Another year of challenges can be characterized in 2023, with the Cypriot economy reconfirming its resilience. However, the outgoing year was marked by a significant economic slowdown driven mainly by the cycle of aggressive interest rate hikes by the world's main central banks. At the same time, the clouds of uncertainty not only persisted with the ongoing war in Ukraine, but intensified with the new conflict in the neighborhood of Cyprus, between Israel and Hamas in the Gaza Strip.
For 2023, the growth rate of the Cypriot economy is predicted to rise to around 2,4%. The average growth rate of the economy during the first nine months of 2023 is estimated at 2,5%, marking a significant slowdown, compared to the corresponding period of 2022, which was at 5,8%, with uncertainty and high interest rates to " brake" economic activity. However, the Cypriot economy registered a multiple growth rate in the first nine months of the year, compared to just 0,6% of the Eurozone average and 0,5%, which was the EU average. Compared to the 2nd quarter of 2023, Cyprus registered the 2nd largest increase after Poland while the E.U. shows a zero growth rate and the Eurozone marginally negative at -0,1%.
Four upgrades in 2023
In a year of renewed challenges, three houses proceeded to upgrade the Cypriot rating, the most prominent being the double upgrade by Moody's, which sent the Cypriot debt to investment grade after 12 years. The beginning was made in March by Fitch, which proceeded to upgrade by one level, to BBB. Moody's followed on September 29, upgrading the Cypriot credit rating by 2 notches to Baa2. On the same day, the Canadian house DBRS Morningstar upgraded the long-term rating of Cyprus by one level to BBB (high). It is important that the Cypriot economy enters 2024 with two houses keeping the Cypriot debt on an upgrade trajectory, since S&P's put the assessment in a positive perspective (September 2) and Fitch upgraded the outlook to positive on December 8.
Inflation
At the same time, and despite the increase in lending rates in Cypriot APIs, inflation, although reduced compared to 8% in 2022, is still at high levels.
Specifically, it is estimated that for the year 2023 it will rise to around 4%. In October it showed an increase of 3,6%, compared to 4,3% in September 2023. For the period January-October 2023 it is estimated that it showed an increase of 4,3% compared to the corresponding period last year. The Minister of Finance stated that for 2024 it is estimated that inflation is expected to be limited to 2,5%.
Meanwhile, unemployment is at relatively low levels. Monthly seasonally adjusted unemployment decreased to 5,8% in November 2023 compared to 6,8% in the corresponding month of 2022. For the year, it is expected to be 6,4%, while according to the Minister's estimate, in 2024 it is expected to fluctuate at 5,8%.
Big correction in the debt-to-GDP ratio
During 2023, the downward trend of the public debt continued, which had peaked at almost 118% in October 2020, when the government had carried out large debt issues in an attempt to "build" the necessary reserves to face the crisis of Covid-19. Based on the latest available data, the debt-to-GDP ratio fell by 2023% in October 78, a massive 40 percentage point decline, considered among the largest in the EU. The decline is driven by bond repayments but also the growth of nominal GDP due to inflation. In absolute numbers, the debt reached €23,18 billion at the end of October, showing a decrease of €1,2 billion.
Unrest at the mercy of sanctions
The outgoing year was marked by the upheaval caused in the services sector by the US and UK sanctions against Cypriot individuals and entities due to their relationship with Russian "oligarchs". The sanctions affected companies that had sanctioned individuals and entities on their boards. This had caused a great mobilization of the Office of the Registrar of Companies in order to make changes of officials so that the companies could be released and continue their business activity. However, the sanctions and the whole geopolitical scene resulted in the services sector taking a serious hit, since the contribution of services to GDP in the second quarter showed an annual decrease of 4,3%, while, even marginally, the downward trend continued and in the third quarter (-0,1%).
Banks: Interest rates push profitability
In the banking sector, rising interest rates boost bank profitability. By the end of the first half of the year, the net profitability of the Cypriot banking system (after tax) reached almost €900 million. The high profitability allowed banks to start paying dividends to their shareholders after the ban that was in force here and more than twelve years. The total assets of the banking system stood at €65 billion at the end of September, while capital (CET1) stood at 19%, with increased profitability strengthening the internal capacity to generate capital for Cypriot banks. Despite the rise in interest rates, new loans showed an annual increase of 5,4% in the January-October period and amounted to €2,7 billion, driven mainly by the increase in large corporate loans, while housing loans also increased.
New tool to reduce NCDs
Non-performing loans (NPLs) at the end of October stood at €2,09bn, compared to €2,31bn at the end of 2022, with the decline in non-performing loans showing a slower rate of decline compared to previous years years. Importantly, despite the increase in interest rates, there was no increased flow of new NPLs, something that was pointed out by both the Central Bank and rating agencies. However, the bulk of the "red loans" are now outside the banks and in the credit recovery companies. Around the end of 2023, the government announced the launch of the Rent for Installment Scheme, which aims to give an extra safety net to vulnerable owners of primary homes worth up to €250.000 who had a non-performing loan and are now turning into tenants, since they hand over the ownership of their house to the state KEDIPES, while the state will pay them the rent, thus preventing possible expropriation.
Developments in labor
In the field of industrial relations, after the implementation of the national minimum wage for the first time in early 2023, processes are underway to readjust it at the end of the year, so that its performance from the beginning of the new year covers the increased cost of living.
During the year, agreement was also reached to adjust the performance of the Automatic Indexation, increasing the rate from 50% to 66,7% of the previous year's inflation, starting from June 2023, while the Social Dialogue on ending in a comprehensive and a permanent deal is expected to be completed by June 2025.
Social support measures €71 million in 2023
Amid persistently high inflationary pressures, the government reinstated the staggered electricity subsidy and cut fuel consumption tax, while earlier bringing basic goods into the zero VAT rate and other goods into the low rate of 5%. Based on data from the Ministry of Finance, the fiscal impact of the electricity subsidy for 2023 is estimated at €23,2 million, while the consumption tax reduction is valued at €33,7 million. Finally, the impact on public finances from zero VAT rate is estimated at €14 million, with the total impact amounting to €71 million. The total impact of the measures extending into the next year is estimated at €65 million.
Source: KYPE