Cyprus Pocket Brief, 6 Nov 2023
The ‘cream off the top’ of our flagship Sapienta Country Analysis Cyprus
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Welcome to Cyprus Pocket Brief: the ‘cream off the top’ of Sapienta Country Analysis Cyprus, our flagship monthly report bought by some of the largest companies and institutions in the world. This and the next few issues of Cyprus Pocket Brief will be free. Thereafter it will be charged at €17 per month or €190 per year.
Political analysis and outlook
The fallout from Israel–Gaza is creating challenges for the government. Although Cyprus has stepped into its longstanding role as the first safe haven for (mainly Westerner) evacuations from the region, the government would face both logistical and political challenges if it had to handle very large numbers of refugees.
The latest developments have again underlined Cyprus’ changing foreign policy alliances in recent years.
We expect the impact of the latest developments on the Cyprus problem to be negative.
Energy and structural reforms
Gas exports. Chevron’s involvement in the Aphrodite offshore natural gas field could be coming to an end before any gas is exploited, as the energy minister and the consortium have diametrically opposing views. Hopes have now moved to ENI in the Cronos Block 6 target. However, the neighbouring war might change calculations about Aphrodite, as it has probably put any Cyprus-Israel gas cooperation on ice for the time being.
Gas imports. The energy ministry is seeking to lease out the EU-funded floating, storage and regasification unit (FSRU), as the infrastructure in Cyprus that will be used by the FSRU is running behind schedule.
Interconnector. Greece’s Independent Power Transmission Operator (ADMIE or IPTO) and EuroAsia Interconnector Ltd have confirmed that ADMIE has taken over the management of the EuroAsia Interconnector that is due to connect Israel, Cyprus and Greece’s island of Crete with a submarine electricity cable.
Renewables (RES). The government has announced €100m worth of energy measures, including a “Photovoltaics for All” programme, part of a broader range of measures amounting to €196m that are aimed at tackling the rising cost of living.
Fiscal performance and forecast
The state budget for 2024 is cautious in its assumptions but the row over the payroll rising faster than nominal GDP raises the risk that the opposition Democratic Rally (DISY) will veto its passage in parliament.
The public finances results for January-August point to larger than expected budget surpluses in 2023 and Inland Revenue data confirm strong corporate tax revenue in the first quarter. We have therefore revised up the expected budget surpluses in 2023-25.
The government has budgeted almost €200m to address the rising cost of living. The internationally mandated corporate tax rate of 15% will apply only to large companies.
Banking sector
Sector-wide data confirm improving bank profitability, thanks partly to borrowing costs that have risen faster than the eurozone, which the government wants to address with a new subsidy.
Bad loans have declined but transport non-performing exposures (NPEs) have crept up and the legislation surrounding foreclosures on primary residences under €350,000 remains uncertain.
The investment funds sector has continued on an upward but slower trend.
Macroeconomic performance and forecast
We expect more economic growth than disruption from the Israel-Gaza war. Scope Ratings agency’s assessment about the risks to Cyprus seems to be only partly informed.
Tourism is approaching a record year as the gap left by Russian tourists has been filled.
Latest earnings figures show rise in real incomes in 2023 and labour data point to a buoyant economy.
Property sales have slowed but continue to increase in double digits, while declining mortgages may point to a high proportion of cash sales.
We have revised our GDP forecast following revisions to historical data.
Economy of northern Cyprus*
Real GDP growth in northern Cyprus is reported at 13.3% in 2022 thanks to a bounce in tourism.
Banks in northern Cyprus remain highly liquid and are presumably restructuring loans to keep non-performing loan (NPL) ratios low.
The inflation rate rose again in the third quarter.
The budget was in surplus in January-September.
Trade in goods from north to south across the Green Line trade rose by 12.9% in January-June.
*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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