articles | 26 September 2023

Cyprus economy resilient amid challenges, says Finance Minister

The Cypriot economy has demonstrated exceptional resilience in recent years, according to statements made by Finance Minister Makis Keravnos, while speaking at the 4th Conference on “Banking System: New Challenges and Opportunities”, held in Nicosia.

While highlighting the economy’s strength, he also addressed the challenges facing the banking sector. Keravnos pointed out that the successive interest rate hikes and their impact on the economy were challenges that the banking sector must confront. He acknowledged that banks had taken some positive measures in response to these challenges and anticipated further positive actions from all banks.

During his address, read on his behalf by Senior Economic Officer Georgia Themistocleous, the minister emphasised that the Cypriot economy had demonstrated remarkable resilience over the past few years, effectively tackling numerous difficulties and challenges. The minister noted that the banking sector, having made significant progress in recent years with a strong capital base and liquidity, had played a crucial and productive role in this collective effort and was expected to continue doing so. However, the minister also stressed that visible challenges and risks must be addressed.

One of the primary challenges faced by the banking sector, he noted, is the series of repeated interest rate hikes by the European Central Bank (ECB), possibly representing one of the most decisive cycles of restrictive monetary policy in the past 40 years.

“These successive interest rate hikes have significant and multifaceted repercussions on the economy, increasing the cost of borrowing for housing, education, and other necessary financings, thus limiting household disposable income,” the minister stated. He added that banks, recognising the serious implications of these developments, had adopted certain positive measures regarding the absorption of the increased cost resulting from the interest rate hikes, as well as the adjustment of deposit interest rates. The minister expressed confidence that the banks, by assuming their social responsibility, would continue to closely monitor these developments and predicted that additional positive measures would be taken by all banks.

Referring to Non-Performing Loans (NPLs), he noted that the NPL ratio had significantly decreased, which is a positive development for the Cypriot economy. This reduction demonstrates that efforts to manage NPLs and revive the banking sector have started to yield results. He cited the conclusions of the progress report on NPLs in relation to specific targets set within the Resilience and Recovery Plan, which was recently submitted and approved by the Cabinet. He highlighted that the two quantitative targets of the plan regarding NPLs had been met, and the achievement of these targets would contribute to the release of the next tranche from the Recovery and Resilience Fund.

The Minister also emphasised that the prospects for the future were highly encouraging, as the government had implemented significant measures and continued to develop strategies to address issues related to NPLs. He further praised the shift towards digital banking as a positive development that reflects the financial sector’s need to adapt to the digital era.

The Finance Minister also noted that the banking landscape in Cyprus had radically changed in the last decade, recalling that four banks had exited the country’s banking system through consolidations and recapitalisations of the remaining banks in the domestic market. He highlighted the inherent nature of the banking system, its focus on the domestic market, and its size relative to the country’s GDP, which places it in the European Union’s average. “The Ministry of Finance considers any acquisitions and mergers in the banking sector as indicators of a healthy industry and the function of free market rules,” he stated. Keravnos added that structural changes, whether through acquisitions or technological upgrades, are expected to contribute to strengthening competition and improving financial services for consumers in Cyprus.

The minister also referred to the positive assessments by international rating agencies, describing them as significant demonstrations of confidence. He stated that the country is on the right path to economic recovery, dispelling any concerns that have been voiced recently. “It is important to continue monitoring developments and taking effective measures as needed to ensure our prosperity and credibility both domestically and on the international stage,” he concluded.


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