Cyprus: Bell for a new wave of Non-performing Loans
What are the risks facing the Cypriot economy, despite the significant improvements it has made?
The Cypriot economy did better than expected, but the risks and problems remain. This is reflected as a general conclusion in the semi-annual Bulletin issued today, Wednesday, by the Central Bank of Cyprus (CBC).
The remarks to the banking sector about a new wave of Non-Performing Loans are causing a sensation. At the same time, the challenges that tourism will face are underlined, while the positive results from the financial management of the pandemic crisis are also pointed out.
The forecasts regarding the course of inflation are negative, while the problems that arise due to a pandemic are recorded, which despite the progress that has been made, seem to be affecting the economy of Cyprus and the world economy in the near future at least.
Risks and incentives in the banking sector - Risk for a new wave of Non-performing loans
As far as the banking sector is concerned, the ECB Bulletin addresses the additional challenges posed by the pandemic in the past. Despite the efforts made to contain and reduce non-performing loans, the CBC points out the dangers of a new wave of MES due to the continuing pandemic pressures.
"For this reason, the CBC has repeatedly drawn the attention of banks to the need for their operational readiness in the eventual increase in the flow of restructuring applications, as well as to the need to speed up the volume, processing time and restructuring procedures. to avoid the increase of non-performing loans but also to allow viable companies to continue their operations in a smooth manner ", the ECB Bulletin states.
It is emphasized that, in parallel with the risks for a new wave of MES, the existence of a significant number of existing MES remains one of the most serious problems. The NPL ratio stands at 17% at the banking system level, and, despite its sharp decline, is still significantly higher than the EU average (around 2%), according to CBC data.
As far as the banking sector is concerned, reference is also made to the ECB Bulletin on the "need to adjust the business model" of banks, as a result of the "low profitability" of credit institutions due to the "existing environment and competition"!
The Cypriot economy did better than expected in the pandemic
More limited than expected were the effects of the pandemic on the Cypriot economy. This is reflected in the "strong recovery of economic activity in 2021" which is expected to record 5,6% annual growth in GDP.
This is credited, according to the CBC Bulletin, to the government, the CBC and the ECB for the support and mitigation measures they have taken.
Special mention is made of the "fiscal tidiness" that preceded the pandemic and which allowed the adoption in times of crisis, sponsorship policies and containment plans for businesses and households, as reported.
In terms of support measures and the positive results they brought, in its Bulletin the CBC underlines the low unemployment rates that fell to 6.6% for 2021. Reference is also made to the increase of 5.3% of savings (in October 2021 compared to 2.5% of Dec. 2020). During the pandemic, evidence suggests that savings behavior has increased "due to the pandemic's restrictive measures and the uncertainty of its evolution."
The increase in loans to the domestic private sector reached 3,8% in October 2021 compared to 3,3% at the end of 2020.
However, despite the improved situation and the relatively limited damage caused by the pandemic to the Cypriot economy, the prospects for the future remain linked to the evolution of the pandemic.
Pandemic problems remain…
According to the CBC Bulletin, inflation is expected to increase significantly in 2021 and 2022 (to 2,2% and 2,5%, respectively). This development is due to the increases in energy prices mainly due to the significant increase in the price of oil in international markets but also to the upward effect of the base, as well as to the significant recovery of the economy this year compared to 2020.
In addition, the Bulletin highlights problems such as disruptions in production and supply chains caused by international trade caused by the pandemic and the continuous upward pressures on international commodity prices mitigate the growth prospects, as Cyprus' dependence on imports, especially from oil, is very high.
The increased inflationary pressures recorded mainly due to the above factors, although expected to weaken by the end of 2022, however, as long as they last, cause a blow to the purchasing power of both households and businesses, with negative potential consequences on consumer demand and in investments.
The challenge for tourism is great
Despite the improved data recorded by tourism in 2021 given of course the conditions, the challenges for the future remain great according to the CBC.
Based on the available data, the course of tourism in 2021 is more improved than originally projected, with tourist arrivals for the first ten months of 2021 amounting to 46% of the level of 2019. The challenge is great for the coming years, and especially for 2022, in the midst of the uncertainty that prevails in relation to the course of the pandemic, however, a gradual recovery of tourism to pre-crisis levels in 2024 is expected.
Grants kept house price increases low
According to the CBC Bulletin, house prices rose 0,9% and 0,3% year-on-year in the first and second quarters of 2021, respectively, driven by increased demand for apartments from domestic buyers.
This trend is supported by the government's plan to partially subsidize the interest rate on new mortgages and the low-interest environment, while rising construction costs also contribute to rising prices, although not related to the effects of demand. On the contrary, the prices of commercial real estate have been affected by the pandemic, with the prices of shops, warehouses and offices decreasing in the first half of 2021 by 5,2%, 4,3% and 0,9%, respectively.