Will opposition DISY enter the Cyprus government?
Cyprus Pocket Brief, 4 Oct 2023
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Political analysis and outlook
The Republic of Cyprus president, Nikos Christodoulides, has run into further trouble over appointments. Meanwhile, a divided Democratic Rally (DISY) will have to make a decision about joining government. Prospects for progress on the longstanding Cyprus problem, for example, by appointing a UN envoy, may be slipping again. Having first tried to procure a high-level EU envoy, then a UN envoy, Mr Christodoulides has now switched to trying to create the impression that the EU is as keen as he is on linking progress on EU-Turkey relations with moves on the Cyprus problem.
Energy and structural reforms
EuroAsia Interconnector. Greece’s Independent Power Transmission Operator (ADMIE) may be poised to take over the management of the EuroAsia Interconnector—the 2,000 megawatt (MW) submarine electricity cable that is due to connect Israel, Cyprus and Greece’s island of Crete, at a time when interconnectors in the wider region are expected to mushroom.
RES. The government and the energy regulator are pushing through a range of projects to try to increase the share of renewable energy sources (RES) in electricity production and to launch a fully competitive market for electricity. Private power producers will be able to contract directly with households from 2024.
Gas exports. Discussions with the Chevron-led consortium of the Aphrodite offshore gas field in Block 12 of the Republic of Cyprus Exclusive Economic Zone (EEZ) are continuing following the government’s rejection of Chevron’s latest plan for development. Meanwhile, Israel is deepening energy ties with both Cyprus and Turkey.
Gas imports. The delayed floating, storage and regasification (FSRU) unit that will handle imports of liquefied natural gas (LNG) is now due to be ready in July 2024.
Reforms. The government has officially requested a revision to the EU-funded Recovery and Resilience Facility (RFF) as reforms fall behind schedule.
Fiscal performance and forecast
The public finances moved back into surplus in July.
Corporate tax revenue rose by 27.2% year on year in the first seven months of 2023.
The government has pledged to reduce its €10.2bn debt to the Social Security Fund from 2027.
Long-term external debt accounts for 94% of all consolidated general government debt.
Moody’s Investor Service has lifted Cyprus into investment grade, having first placed it in junk in March 2012. This should in theory cut borrowing costs.
The government expects a budget surplus of 2.2% of GDP in 2024, which is in line with our own forecast.
Banking sector
Bank of Cyprus and Hellenic Bank, the two largest banks, have see a sharp rise in net interest income.
The highest non-performing loan (NPL) ratio at Bank of Cyprus now is for the professional services sector.
Banks have started to respond to government pressure to reduce lending rates.
Another acquisition has lifted the stake of Eurobank Greece in Hellenic Bank to 55.1% (subject to regulatory approval), while AstroBank has made a bid for Cyprus Development Bank.
Macroeconomic performance and forecast
The full breakdown of GDP, together with other data, show that financial and professional services were behind the quarter-on-quarter real GDP decline in the second quarter.
With sanctions affecting Russian business for these sectors, they are likely to start looking to India and the Gulf for new business.
Meanwhile, consumer demand has been supported by rising employment.
The trade deficit on trade in goods narrowed in the second quarter as imports declined.
We continue to expect real GDP growth of 2.3% in 2023 and 2024.
Economy of northern Cyprus*
Turkey’s pledge to build a two-way electricity interconnector to northern Cyprus will run up against a global shortage of high-voltage cables.
As the number of Russian residents in northern Cyprus balloons, the Turkish Cypriot leadership is making another push for direct flights to northern Cyprus from Russia, which is now the second largest tourism market.
University students from Turkey are expected to increase. The Turkish Cypriot authorities have raised VAT on luxury items. The European Commission is set to spend €31.7m in support of reunification of the island. Denizbank of Turkey has set up in northern Cyprus.
*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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