Cyprus Pocket Brief, 4 Sep 2023
The ‘cream off the top’ of our flagship Sapienta Country Analysis Cyprus
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Political analysis and outlook
The UN Security Council has repeated its call to appoint a UN envoy after the worst clashes in the UN-monitored buffer zone since 1996. If appointed, the UN envoy might have a broader mandate than in the past. There are a number of reasons for the clashes, including a questioning by the Turkish Cypriot leadership of the mandate of the UN Peacekeeping Force in Cyprus (UNFICYP). This raises the risk of Russia forcing a withdrawal of UNFICYP as the Republic of Cyprus’ alliance continue to shift westwards. A list of 14 substantive gestures towards Turkish Cypriot citizens by the Republic of Cyprus president, Nikos Christodoulides, has been leaked by the Greek Cypriot media.
Energy and structural reforms
Gas. The government has rejected the Chevron-led consortium’s natural gas development plan for Aphrodite. It probably has a number of motives for doing so, including potential cooperation with Israel that could conceivably include Turkey.
RES. RES producers have reacted to plans to allow the state-owned Electricity Authority of Cyprus (EAC) to increase renewables and the government is considering taxing the excess profits of RES companies.
Electricity. The floating, storage regasification unit (FSRU) gas import vessel is due to be ready in September. Exactly when gas imports will actually begin to start feeding electricity power stations remains open to question.
EuroAsia Interconnector. The EuroAsia Interconnector submarine electricity cable project might have found enough finance, now that Greece’s Independent Power Transmission Operator (ADMIE) has reached a preliminary agreement with an Israeli fund that would allow ADMIE to take a 33% stake in the project.
Fiscal performance and forecast
The general government budget slipped into deficit in the second quarter and the government has moved to contain expenditure in the 2024 budget but the opposition has exaggerated the seriousness of the issue.
We have revised down our fiscal forecast but we still expect a budget surplus in 2023-24.
Russia has suspended parts of its double taxation treaty with Cyprus.
Banking sector
Eurobank of Greece has ramped up its stakes in Hellenic Bank and ultimately aims for a 75% ownership but it will face some challenges in bank management.
The finance ministry is considering a windfall tax on “excess” bank profits as bank margins reach the highest in the eurozone periphery, restructurings soar and new lending declines.
The Cyprus Asset Management Company (KEDIPES) has a positive cash position but has warned about uncertainties surrounding foreclosure legislation.
Macroeconomic performance and forecast
A quarter-on-on-quarter contraction of GDP in the second quarter has been blamed on sanctions, interest rates and inflation.
The year-on-year GDP performance remains positive relative to the EU, and a strong summer for tourism, as well as still buoyant retail sales growth in the second quarter, suggest that quarterly growth could resume in the third.
Disaggregated data from the 2021 census is slowly coming through. The number of housing units rose 13.7% between the 2011 and 2021 censuses compared with population growth of 9.9%.
Economy of northern Cyprus*
Grants from Turkey pushed the Turkish Cypriot public finances into surplus in January-July.
Tax revenue is also rising faster than inflation, which may be related to real estate demand from Russians.
Treasury bill issuance reached €107m in January-July.
Continued issues with electricity have led to ongoing power cuts. An electricity cable with Turkey to tackle electricity issues might encounter resistance from the Greek Cypriots.
Inflation has started to climb again.
*Areas not under the effective control of the government of the Republic of Cyprus as defined in Protocol 10 to the 2004 EU Treaty of Accession.
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