Brexit is expected to have a marginally negative but manageable impact on the Cyprus economy, as confirmed by the annual report of the Central Bank of Cyprus of December 2016. This conclusion is based both on the flexibility demonstrated by the tourism sector over the years and a gradual decline in reliance on the United Kingdom market, as well as the partial mitigation of the impact of a drop in the export of services to the United Kingdom from lower costs for the import of goods and services.
At the same time, it should be noted that Brexit can also create opportunities, given Cyprus’ membership of the EU and of the Eurozone, the Cypriot legal system which is based on English law, the low tax environment, Cyprus’ geographical position and the high quality of its human capital may attract companies which want to retain access to the European Economic Area.
At EU level, Brexit is expected to create additional market volatility. On the one hand, we see a slowdown in GDP growth in the United Kingdom which is estimated to average 1.6% over the next few years (Bank of England projections). On the other, there is growth in a number of EU countries which are benefitting from increased ECB liquidity as well as from the relocation of some services from the UK to EU member states because of Brexit. However the long term financial impact on EU member states as a whole will depend on the future context of trade relations.
All the possible negotiating models between the UK and the EU (bilateral agreements, a commercial agreement of the Norway type, an agreement modelled on the EU-Canada agreement, an interim agreement etc.) will make trade between the United Kingdom and the EU more expensive, which is harmful to the potential economic growth of both partners. However, the structure of the Member States of the European Union and their economic size will to a large extent determine the further development of the negotiations. It is estimated that only 2.6% of the European Union's GDP is directed in the form of exports to the United Kingdom (ECB data June 2016). Particularly if the EU, to a large extent, retains free trade with the UK where it has a surplus and curbs obstacles in the financial services sector where there is a deficit (where most companies of the financial sector have their headquarters in London), the financial impact on the EU is expected to be much lower than on United Kingdom.
In any case, a framework is expected to be formulated in the coming months as regards the future of the negotiations. It is essential that during this time Cyprus makes the best of its close ties and the competitive advantages set out above, so as to achieve a beneficial agreement with the United Kingdom post-Brexit.
As CFA Society Cyprus, we are monitoring developments and participating in advisory bodies so as to contribute with our expertise and experience to forging the best possible continuation of Cyprus’ relationship with the United Kingdom after it has left the EU.
Author: Theodoros Alepis, Vice president of the CFA Society Cyprus, member of the Brexit Steering Committee of the Association of Cyprus Banks