Panayiotis Rougalas
Eurobank group's chief economist, Dr Tasos Anastasatos, expresses optimism about the Cyprus economy, emphasizing that the decision to expand the group's banking presence in Cyprus is linked to these positive economic prospects.
In his interview with "K", Dr. Tasos Anastasatos says that the Eurobank group has a systemic presence in three economies: Cyprus, Greece, and Bulgaria. He adds that these three economies are expected to outperform the average European growth in the coming years.
Regarding geostrategies, the chief economist of the Eurobank group observes that crises also create opportunities, and the Cypriot economy has shown great flexibility and speed in seizing them. In his interview, he points out that one aspect that needs attention in the performance of the Cypriot economy is the current account deficit, which he says remains high, above 9% of GDP.
Finally, Dr Anastasatos comments on the performance of the Cypriot economy over the past year, makes a forecast for 2024, mentions the two weaknesses of the Cypriot banking sector, and discusses the ECB's next moves regarding interest rates.
How do you comment on the performance of the Cypriot economy in 2023?
The Cypriot economy maintained its strong recovery in 2023 and in 2021-2022, growing at an average rate of 2.5% in the period January-September 2023, the third best performance in the Eurozone. We estimate that the average growth rate for the whole of 2023 was 2.2-2.3%.
It is noteworthy that this performance was achieved in a global environment of economic stagnation, given that the Eurozone averaged only 0.5% growth in 2023 (and this is where it will stay in 2024), a remarkable outperformance that demonstrates the dynamism of the Cypriot economy. Indeed, growth stems not only from consumption but also from investment and exports, especially services, which have increased by over 40% since 2020. Equally important, it is sectorally diversified, as it involves not only tourism but also trade, financial services, health and education services, and new technologies, thanks to the policy of attracting headquarters.
The growth enabled unemployment to drop to 5.8 percent of the labor force in the third quarter of 2023, a 13-year low for that period of the year. Inflation has not yet reached the 2% target but is the fourth lowest in the Eurozone in the ten months of 2023, despite higher growth, and will hover just above 4% for the year as a whole. Public finances are also characterized by stability, with a primary fiscal surplus already in 2021, which rose to 3.9% of GDP in 2022 and is estimated to have remained around 3.5% of GDP in 2023.
If there is one aspect that deserves attention in this generally excellent picture, it is the current account deficit, which remains high, above 9% of GDP, as imports of goods are growing even faster than exports. A systematic effort will be required in the coming years, both to further boost exports and to substitute imports, in order to achieve external balance and to ensure the resilience of the Cyprus growth model. This is perfectly feasible but requires persistence in implementing structural reforms to enhance productivity.
What are your predictions for 2024?
We estimate that growth will accelerate this year to 2.6-2.7%, as private consumption is boosted by the decline of unemployment and the government measures to support citizens against inflation. Moreover, the strong demand for real estate creates conditions for an increase in construction activity.
More generally, investment activity will be significantly boosted in the New Year by the implementation of the revised recovery plan and the recent credit upgrades. The external deficit is estimated to narrow slightly in 2024, to 8.0-8.8% of GDP. In the fiscal field, a primary surplus of more than 3.0% of GDP is expected again and public debt will decline to around 71.5-73.5% of GDP.
In the longer term, what prospects does the Cypriot economy present?
We are optimistic. International organizations forecast that the Cypriot economy will grow at a rate of around 3% in the period 2025-2028, clearly faster than those in the Eurozone, and thus achieve economic convergence. Several sectors have dynamic prospects, including information and communication technologies, energy (including mining activities and electrical interconnections, given the island's strategic location in the energy transit corridors), tourism, the banking sector which now has a healthy size and scope for business growth, higher education services, health services, and construction.
Geostrategic
How do you think the geopolitical developments in Ukraine and Israel affect the development model of Cyprus?
Geostrategic turbulence, both in Ukraine and Israel, undoubtedly poses a risk to short-term economic prospects, either through the financial services channel or through a potential impact on tourism in the event of an escalation of the war in Gaza.
Such risk is low at the moment. On the other hand, crises also create opportunities, and the Cypriot economy has proven to be very flexible and quick in perceiving and exploiting such opportunities. For example, the war in Gaza also creates potential for attracting foreign investment thanks to the policy of headquartering.
Moreover, Cyprus, through its accession to the institutions of the developed world, is a pillar of stability in the region and can benefit from the rearrangement of international supply chains against countries in the region that are experiencing instability, but also as a transit hub for energy.
The banking presence
Is the decision to expand your banking presence in Cyprus correlated with these positive economic prospects?
Undoubtedly, yes. The banking industry is probably the industry with the closest correlation to the macroeconomic outlook. The relationship between economic growth and bank lending is two-way: on the one hand, growth requires investment support with sufficient borrowed capital. In this regard, the Eurobank Group presents sound financial figures that allow it to lead the financing of the economy: high capital adequacy, high liquidity, reduction of non-performing loans to levels comparable to the major European banks and now, and a purely private equity composition.
On the other hand, dynamic economic growth prospects in a country mean for a banking group a potential for dynamic organic growth of its operations. In this regard, I must note that our group has a systemic presence in three economies: Cyprus, Greece, and Bulgaria, all of which are expected to outperform the average European growth in the coming years. Similar to Cyprus, the Greek economy grew in 2023 at a rate of more than 2% and the same is expected to happen in 2024. Further acceleration is possible in the medium term provided that the external environment is normalized.
The key drivers of growth are the high resources from the NSRF 2021-2027 and the Recovery Fund (the highest in the EU as a percentage of GDP), the good performance of tourism, a healthy financial sector, and the recent restoration of the investment grade by the Greek state, which greatly facilitates the attraction of investments. In addition, the country has political and fiscal stability, with primary fiscal surpluses and a rapid decline of public debt as a percentage of GDP. Similarly, Bulgaria is growing at a rate of around 2% in 2023, which is expected to accelerate to 2.5% in 2024, with low unemployment and a balanced external balance, with significant support from the investments of the Recovery Fund and, in the medium term, the prospect of the country joining the Eurozone in 2025.
When do you expect the ECB to start reversing its restrictive monetary policy and what risks do you see for banks?
As mentioned, growth in the euro area is very weak and inflation has dropped significantly, suggesting that interest rates could be lowered sometime in 2024. On the other hand, the last part of deflation is always slower, and a temporary increase of inflation in the coming months is not ruled out due to base effects. Moreover, the labor market is quite resilient, with only a small effect of tight monetary policy on unemployment and wages rising around 4.5% in 2023 to slow to 3.5% in 2024. With this in mind, I believe that the ECB will not hurry to lower interest rates until it is sure that the decrease in inflation is consistent and stable, otherwise it risks harming its credibility. In practice, this means that, given the current data, we do not expect an ECB intervention rate cut before June this year. At the same time, of course, the reduction of the ECB's balance sheet is progressing, that is, the reversal of the quantitative easing of previous years, which limits the overall liquidity in the European economy.
Profitability: The banks
Profitability based on interest rates will continue in the coming quarters.
The organic profitability of banks related to an increase in ECB interest rates is a cyclical phenomenon that will gradually normalize as ECB interest rates return to lower and more typical levels. On the other hand, lowering interest rates also reduces the servicing difficulties that some businesses and households would likely face if we stayed in a restrictive monetary policy environment for a long time. This reduces the risk of a recurrence of bad debts that would affect banks' results, which has been avoided so far. Therefore, the overall effect is a return to normality, within which a key source of healthy profitability is the organic growth of operations.
NPLs and divestments the big challenges
What do you consider the two most important challenges facing the Cypriot banking system today?
The level of non-performing loans, despite its significant decrease, remains the highest in the euro area (8.3% of loans in December 2023), so it is a major challenge to reduce it further for convergence with the euro area average. Another challenge is the transition from the general regime for the suspension of real estate sales that was in force until December 2023 to the new framework for their protection, which, among other things, requires the suspension of the sale of main residence prior to the validation of the borrower by the Financial Commissioner.
Do you believe that the pathologies and bad attitudes that led the banks of Cyprus to the crisis of 2013 have been decisively dealt with, or there is still work that should have been done but was postponed?
The banking sector in Cyprus underwent a process of deep restructuring during the years of the Adjustment Programmes 2013-2016, with some characteristics unprecedented for a country of the EU, continued with less drastic actions after the programmes and is still ongoing. The process includes restructurings, recapitalisations, mergers between banks, banking transformations (e.g. Co-operative Cyprus Bank Ltd to Co-operative Asset Management Ltd - now KEDIPES).
Significant changes have already been made in the regulatory framework for bank management since 2013. In addition, an extensive restructuring of the sector's assets has taken place, focusing on drastically reducing non-performing loans (NPLs) and strengthening the capital base, and reducing the size of the banking sector as a percentage of GDP to mitigate related risks. All of the above restructuring processes have resulted in significant reduction of NPLs, increased capital adequacy, improved corporate governance and financial results.
Therefore, overall, the Cypriot banking sector is now directly comparable in its structural characteristics and financial figures to those in the rest of the Eurozone, while in some indicators it surpasses it (e.g. CET1, total solvency ratio).
[This article was translated from its Greek original]
