,
utilising existing gas infrastructure in Egypt for the mutual benefit of the
two countries.
The signed Memorandum of Understanding authorizes the Egyptian
Natural Gas Holding Company (EGAS) and the Cyprus Hydrocarbons
Company (CHC) Ltd to examine technical solutions for transporting
natural gas, through a direct marine pipeline, from the Aphrodite field
to Egypt.
Following this, in March 2015 EGAS and CHC signed a Memorandum
of Understanding in relation to the examination of such technical
solutions.
Noble’s plans on commercialisation of natural gas
Four years after the initial exploration well in block 12 in Cyprus’ EEZ,
US Noble Energy is expected to shortly submit a development plan for
the commercialisation of the 4,50 trillion cubic feet reserve of natural
gas found in the Aphrodite well, declaring it commercially viable.
Due to the size of the Aphrodite plot, which holds proven reserves of
between 3,6 to 6 trillion cubic feet (tcf), it is understood that a pipeline
is the likeliest development option. Noble has expressed its intention to
commercialise the Aphrodite gas both through exports as well as
supplies to Cyprus for domestic electricity generation. (Source:
www.cyprus-mail.com).
Action plan to further develop Cyprus as an investment
funds jurisdiction
The Cyprus Investment Funds Association will cooperate with the
renowned law firm King & Wood Mallesons (KWM) for the purpose of
the preparation and implementation of an action plan for the promotion
of Cyprus as a financial services and investment funds centre. KWM is
one of the top 10 global firms by lawyer numbers, headquartered in
Asia, with international presence in Australia, Europe, the Middle East
and North America.
The enhancement of the sector will strengthen Cyprus as a financial
services centre and provide the framework for the provision of new
financial products to investors, satisfying in that way their continuously
changing needs as these arise out of the ever-changing European and
global financial landscape.
It is anticipated that with the modernization of the regulatory and legal
framework of Cyprus, the implementation of the completed action plan
will further contribute to the rapid development and positioning of
Cyprus as an investment funds jurisdiction of choice (Source:
www.cifacyprus.org).
Casino in Cyprus
A bill governing the operation of casinos is expected to be put to vote
during May and the license will be issued about nine months later,
Energy and Commerce Minister Mr. Giorgos Lakkotrypis stated last
week.
“After voting the legislation we will give one month for those interested
to be informed and then proceed with the bidding procedure”
Lakkotrypis said in parliament. “The documents are effectively ready.”
The bill provides for a casino of international standards and a hotel or
hotels exceeding the requirements for a five-star establishment under
existing laws with at least 500 luxury rooms, 100 gaming tables and
1.000 gaming machines. The operator will choose the district in which
the resort would be located in.
State income will derive from the signing bonus, the annual license
and taxes. Revenue will also be generated from tourism (Source:
www.cyprus-mail.com).
Companies registrations
According to new data from the Registrar of Companies and Official
Receiver, applications for company registrations fell at 968 in March
2015 compared to 1024 in March 2014, recording a decrease of 5,6%.
As to the first quarter of the year, figures show a decrease of 11,9% at
2.535 registrations from 2.877 in the corresponding period last year. In
2014 registrations amounted to 11.189. The total number of registered
companies in Cyprus stands at 253.929 (Source:
www.stockwatch.com.cy).
Growth Drivers – Recent Developments
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The European Central Bank announced an expanded asset
purchase programme, through which it will expand purchases to
include bonds issued by euro area central governments, agencies
and European institutions. The purchases are intended to be
carried out until at least September 2016 and the combined
monthly asset purchases to amount to €60 billion
The Central Bank of Cyprus decided to differentiate the maximum
deposit rate by one per cent. The majority of commercial banks
have announced reductions in interest rates on loans
Cyprus and the USA signed an inter-governmental agreement to
enhance international taxation cooperation for the implementation
of FATCA (Foreign Account Tax Compliance Act), to streamline
compliance and reduce compliance costs
Cyprus Government is implementing the privatization plan for the
Cyprus Telecommunications Authority, Electricity Authority of
Cyprus, Cyprus Ports Authority and other organizations, a process
that will attract foreign investors
In particular, in relation to the Cyprus Ports Authority, the
amendments to the legal framework governing its operation were
approved by the Council of Ministers and the privatization
proposals procedure will start by May 2015
The government has decided to create a Science Technology Park
(‘STP’) in the form of a Knowledge Park within the scope of
promoting research, innovation and technology
Number of investment companies licensed by Cyprus Securities
Commission is increasing
Specific incentives are provided to non-EU citizens for investing in
Cyprus, including acquiring immovable property
Shipping industry has strong potential considering the tax
beneficial regime which has been approved by the EU
Specific European funds have been approved for developments in
farming and agriculture, while Cyprus has proposed projects in
relation to European Union Investment Plan.
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