Strong Growth Prospects for Cyprus: 2020 Economic Update
Cyprus is still undergoing a broad based recovery, with assurance and stability returning after 5 years of reforms and austerity measures to stabilise the financial sector and refine public capital.
Economic growth on the island is now driven by stable consumption and a vibrant tourism sector. As the current financial year draws to a close, let’s look into more depth at each area over the last few years and what that means going forward for 2020.
Recapitalised Banking Sector
A successfully recapitalised banking sector passed rigorous ECB testing regime and found a stable footing after the chaos of the 2013 bail-in. Liquidity & solvency in the Cyprus banking system have improved considerably and deposits grew by over €3 billion in 2018 last year.
Successive Ratings Upgrades
Cyprus’ speedy return to global markets was a positive step towards the restoration of confidence and credibility in the eyes of the international business community. Lucrative bond issues over the recovery period rose over €3 billion and consecutive upgrades by international ratings agencies are contributing factors to stronger investor interest. Cyprus returned to growth from 2017, showing, on average, a growth rate of 1.7%in 2017 and 2.9% in 2018 according to the Cyprus Ministry of Finance; who are also predicting similar figures for the end of quarter 4 this year.
Falling Unemployment Figures
Unemployment is set to continue its decline on the island, although tackling youth and recent graduate unemployment continues to be a substantial task. The unemployment rate first started to fall in the first half of 2017, averaging 15% in that year and dropped to 13% in 2018. The EC predicts further decline as current forecasts for Q4 2019 are currently 12%.
Recently approved tax measures have further improved the long-established Cypriot tax framework, making it more efficient and transparent. The new measures are fully compliant with EU Directives, and support the promotion of economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing.
Tax incentives for intellectual property, innovative small and medium start-ups were also introduced earlier this year which will further improve Cyprus’ competitiveness as a location for multinationals seeking to do business within the Eurozone.
It will be a long time before risks relating to high levels of non-performing loans (NPLs) and public debt disappear entirely, and these two issues remain a substantial problem for Cyprus in 2020, however these numbers are declining; albeit slowly. The icing on the cake for the economy during this pre-election year will be if parliament passes the reforms to offer appropriate support for investors and to introduce performance incentives within the public sector.