The departing year was marked by a significant economic slowdown driven mainly by a series of aggressive interest rate hikes by major central banks worldwide.
Meanwhile, uncertainty persisted with the ongoing war in Ukraine and further intensified with the new conflict in Cyprus’ neighborhood between Israel and Hamas in the Gaza Strip.
For 2023, the growth rate of the Cypriot economy is predicted to reach around 2.4%.
The average growth rate for the first nine months of 2023 is calculated at 2.5%, indicating a significant deceleration compared to the corresponding period in 2022, which stood at 5.8%.
High uncertainty and interest rates acted as brakes on economic activity. Nevertheless, the Cypriot economy recorded a multiple growth rate during the first nine months of the year compared to the meager 0.6% of the Eurozone and the 0.5%, which was the EU average.
Compared to the second quarter of 2023, Cyprus experienced the second-highest increase after Poland, while the EU showed zero growth, and the Eurozone had a marginally negative rate of -0.1%.
Four Upgrades in 2023
Three rating agencies upgraded Cyprus during 2023, with Moody’s leading the way with a double upgrade, placing Cypriot bonds in the investment grade after 12 years.
Fitch initiated the process in March, upgrading it by one notch to BBB. Following on September 29, Moody’s upgraded Cypriot bonds by 2 notches to Baa2.
On the same day, Canadian agency DBRS Morningstar upgraded Cyprus’s long-term rating by one notch to BBB (high).
Cyprus enters 2024 with two agencies maintaining a positive outlook on Cypriot bonds, as S&P’s set the assessment on a positive trajectory on September 2, and Fitch upgraded the outlook on December 8.
Inflation
Meanwhile, despite the increase in lending rates in Cypriot banks, inflation, although reduced compared to the 8% in 2022, continues to hover at high levels.
Specifically, it is estimated to reach around 4% for the year 2023.
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 to have increased by 4.3% compared to the same period last year. The Minister of Finance mentioned that for 2024, inflation is expected to be limited to 2.5%.
At the same time, unemployment remains at relatively low levels.
Seasonally adjusted unemployment decreased to 5.8% in November 2023, compared to 6.8% in the same month of 2022.
For 2023 the final figure is expected to be around 6.4%, while according to the Minister’s estimate, in 2024, it is expected to fluctuate around 5.8%.
Significant Correction in the Debt-to-GDP Ratio
In 2023, the downward trend of public debt, which had peaked at almost 118% in October 2020 when the government issued significant debt to build up the necessary reserves to address the Covid-19 crisis, continued.
Based on the latest available data, in October 2023, the debt-to-GDP ratio dropped to 78%, recording a massive reduction of around 40 percentage points, considered one of the largest in the EU.
The reduction is driven by bond repayments and the growth of nominal GDP due to inflation. In absolute numbers, the debt at the end of October amounted to €23.18 billion, showing a decrease of €1.2 billion.
Turmoil Due to Sanctions
The departing year was marked by upheaval in the service sector, triggered by sanctions imposed by the United States and the United Kingdom against Cypriot individuals and entities linked to Russian oligarchs.
Companies with individuals and entities on the sanctions list faced repercussions, leading to a significant mobilization by the Companies Registrar’s Office to make personnel changes, allowing businesses to disentangle and resume their operations.
However, these sanctions, along with the geopolitical landscape, resulted in a substantial blow to the service sector.
In the second quarter, the contribution of services to the GDP saw an annual decline of 4.3%, and the downward trend persisted in the third quarter, albeit marginally (-0.1%).
Heightened Interest Rates Boost Bank Profitability
In the banking sector, the rise in interest rates propelled the profitability of banks. By the end of the year, the net profitability of the Cypriot banking system (after taxation) reached almost €900 million.
The increased profitability enabled banks to initiate dividend payouts to shareholders after a twelve-year prohibition. The total assets of the banking system amounted to €65 billion at the end of September, with Common Equity Tier 1 (CET1) capital reaching 19%.
The enhanced profitability strengthened the internal capital generation capacity for Cypriot banks.
Despite the rise in interest rates, new loans showed an annual increase of 5.4% from January to October, reaching €2.7 billion. This growth was mainly driven by the rise in large corporate loans, while housing loans also experienced an uptick.
New Tool to Reduce NPLs
Non-performing loans (NPLs) at the end of October stood at €2.09 billion, compared to €2.31 billion at the end of 2022, indicating a slower reduction in bad loans compared to previous years. Despite the increase in interest rates, there was no recorded surge in new NPLs, as noted by both the Central Bank and rating agencies.
However, the majority of these “bad loans” now reside outside of banks, held by debt acquisition companies.
Towards the end of 2023, the government announced the launch of the “Rent in Exchange for Installment” scheme, aiming to provide additional protection to vulnerable homeowners with properties valued up to €250,000.
Those with non-performing loans who choose to become tenants by transferring ownership to the state-owned KEDIPES will receive rent payments from the government, preventing potential foreclosures.
Developments in Employment
In the realm of employment relations, following the implementation of the national minimum wage in early 2023, processes for its adjustment are underway by the year’s end to cover the increased cost of living from the beginning of the new year.
Throughout the year, an agreement was also reached to adjust the performance of the Automatic Salary Adjustment, increasing the inflation rate coverage from 50% to 66.7% of the previous year’s inflation.
This adjustment is set to take effect from June 2023, while Social Dialogue for a comprehensive and permanent agreement is expected to conclude by June 2025.
Social Support Measures €71 million in 2023
Amid persistent high inflationary pressures, the government reinstated the graduated subsidy for electricity and reduced the consumption tax on fuels.
Earlier, essential products were included in the zero VAT rate, and other goods in the low 5% rate. According to the Ministry of Finance, the fiscal impact of the electricity subsidy for 2023 is estimated at €23.2 million, while the reduction in consumption tax is assessed at €33.7 million.
Finally, the impact on public finances from the zero VAT rate is calculated at €14 million, with the total impact amounting to €71 million. The overall impact of these measures, extending into the next year, is estimated at €65 million.
(Cyprus News Agency – Gregoris Savva & Maria Christodi)
