“We’re involved in damage control,” Finance Minister Constantinos Petrides told the Cyprus Mail in an interview. Fortunately, the government has the means to keep the damage to a minimum while the economy recovers.
A strong revival of demand will come after the vaccination rollout, and unemployment will remain low, as government support for business has “provided the necessary oxygen,”
The government has the reserves necessary to continue supporting business right through the period needed to provide the vaccinations, he noted.
While admitting to the high level of uncertainty at present, consumer demand will ramp up and drive economic recovery once the vaccinations have been largely completed.
With analysts still concerned about the banking system, Petrides says that the ‘bad bank’ under construction will manage to control and monetise the ‘legacy non-performing loans.”
No expectation of massive business failures or high unemployment
“The situation now is that we are suppressing demand because of the restrictions,” Petrides explained. “The effort in Cyprus has been recognised by the latest report of the European Commission, which shows that demand has been kept high thanks to the government support measures. So for the time being, the question is when we will totally release this demand and the purchasing power that we have kept at the very satisfactory level, once it starts operating normally without restrictions. I think that’s the that’s the ‘million-dollar’ question. This is why it is very important that we proceed with the vaccine programme as soon as possible in order to reopen the economy.”
Petrides maintains that businesses have not suffered during the restriction period to the point that many will fail after support is removed, nor will there be a considerable rise in unemployment.
“Right now, this is not this is not the time to address this issue, because you are keeping them active, you are providing oxygen. So they will also stay alive. The actual impact on the economy will be seen a few months after the total lifting of the restrictions. But I do anticipate that we will not be diverging from our estimates too much, and that we will mitigate the costs to the greatest extent. That’s why I don’t see a huge rise in unemployment. So we don’t anticipate for the time being a big number of bankruptcies, exactly because of the support measures of the government. But it is of crucial importance to address this question, to end the restrictions as soon as possible because every week you stay closed, the possibility for an increased number of bankruptcies is multiplied.”
Government has sufficient reserves
The minister points out that the government has sufficient reserves to continue support to businesses throughout the period required for vaccinations.
“Yeah, I think our strategic decision for March and April was to double our cash reserves, because we we didn’t know exactly when the second wave would come. We were faced with with something totally alien to anything we had known before. The good thing after, let’s say, nine months is that we did manage to keep these cash reserves quite high, and to maintain targeted support measures. And we have kept the economy working at a satisfactory level. This can be seen also from the fact that our recession has been lower than other countries, much lower than that of other tourist destinations.”
Petrides notes that Greece, Italy, and Spain are all seeing double-digit recessions. France is at -8.5 per cent, Malta at -9 per cent.
“So, I am quite optimistic, with the vaccination rolling out, we will soon be in a position to safely reduce that cash reserve and at the same time safely reduce the national debt. We do say that we have a national debt of around 120 per cent, because of the extraordinary borrowing at the beginning of the year. But we expect about 20 per cent of GDP in cash reserves that we can have by before the end of the year.”
The nearly-complete closing down of the tourist industry in Cyprus has not had the grievous effect on the country’s economy that many expected, according to Petrides.
“We have a huge tourist product, but we also have decreased to this product throughout past 10-15 years. The direct contribution to the GDP is not what some people think. Many think it’s 25 per cent, but in fact it’s just about 12-13 per cent. As opposed to some other countries, we have diversified the economy to a large extent. We have increased shipping, we have increased the renewables we have a steady contribution from professional services, and we’ve created emerging sectors like the university sector, which was something non-existent a few years ago.”
Petrides admits that revenue from VAT has diminished sharply, and that public expenses have increased, yet the effect on public finances is not strong. “This is quite considerable. So together that will bring the budget, the fiscal stance at a deficit of around 4.5 per cent for 2020, in relation to the expected plus 3 per cent that we would have seen without the crisis.
‘Bad bank will not cost taxpayer’
Economists regularly express concern about the Cyprus banking system, particularly as the pandemic is liable to lead to an increase in non-performing loans.
But the ‘bad bank’ project, which will turn KEDIPES into a p0tential asset manager for non-performing loans from all banks in Cyprus, can provide a high level of performance without a burden for the tax-payer, Petrides insists.
“This project fpr an asset manager for NPLs is fundamental in turning the page regarding the NPLs legacy; it is not aimed at dealing with new NPLs. I do accept that the some of the banks did quite well in getting in selling some of their NPL portfolios. We want to see where at this point after so many years, now we finally have the right legal framework to step in regarding primary residences and principal business headquarters. The system is functioning, and now it’s ready to take the next challenge. This includes implementing schemes in order to avoid any related social problems.”
There will be no excessive cost to the taxpayer, he adds.
“The taxpayer intervened in 2018. And the taxpayer paid money to manage the debts at the Cooperative bank with KEDIPES, and now that investment is bearing fruit. And I think the taxpayer’s investment in 2018 should be utilised in order to turn the page regarding the NPLs, as well as in social programmes to help those vulnerable in this context. It is rational; it makes economic sense and social sense. And we hope to be able to bring the number of NPLs down to the EU average.”