articles | 06 January 2013

The effects of recession on wealth in Cyprus

In Cyprus the recession and stagnation that characterises the response of the local economy to the international economic and financial crisis have concentrated on the issues of changes in output (GDP), the budget deficit, the sovereign credit ratings, the banks and the effects of the Greek crisis, but very little has been said about the wealth effects of the crisis. This is in contrast to the United States where wealth is at the centre of discussion, in terms of both the origins of the crisis, notably non-performing mortgage loans, heavily borrowed households, leading to toxic bonds and the collapse of house prices and a lower or stagnant demand by the population at large. In Cyprus, however, the sequence of events has been more complex and in some ways more surprising.

In most households, wealth is determined by the value of assets in terms of immobile property ownership, savings and company shares.

The market capitalisation of shares on the Cyprus Stock Exchange (CSE) - the price shares would get at the time in question assuming that there is no mass panic to sell - increased sharply from €3.4 billion in 2004 to over €20 billion in 2007. This was a period of rapid real growth of the economy, but can be described as one of excessive or irrational exuberance by investors in shares, with the capital value of shares exceeding the value of GDP at current prices in 2007.

In late 2007, the effects of the international financial crisis began to be felt in the USA and Europe, and in 2008 it was a full blown crisis with share prices falling in most markets by 30 to 35 per cent. The Cyprus market was hit, especially by the withdrawal of foreign investors facing losses in their home markets, and the capital value of shares in the CSE fell by 77 per cent to only €5.7 billion, even though the domestic economy was still growing rapidly.
To confuse matters further, when the international crisis hit Cyprus in 2009, the stock exchange prices went up and the market value increased to over €7 billion. However, in 2010 the market value of shares fell again to around €5 billion, and from then on in 2011 it was all downwards as a result of the Mari explosion which destroyed much of Cyprus’ most modern power plant. This reduced confidence which further declined as the impact on the country of the Greek euro crisis became evident. In 2011 share values fell to €2.2 billion. At present, share values on the CSE are estimated at only €1.6 billion, as a result of the financial and economic crisis and the current recession (estimated at -2 per cent). Consequently, the loss of wealth to shareholders from 2007 to 2012 was about €18 billion.

In contrast to share values, bank deposits by Cyprus residents have actually increased by 22 per cent since 2008, increasing the wealth of the local population by almost €10 billion. In 2008 deposits by residents were €43 billion, but in the recession year of 2009 they actually rose by 5 per cent to €45 billion. Deposits continued to increase by about €2 billion a year and reached over €53 billion in November 2012. These figures do not include deposits by third country nationals which are currently at over €13 billion.

By increasing savings and depositing them in the banks, the residents of Cyprus have actually created wealth in the middle of an economic crisis. In so doing, however, they have reduced consumption and therefore contributed to the current 2012 recession in Cyprus. Wealth has increased, but incomes have fallen.

Though stock market values and savings are important forms of wealth in most countries, the main form of wealth held by households is generally immovable property, essentially their homes. The 2011 census found that there are 431,059 dwellings in Cyprus (south of the Green Line), which on the basis of 2012 values presented in the “RICS Cyprus Property Index” have been estimated to be worth €115 billion. Adjusting the census data the number of dwellings in 2008 is estimated at 384,898 and valued at about €118 billion. However by 2012 it appears that dwellings (mainly houses and flats) increased by 11 per cent over the period but this additional value of about €13 billion has been lost. Overall therefore the households lost €16 billion in value of property.

The construction and real estate sectors have been badly hit in Cyprus since 2008, but the indices are not in agreement with respect to how much prices of buildings have fallen. One source normally considered reliable is the “Residential Index of the Central Bank”, but its estimates appear conservative. This index shows a 10 per cent decrease in price values for houses and flats between 2009 and 2011. Most observers would estimate larger price falls. In fact the “RICS Cyprus Property Index” implies a larger fall, depending on whether they are houses or flats, of between 15 to 20 per cent. 

To conclude, the combined losses in wealth arising from the fall in prices on the stock exchange (€18 billion) and the property market (€16 billion) are estimated at €34 billion, while gains in saving deposits have increased wealth by €10 billion. There has therefore been a loss in wealth of about €24 billion. This exercise does not however include all forms of wealth, and consideration of business losses would greatly increase the deficit arising from the recession and stagnation. Furthermore this analysis does not include losses in income, which is also substantial or the losses to the unemployed. Though it presents the position arising in three very important components of wealth, it does not represent the whole picture.

Author: Costas Apostolides, chairman of EMS Economic Management Ltd,

Source: Cyprus Mail


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