Key Economic Indicators
The Cyprus economy has shown remarkable resilience and flexibility following the financial crisis of 2013. The financial sector’s stability, transparency and efficiency has improved remarkably through a significant re-organisation of its regulatory and legal framework.
GDP is following a positive upward trend since 2014, when the last negative GDP growth was recorded at -2.9%. GDP has been increasing gradually, reaching €20.7bn in 2018 according to IMF estimates, indicating the improved standard of living and stabilisation of the country's economy. Unemployment rate has been steadily declining, now reaching 8.6%, after hitting an all time high in 2014 of 16.1%.
Inflation, as measured by the Harmonised Index of Consumer Prices (HICP) in Cyprus reached 1.7% in Q3 2018, from 0.7% observed in 2017.
Tourism has been a major source of income and a driver of economic growth for Cyprus. Specifically, in mid 2018, arrivals of tourists have recorded an annual increase of 7.8%, while revenues from tourism have reached €1.9bn compared to €1.84bn in mid 2017, with the majority of tourists (88%) coming from European Countries.
Despite the macro-economic turnaround, the country continues to workout its high levels of non-performing loans (NPLs) and high Government Gross Debt. Government Gross Debt as percentage of GDP increased marginally, reaching 110% in Q3 2018.
The economy shows strong signs of improvements with the current bond yield at 1.5% and upgrades to investment grade from Moody’s, Fitch and S&P to Ba3, BBB- and BBB-.
The Cypriot economy has entered a new era of recovery, with significant improvements both to public sector processes and the financial sector’s stability.
Cyprus Banking Sector
The banking sector achieved a substantial recapitalisation in less than four years, which restored confidence in both domestic and foreign investment.
Credit rating upgrades and growing deposits helped to boost confidence in the market. Cyprus credit worthiness has been improving, as Moody’s, Fitch and S&P credit ratingσ stand at Ba3, BBB- and BBB- respectively, as of the second half of 2018, which represents the first period that Cyprus re-entered an investment grade rating after the financial crisis, a significant milestone for both government finances and private investment.
Evidence of improvement in the banking sector’s financial strength is shown by the higher rates of Tier 1 capital to risk weighted assets ratio. Tier 1 Capital ratio has reached 16.6% in 2017 indicating the substantial progress of the financial system’s recovery since 2012, when the ratio stood at 6.3%.
Total outstanding amount of bank deposits remained relatively constant during the past year, reaching €47.5bn in November 2018, with a decrease of €1.7bn compared with November 2017.
Meanwhile, total transactions of deposits in November 2018 recorded a net decline of €273mn which indicates an improvement compared to January (fall of €558mn). Deposits are expected to keep rising as investors’ confidence strengthens and the overall economy improves, resulting in better business cashflows and improved labor market conditions.
Interest rate on deposits from households with an agreed maturity of up to one year is declining since 2008 with the rate currently standing at 0.54%. Interest rates on consumer credit during the past year recorded a minor decline to 4.9%.
The interest rate for housing loans is 2.29%. However, lending criteria and requirements for providing these loans have tightened up substantially, marking a new era of a more transparent and robust banking system.
Cyprus NPL market
Cyprus banks managed to bounce back to profitability after a short period of recession, while the banking sector remains fragile due to its high percentage of non-performing loans to total gross loans and the lower lending opportunities in the market. Cyprus has one of the highest NPL ratios in the EU, with the highest being the Ukraine followed by Greece and Cyprus. The Central Bank of Cyprus (CBC) has as its top priority the reduction of non-performing loans, while other remaining challenges of the island’s banking system include further improvement in the banks' lending practices and profitability.
According to the IMF, non-performing loans to total loans have been steadily declining since the peak in 2014 (48%), with the latest figure (2018) being 32%, while the ratio is expected to fall even further in the next few years. Moreover, the ratio of non-performing loans to GDP dropped from 161% in 2014 to 54% at the end of 2018. The remarkable improvement in NPLs is mainly driven by improvements in the foreclosure legislation and processes and loan securitisation legislations that allowed bulk portfolio disposals, along with a stronger economic growth.
NPLs of the three core banks in Cyprus (BoC, CBC, Hellenic Bank), have decreased to €11bn in Q3 2018 from €27bn at the YE 2014.
Cyprus banks have progressed significantly in facilitating the reduction of NPLs. Furthermore, the bulk sale of the NPL portfolio of €2.8bn by Bank of Cyprus to Apollo Fund (Helix), was one of the main reasons for the substantial reduction of NPL levels. In addition, Hellenic Bank appointed APS Holding to service its NPL and REO book, commencing operations on the 3rd of July 2017.
Meanwhile, Cyprus Cooperative Bank (CCB) made an agreement with Spain’s Altamira Asset Management, Europe's second largest NPL management company with a portfolio of €65bn, while the good assets of CCB were sold to Hellenic Bank.
Finally, the Cyprus Parliament approved a major legislative package in July 2018 in an attempt to further facilitate NPL resolution.
In addition, the burden sharing scheme “Estia” is intended to strengthen the resolution of a key sensitive segment of NPLs, i.e. first residences.
These actions resulted in a substantial strengthening of the Banks and improved stability of the Banking system, while restoring and strengthening both foreign and domestic investor confidence in the market.
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