Finance Ministry: 'Cyprus economy will not enter a recession'

by Yiannis Adilinis

There will be a significant slowdown in economic activity next year, we will be affected by increased energy prices and borrowing costs, but "inflation in Cyprus is being reined in at lower levels" compared to other European member states, and with the support of rising tourism, the flexibility and resilience of the Cypriot economy, and the recovery policy through the Recovery Fund, the country can allow growth rates to pick up, says Minister of Finance, Constantinos Petrides in an exclusive interview with Kathimerini business.

Comprehensive tax reform should take place when international economic conditions are favorable and there is greater certainty.

At this stage, he notes that "interest rate increases are considered the most appropriate tool to tackle inflation in the euro area", based on the statements of Christine Lagarde, and states that "society will have to adapt to the new order of things". He regards the results of the Strategy for Attracting Companies and Talent as "excellent," and the issuance of the green bond as "very important" as evidence of the Cypriot economy's maturity and credibility.

Petrides also puts a temporary freeze on tax reform because "it is urgent to maintain Cyprus as an attractive investment destination and business center", leaving the new tax framework for later "at a time when international economic conditions allow".

-In light of the impending harsh winter, what are your forecasts for the global economy in 2023, and how will the international economic environment affect the Cypriot economy?

We anticipate a significant slowdown in economic activity in 2023, taking into account the impact of Russia's invasion of Ukraine, rising inflation, tightening monetary policy, and China's economic slowdown.

The war in Ukraine will continue to have an impact on the global economy, resulting in higher commodity prices (energy, grain, and others) and supply chain disruptions. As a small and open economy, the Cypriot economy will inevitably be impacted in 2023. Nonetheless, the Cypriot economy has demonstrated its flexibility, resilience, and ability to deal with adversity in recent years, most recently with its better-than-expected performance in 2022.

The Cypriot economy, unlike other economies, will not enter a recession. I anticipate growth of around 3%. Higher energy prices and borrowing costs will have the greatest impact on the Cypriot economy, affecting consumption and fixed capital investment.

On the other hand, the outlook for tourism in 2023 is quite positive, with additional increases in connectivity and flight supply offsetting the negative impact of higher inflation, and Cyprus once again having one of the highest growth rates in the EU. This, while the business attraction program continues to perform admirably. Simultaneously, we have set an aggressive growth policy through the Recovery Fund.

-The level of inflation, both globally and in Cyprus, is a major source of concern today. The prices of basic goods have risen, affecting both households and businesses. Is there a way to combat the inflation that threatens everyone, but especially small and medium-sized businesses?

Inflation levels have risen significantly in the last year, both internationally and in Cyprus, as a result of sharp increases in energy and food prices. I believe that inflation has peaked and is beginning to slow.

In October 2022, inflation in Cyprus fell from 9% to 8.6%, compared to 11.5% and 10.6% in the EU27 and eurozone, respectively. Cyprus ranked fifth among EU member states in terms of comparative inflation, with France having the lowest at 7.1% and Estonia having the highest at 22.5%. At the same time, Cyprus ranked second in the EU for the lowest increase in food prices, at 9.9%, compared to 14.7% and 13.1% in the EU and Eurozone, respectively, and 11th for the lowest increase in energy prices, at 25.6%, compared to 38.7% and 41.5% in the EU and Eurozone, respectively, in October 2022. As a result, when compared to the other EU Member States, inflation is low in Cyprus.

Although there is no magic formula for reducing inflation, there are specific tools for dealing with it. Society will have to adapt to the new world order by changing its consumption habits in order to keep its citizens' quality of life as high as possible. According to recent statements by European Central Bank President Christine Lagarde, interest rate increases are currently regarded as the most appropriate tool for combating inflation in the eurozone, while fiscal policy measures must target the most vulnerable groups in society.

It should be noted that the government has taken measures totaling approximately €400 million to address recent inflationary pressures, primarily targeting vulnerable groups but also small and medium-sized businesses through subsidies, consumption tax cuts, and so on.

-Minister, who is the target of the green bond, which you have announced will be issued by the end of the year, and what will it bring to the Cypriot economy?

The green/sustainable bond, as is well known, is a bond issued with our explicit commitment that the proceeds will be used to finance specific expenditures or investments classified as environmental in the case of the green bond and/or social in the case of the sustainable bond.

Because of the increasing importance given to environmental issues by both issuers and investors, as well as credit rating agencies and supervisory authorities, there is currently a lot of interest in the international government bond market.

We will primarily target international investors, particularly those who specialize in such issues, but we will also target domestic institutional investors who are interested in investing in the Republic's bonds. Given the significant cash reserves maintained by the Cypriot government, we have ensured the flexibility to finalize the timing of the issue within 2023 depending on the prevailing conditions in the European bond market, in order to achieve the best possible outcome. The issuance of the green bond is very important and is a sign of the Cypriot economy's maturity and credibility.  This also demonstrates that Cyprus is ready to move into the new Green era.

-You have acknowledged the need for tax reform in order to enhance the country's competitiveness and to serve the citizens. Have you developed the parameters for the new modern tax framework?

The need to reform Cyprus's tax framework has been recognized in recent years, with the goal of further modernizing it while maintaining its competitiveness and attractiveness. On the other hand, Russia's invasion of Ukraine, the new era of higher interest rates, inflation, the observed de-globalization in production, and the acceleration of green growth have all contributed to the formation of a completely new economic scenario, with uncertainty as its defining feature.

I believe that embarking on broad tax reform now would be irresponsible. In the face of high inflation, there is an urgent need to keep Cyprus as an appealing investment destination and business center. Holistic tax reform should be implemented when international economic conditions are favorable and there is greater certainty. At the same time, it is prudent to wait for the completion of major European taxation initiatives, where there is also a justifiable delay.

-With regard to security holders, you stated that funds have been included in the 2023 budget to begin the creation of the Solidarity Fund. What is the next step?

The National Solidarity Fund was established to assist in the compensation of losses suffered by persons (natural and legal persons) who possessed the characteristics of a "private client" and were affected by the impairment of deposits, securities, and shares in the Bank of Cyprus.

To that end, the Fund's Management Committee has been working with the State Ministry of Research, Innovation, and Digital Policy to develop an online platform, which is expected to be completed in the second half of 2023.  Through the platform, affected individuals will be able to submit applications, allowing for the necessary assessment and identification of beneficiaries, as well as the costing and preparation of the Replacement Plan for potential Fund beneficiaries.

The Fund is supported by a grant from the State Budget as well as several State pieces. State sponsorship of €135.03 million was granted as part of the reserve creation in the years 2018-2022, while the Fund's balance to date is €135.46 million. In terms of the following year, the 2023 Budget includes €25 million in funding for the Fund.

-The Cyprus Recovery and Resilience Plan is here to boost the country's economic growth potential. Are Cypriot businesses capable of absorbing the entire amount of the Cyprus Plan? Do they recognize the significance of its full implementation?

The Recovery and Resilience Plan is part of Cyprus's larger medium-term development program and is fully consistent with the recently adopted long-term Vision 2035 Strategy. This Plan includes significant investments to boost the competitiveness of Cypriot businesses, including, of course, progress toward the green and digital transition goals.

More than €380 million will be made available to Cypriot businesses, organizations, and households through the Plan. Given that a significant portion of this money will be made available to Cypriot businesses, and given that securing their own financing for investment remains a challenge for them, the Ministry of Finance has engaged in extensive contacts and consultations with credit institutions to facilitate Cypriot businesses' access to bank financing.  In this context, specifically for the Recovery and Resilience Plan Grant Schemes, provision has been made in the implementation guides of selected Grant Schemes for the granting of an advance without a bank guarantee, while procedural optimization measures have been promoted to assist banks in granting loans to beneficiaries.

Based on the foregoing, and with the state's support, I am optimistic that Cypriot businesses have recognized the funding opportunities under the Recovery and Resilience Plan and will be able to absorb the available funds with domestic credit institutions as allies in this effort.  Also crucial for disbursement is that the reforms stipulated as conditions are passed by Parliament, despite political parties' reluctance.

-How does the new European Stability Mechanism (ESM) contribute to Eurozone economic stability, and how do you rate the country's financing and liquidity conditions?

The existence of the European Stability Mechanism, and its demonstrated contribution to maintaining financial stability in the eurozone during the previous debt crisis, provides another safety valve for investors, ensuring that even if the situation in international capital markets deteriorates, appropriate mechanisms are in place to prevent any eurozone member state from defaulting.  This is accomplished through a variety of means, including the provision of loans under a macroeconomic adjustment program and the purchase of securities in the primary and secondary markets.

In terms of financing conditions for the Republic of Cyprus, they are undoubtedly less favorable than in recent years, owing to an increase in interest rates as well as a decrease in investors' risk appetite. Despite the increased challenges, the Republic is in a very good position to manage them and ensure continuous state financing.  The prudent fiscal and public debt management policies, as well as the upgrading of the Cypriot economy, have resulted in relatively low financing needs over the next two years. Furthermore, the State has substantial liquid assets at its disposal, which provide flexibility and the ability to manage any additional challenges arising from the international environment.

-What could the country do today to create more economic opportunities and attract top-tier company investment?

Cyprus has become an increasingly appealing investment destination and a location for international companies to operate in recent years, owing to its reliable and stable regulatory and supervisory framework, competitive tax regime, excellent quality of life, modern infrastructure, and highly educated and skilled workforce.

The Company and Talent Attraction Strategy was approved by the Council of Ministers in October 2021 in the context of leveraging and maximizing these advantages, as well as investing in the diversification of the production model and the knowledge economy. The Strategy includes, among other things, actions to simplify procedures for obtaining residence and work permits for skilled personnel from third countries, special tax breaks to attract talent, and investments in R&D&I. Simultaneously, the Strategy promotes the government's development and reform program for the transition to a digital and green economy, a large portion of which is funded by European funds, in order for Cyprus to maintain and improve its competitiveness as a modern economy.

The Strategy's results are first and foremost regarded as excellent, as more than 1,200 companies have been registered in the Company Facility Unit since its effective implementation in early 2022. These companies employ approximately 10,000 people who live in Cyprus with their families. These are highly skilled and well-paid workers who benefit the Cypriot market and society not only through consumption, but also by providing valuable experience, know-how, and new skills.

[This article was first printed in Kathimerini business magazine and has been translated from its Greek original]