Cyprus Pocket Brief, 3 Aug 2023
The ‘cream off the top’ of our flagship Sapienta Country Analysis Cyprus
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Political analysis and outlook
The Republic of Cyprus president, Nikos Christodoulides, is struggling for cohesion among government-supporting parties, and expectations are increasing that the former ruling party, the Democratic Rally (DISY), will join the government. A renewed effort on the Cyprus problem may be slowly moving into gear but agreeing on a way forward will be very difficult and the design of the traditional negotiations process is in any case prone to deadlock. There remains a risk that Cyprus will be sidelined in rapprochement efforts in the region.
Energy and structural reforms
Electricity. The government is mulling financial support for the EuroAsia Interconnector submarine electricity cable. Greece’s Independent Power Transmission Operator (ADMIE) has taken a stake and the project might also find private finance.
Israel. Cyprus is working on an inter-governmental agreement with Israel on electricity and natural gas interconnections. The energy minister, George Papanastasiou, has said that the floating, storage and regasification unit (FSRU) gas import facility, due by 2024, will not be affected by these talks.
Gas. Offshore natural gas drilling results for the Aphrodite field and the government’s response to Chevron’s development plan are due by the end of August. The gas might ultimately be consumed by Egypt for domestic consumption. ENI’s Cronos-1 field will be the next focus for offshore gas drilling.
RES. The government is dashing to increase storage for electricity produced with renewable energy source (RES) but is facing apparent vested interests.
Reforms. More deputy ministries are being created, including one that will focus on green transition.
Fiscal performance and forecast
Spending continued to outpace revenue in May but our analysis shows that expenditure ratios have not risen in historical terms. The government has clarified that the 1,851 public-sector posts are not net new positions but replacements of retirees.
Redemptions of public debt will average €2.4bn per year in 2024-28 but the cash position and fiscal performance suggest this will be easily managed. The legacy bailout debt to the European Stability Mechanism (ESM) will be paid in instalments during 2025-31. We continue to expect fiscal surpluses over the forecast period.
Banking sector
Our analysis of annual bank results has highlighted the wide difference in performance among authorized credit institutions in Cyprus.
Non-performing exposures (NPEs) in the banking system continue to fall but bad loans in tourism have been climbing.
Members of Parliament (MPs) continue to plan alterations to foreclosure legislation but approval of the mortgage-to-rent scheme might help bring about a deal with the government.
Deposits expanded in the second quarter after a decline in the first.
Macroeconomic performance and forecast
Results for the tourism sector suggest that there is plenty of growth potential from untapped markets despite the huge decline in Russian tourists.
We do not expect the rapid growth in property sales to last into the third quarter and this might also affect hitherto buoyant property prices.
Inflation rates continue to drop, partly thanks to government intervention.
It looks as though motor vehicle registrations, which follow multi-year cycles, will return to growth in 2023.
We expect real GDP growth of 3.2% in 2023 and 2.4% in 2024. This is higher than official forecasts, which tend to lag developments on the ground.
Economy of northern Cyprus*
The World Bank has reported high inequality and rising infant mortality in northern Cyprus.
The year 2022 was a record for trade from north to south over the Green Line and the latest statistics point to continued macroeconomic recovery.
A contract has been signed for a feasibility study on an electricity cable between Turkey and northern Cyprus. Meanwhile, the new airport terminal has had teething problems.
Our analysis of the top five banks operating in northern Cyprus shows that bank profits continue to increase in the high interest-rate environment.
*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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