19 Oct Political and Economic Report Cyprus
This monthly political and Economic Report is prepared by Noema Advisors. We share the highlights of the September 2018 report here and you can also download the full report at the end of this article.
- In recent months, Cyprus has, in relative terms, been affected more than any other EU Member State by the increasing number of asylum seekers. The de-facto division of the island has accentuated the difficulties in dealing with this issue, while the Government has appealed to its EU partners for a response at the European level- otherwise a comprehensive solution cannot be reached.
- The underlying conflicting geopolitical approaches of the two main political parties (ruling party DISY and main opposition party AKEL) have surfaced as the US and Russia are trying to mark their spheres of influence in the region. Developments and the current state of play in the region have allowed the government to pursue, in coordination with the US, a deepening of relations between the two countries, while opposition parties emphasise the need to respect the long-standing positive role of Russia in supporting the positions of Cyprus in the Security Council and the strong, historic relations between the two countries.
- The trilateral format of cooperation developed between Cyprus, Greece and other countries in the region has drawn attention by global players (e.g. the US and France) that have vested interests in the area and are positive in participating in efforts that seek to enhance security and stability. Therefore, the extension of the trilateral partnerships on specific issues, such as energy and security, to include other countries is a possible scenario and something favoured by Cyprus.
- The opening of the Embassy of the Kingdom of Saudi Arabia follows the opening of the Embassy of Cyprus in Riyadh in 2015 and reflects the goal of both countries to enhance their relations. The rift between Saudi Arabia and Qatar in the Gulf Governing Council, the siding of Qatar with Turkey and its support to the Muslim Brotherhood cannot be examined in isolation of the improved relations between Saudi Arabia and Cyprus.
- The coming months are considered crucial for the Cyprus Problem. The Government has prioritised the renewal of the mandate of UNFICYP by reaching out to all permanent members of the UN Security Council, while at the same time it has confirmed its readiness to engage in a revived negotiation process. This may not prove enough to convince the UN Secretary General (UNSG) to actively participate in a renewed negotiations effort. The next steps of the UNSG will depend greatly on the report of his Special Envoy Jane Hall Lute, expected to be finalised in the coming days. Up to now he has opted for a cautious stance on the Cyprus Problem and has reserved from making any public statements.
- The upgrading of the Cypriot economy to investment grade by Standard and Poor’s, announced after taking into account the deal between Hellenic Bank and CCB, is considered a vote of confidence to the Government’s economic policy, and allows to the government to borrow cheaper. Positive macroeconomic indices are forecasted for the coming years by S&P, though the high levels of public and private debt, along with the stock of NPEs, still remain a great concern for the rating agency.
- The fifth post-programme surveillance (PPS) mission notes the cyclical upswing of the Cypriot economy yet it stresses that certain risks still continue to threaten recovery. Special emphasis is placed on the positive effects from the Hellenic Bank – CCB deal yet it also notes potential downsides from the deal and the need to secure the successful integration of CCB into HB.
- Key Macroeconomic Indices:
- Annual GDP growth rate in Q2 2018 is close to 4% and nearly double the EU average
- Annual Inflation rate for August 2018: 1.7%
- Annual Employment growth for Q2 2018: 4.3%
- The 2019 Budget approved by the Government shows a surplus (3% of GDP) yet it is not considered austere since it provides for increased public spending.
- In the Financial Sector the available data on loans and deposits do not yet cover the Hellenic Bank (HB) – CCB deal and therefore there is no significant change noticed in the level of NPEs.
- HB, now the second largest financial institution on the island, posted €35m net profit in the first half of 2018 and has stressed its commitment to pursue the successful integration of the CCB operations recently acquired and in further reducing the level of NPEs, possibly with another sale of a non-performing loan portfolio.
- The tourism sector has enjoyed increases both in revenue and arrivals of tourists, despite a drop in arrivals from Russia and Israel (the second and third most important countries regarding the number of tourists travelling to Cyprus). This confirms that there has been an expansion to new markets and a diversification regarding the origin countries of the tourists travelling to Cyprus
- Building permits have recorded an overall increase in the first half of 2018. This is a positive construction sector development since permits constitute a leading indicator for future activity.
- A Bilateral Agreement between Cyprus and Egypt for the underwater natural gas pipeline was signed with the prospect of transferring gas from Aphrodite field to Egypt’s liquefaction plants. The agreement has the blessing of the EU which seeks to diversify its dependence on natural gas. Still significant steps are pending before the government actually starts to enjoy a financial return from the selling of its natural gas.
- The EastMed project is still assessed by the relevant technical committees that will determine the feasibility of the project. In case of a positive assessment it has been reported that an intergovernmental agreement may be signed during the Trilateral Summit to take place in Israel in December 2018, where apart from the other member countries of the cooperation (Greece and Cyprus), Italy will also be invited to participate.
- Exxon Mobil is expected to carry out its two explorative drills in Block 10 before the end of the year, though an exact date has not yet been announced.
About Noema Advisors
Noema Advisors is a consultancy firm offering political risk and macroeconomic analysis. The main activities cover the following areas:
Political Risk Assessment – This is considered of critical value to any private investor considering investing in Cyprus. The assessment is based on a deep understanding of political developments, thorough reviews on the roles of key institutional players (either state or private), electoral forecasting and analysis, and reviews of inter-state relations and regional developments.
Ad-hoc analysis on macro-economic developments and the regulatory and institutional framework that applies in Cyprus.