The economic growth of Cyprus continues to surpass all expectations, and as one of the fastest growing eurozone economies the country’s priority is now shifting to ensure the strong momentum is maintained by improving efficiency, implementing reforms and strengthening investor confidence.
Cyprus has continued on a solid growth path in recent years with key sectors flourishing, foreign investment flowing in, large-scale projects under way and natural gas exploitation in the pipeline. The small EU country has outperformed international expectations and consolidated its status as a self-determining and thriving economy. It recovered rapidly following the financial crisis of 2013, thanks to tough reforms to restructure and diversify its economy. Protecting its competitive edge is a key priority and Cyprus’ pro-business government is determined to further unleash the productive forces of its economy to achieve its vision of a technologically driven country focused on innovation.
A Show of Resilience
Cyprus gained independence from the UK in 1960, became a member of the EU in 2004, adopted the euro as its national currency in 2008 and was listed by the IMF as one of the 31 advanced economies in the world in 2016. Throughout its history the Cyprus economy has experienced external shocks that have been followed by astonishing revival. The Greek sponsored coup d’état and subsequent Turkish invasion in 1974 of the northern part of the island led to a sharp real GDP contraction of 16.9% in 1974 and 19% in 1975. But hard work and collective focus led to a rapid bounce back, with growth of 18.2% in 1976 and 15.8% in 1977, followed by an uninterrupted period of strong growth lasting more than 30 years.
Since independence, the economy has gone through several transformations: from an exporter of minerals and agricultural products in 1961-73, an exporter of manufactured goods from the late 1970s to the early 1980s, to transforming into an international tourist, business and services centre since the 1980-1990s. Classified by the World Bank as a high income country, today the economy is mainly built upon the services sector, including tourism, financial services and real estate, which accounts for over 80% of both total GDP and employment.
The island went through yet another transformation in 2013, when at the height of the eurozone sovereign debt crisis Cyprus became the 5th EU member state to request a financial assistance package from the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) – collectively known as the Troika. Cyprus recovered quickly from the €10-billion bailout deal and the controversial and unprecedented decision by the Eurogroup to impose a bail-in of bank deposits. The country exited the programme in early March 2016, having only drawn €7.2 billion of the €10 billion available, and cut its debt-to-GDP ratio below 100% in 2017. Restructuring the economy and restoration of credibility in Cyprus’ banks has been a top priority – and true to form, the country’s economic recovery has been faster than many first projected.
Cyprus regained its investment-grade status in 2018, with both Standard & Poor’s and Fitch Ratings assigning a BBB- credit rating to long-term sovereign debt. Agencies recognised the country’s strong fiscal record, stabilised banking system and robust growth outlook, with the IMF expecting growth rates in excess of 3% to 2020. The government has taken advantage of the successive upgrades to improve its debt profile by issuing cheaper debt with longer maturities. A 30-year bond issue in April 2019 was more than 12 times oversubscribed, and underlined Cyprus’ credibility in the eyes of international investors.
The year 2018 marked a watershed in tackling the legacy of the 2013 financial crisis. Non-performing loans were slashed in half, dropping to €20 billion or 30.5% of the total. Major initiatives included the sale of mainly performing loans of the Cyprus Cooperative Bank to Hellenic Bank, the establishment of a state-owned ‘bad bank’ to handle the rest, and a new state programme for supporting the most vulnerable borrowers. In addition, credit rating agencies welcomed a major set of laws passed in July 2018 that significantly strengthened the legal framework for tackling NPLs, allowing for the securitisation of loans and the speeding up of loan recovery rates. Even before these laws, the drop in NPLs in Cyprus is proportionately the fastest in the EU.
Banks have successfully raised private capital and have maintained strong capital positions since the turmoil of the 2013 crisis and bail-in. The banking sector took full advantage of the tough supervision and reform programme in 2013-16 to correct fundamental weaknesses in the financial system. Having shed a large proportion of their NPLs and expanded new lending, banks should be in a position from 2019 to post profits on a more consistent basis.
Healthy GDP Growth
The Cyprus economy has been expanding rapidly, with robust growth rates averaging 4.4% in 2015-18. The island was among the top five Eurozone performers in 2018, with an impressive growth rate of 3.9%, compared with a Eurozone average of 1.9%. The European Commission predicts a growth rate of 3.1% in 2019 and 2.7% in 2020. The growth is being driven by both strong private demand, spurred by growing employment, and an expanded and upgraded tourism sector after four successive years of record tourism arrivals.
Unemployment has been falling for several years and is set to continue its decline. The annual unemployment rate declined from a peak of 16.1% in 2014 to below 8% in 2018 – and dropped to 6.9% in April 2019. Youth unemployment continues to be a challenge but fell from a peak of 38.7% in 2013 to 19.3% in the fourth quarter of 2018, thanks to an expanding economy and a range of government training and support programmes.
Trade & Investment
More than half of Cyprus’ trade in goods is done with the European Union, and the country has achieved strong numbers in recent years for exports of both services – €10 billion in 2018 from €8.1 billion in 2014 – and domestically produced goods – €1.6 billion in 2018 from €735 million in 2014. Cyprus’ main export partners for goods are Greece and the United Kingdom. The main domestic export commodities are industrial products of mineral origin, pharmaceutical products, and raw and manufactured food products. The three leading import partners are Greece, the United Kingdom and Italy. The island mainly imports hydrocarbons, machinery, chemicals, vehicles, and iron and steel.
As a small open economy that is currently dependent on energy imports, Cyprus’ trade balance is traditionally in deficit, while its services balance is normally in surplus. After a recession-driven divestment in 2013-14, foreign direct investment (FDI) liabilities (reflecting investment into the country) turned positive, reaching €7.4 billion in 2015, €7.4 billion in 2016 and €9.8 billion in 2017. In 2018, net FDI (net of assets, or outward investment) was a negative €246 million according to initial estimates, reflecting outward investment (an increase in assets abroad). A range of new initiatives under way are attracting more investment and there is renewed investor interest in large-scale developments. New deputy ministries for shipping in 2018 and tourism in 2019 have also provided for increased focus on key growth sectors.
Tax measures approved in recent years have further improved the long-established comprehensive and transparent character of the Cypriot tax framework. The new measures, which are fully aligned with EU directives, support the promotion of economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing – Notional Interest Deduction (NID) regime on equity – and encourage the creation of business substance by offering compelling advantages to individuals from a personal tax perspective, including benefits for non-domiciled individuals. Tax incentives for intellectual property, innovative small and medium-sized enterprises (SMEs), start-ups and film production were also introduced in the last few years. These incentives will further improve Cyprus’ international competitiveness as a location of choice for multinationals seeking to do business in the EMEA region.
Main Economic Activities
Cyprus is a small and adaptable free-market economy with a positive long-term outlook. The island promotes itself as the business gateway between Europe, Asia, the Middle East and Africa, and leverages its highly educated, English-speaking population. Its EU and eurozone memberships, excellent information and communications technology (ICT) infrastructure and business-friendly environment continue to attract international companies and investment – particularly in natural gas exploitation following the discovery of significant reserves in Cyprus’ waters. Company formation, tax planning, trusts, foreign exchange trading and fund administrationare all strong segments of the business services industry, encouraged by a network of double tax treaties with over 60 countries and a legal system based on English Common Law.
The key instrument of Cyprus holding companies has attracted hundreds of thousands of companies to set up and channel their investments into key markets through the island. Despite the challenging economic climate in 2012-14, the attraction of Cyprus has not faded, and the number of applications led for registrations of new companies has seen a solid increase since 2014. The developing funds industry, which is evolving into a multibillion business for Cyprus, is also placing the island on the map as an exciting emerging market. Professional services continue to be one of the country’s most consistently growing sectors, rising on average by 6.5% per year in 2016-18.
Cyprus hosts the largest third-party ship management centre in the EU, underlining the success of the country’s formidable maritime sector, which prompted the creation of a dedicated Shipping Deputy Ministry in 2018. The Cyprus Registry is classified as one of the top 10 merchant fleets in the world and ranks as the third largest fleet in the EU. Flying its flag are more than 1,000 ships, totalling a gross tonnage of around 22 million.
The tourism sector has shown solid growth and 2018 saw a fourth record year for tourist arrivals. Ongoing efforts to upgrade the product have been driving the renaissance of the industry, which currently contributes around 13% to GDP. Recognising the importance of this sector, the government established a separate Deputy Tourism Ministry in 2019. After a long decline, construction has also been rebounding, growing by an average 23% in 2016-18.
Although traditionally strong, primary sectors such as agriculture and manufacturing – contributing around 2% and 5% respectively to GDP – have faced challenges which have led both to follow a similar strategy of creating value-added products targeting niche markets willing to pay a premium for quality. Both sectors of the economy have placed strong focus on innovation and diversification, which has supported the industries’ efforts to increase productivity.
Energy will be a significant new source of growth, following the discovery of natural gas reserves in Cyprus’ EEZ. As Cyprus consolidates its good relations with neighbours, the island has ambitious plans to become a regional energy hub in the Eastern Mediterranean and the successful extraction of natural gas from its waters could allow the island to export to European or East-Asian markets. The already-established involvement of major oil and gas companies in Cyprus, such as US energy giant ExxonMobil, French energy major Total, the Italian-Korean consortium ENI-Kogas, and the UK-Dutch company Royal Dutch Shell, have strengthened the development of these plans coming to fruition. The sector saw a further boost in 2019, when ExxonMobil announced an offshore gas discovery of an estimated 5 to 8 trillion cubic feet.
Major Projects and Privatisation
Cyprus continues to push forward with several major projects to upgrade and expand its tourism offer. One of the most exciting developments is Cyprus’ first-ever integrated luxury casino resort, which was licensed to a consortium including the globally renowned Melco and Hard Rock – with Melco later buying Hard Rock out of the project. The €550-million resort – branded ‘City of Dreams’ – started temporary operations in Limassol and other towns in 2018, with a fully operational Limassol resort expected in 2021. Government chiefs expect the project could increase tourist numbers by up to 500,000 and create thousands of job opportunities. Several new marinas are also planned in key coastal towns of Cyprus, with luxury marina complex Limassol Marina attracting record sales and the Ayia Napa Marina already under construction with significant Egyptian investment. Cyprus also commercialised services at Limassol port in 2016, while other potential prospects for future privatisation are the State Lottery and dominant telecommunications provider Cyprus Telecommunications Authority (Cyta).
Cyprus has maintained a strong fiscal position since the 2013 crisis, allowing it to cut debt and deal with legacy issues without recourse to official lenders. Excluding spending relating to the closure of the Cyprus Cooperative Bank, the budget in 2018 recorded a general government surplus of 3.2% of GDP and a primary surplus (excluding interest payments) of 5.2% of GDP, following large surpluses also recorded in 2017. The general government budget deficit including Coop expenditure was 4.8% of GDP in 2018 but is expected to return to surplus in 2019. Cyprus’ debt-to-GDP ratio peaked in 2015 and dropped below 100% of GDP in 2017, thanks to early repayment of Central Bank and IMF debt. During 2019, Cyprus is also expected to pay off early the €2.5 billion bilateral loan from Russia. While debt rose to 102.5% of GDP in 2018 owing to expenditure relating to the closure of the Coop, the most recent IMF forecast envisages the debt ratio falling back below 100% of GDP in 2019. Ongoing structural reforms are expected to put long-term public finances on a more sustainable path which will also improve competitiveness.
Inflation has been muted in recent years. After declining by 1.2% in 2016, owing to low oil prices and historically high unemployment, the EU-harmonised consumer price index rose by just 0.7% in 2017 and 0.8% in 2018. It is expected to reach only 0.9% in 2019 and to 1.1% in 2019, according to the European Commission. Earnings started to pick up again from 2017 after four years of decline, and are expected to continue rising in 2019 and 2020.
Having regained investment grade in 2018, the next main challenge for the Cyprus economy is to ensure that the robust growth of 2015-18 can be maintained, by implementing more structural reforms that will cut red tape for investors and improve efficiency. Cyprus has established its fiscal discipline credentials, and banks now have a range of tools to reduce non-performing loans (NPLs) even more, including loan-sales and faster foreclosure procedures. These elements will further improve Cyprus’ attractiveness as an investment destination and there is growing confidence and interest from foreign investors in the country.
Cyprus Settlement Opportunities
Research suggests that a solution of the Cyprus Problem could bring an additional ‘peace dividend’ of €20 billion, through an expansion of markets in areas such as tourism, shipping and professional services. It would also attract more foreign investment, boosting the economy and creating new employment opportunities for the young. A solution would also open up substantial opportunities for energy, especially given the synergies available from regional cooperation on hydrocarbons.
Strong Economic Performance
Cyprus has an open, free-market, service-based economy with a long record of resilience and successful economic performance. The expansion and upgrading of the tourism sector, the rapidly developing investment fund sector and the discovery of significant quantities of natural gas in Cypriot waters raise the prospect of a transformation of the Cypriot economy in the medium to long-term. Its strong business environment, highly educated workforce and favourable and stable tax regime remain the keystones for investors looking to take advantage of the growing number of investment opportunities emerging in Cyprus.
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