First of all, let me thank the organizers, “Invest Cyprus”, for hosting this event and for providing me with the opportunity to present the economic outlook of the Cyprus economy. In these very demanding and challenging times, the promotion of our country as an attractive investment destination is key to enhancing the recovery and the resilience of our economy.
Let me also extent my greetings to all participants and to my esteemed fellow speakers.
Without doubt, the COVID-19 pandemic has posed unprecedented challenges for all countries around the globe, with severe socio-economic consequences. In Cyprus, we implemented bold and strict measures of containment, in order to effectively protect our citizens and the public health system. To alleviate the negative economic consequences, the Government responded in a timely manner, by adopting a comprehensive and generous fiscal support package in order to assist businesses and prevent, to the extent possible, job losses. The measures are temporary and include financial support to the health sector, subsidized wages to keep employees on the payroll in case of suspended business operations, income support for small businesses and the self-employed, tax relief measures, as well as targeted support to help the tourism sector. A series of measures were also taken to support enterprises by enhancing their liquidity.
The positive fiscal performance of the last few years prior to the onset of the pandemic, played a significant role in allowing the Government to respond in a timely manner and address the negative effects of the pandemic on the economy, adopting a generous fiscal package. without risking the long-term sustainability of public finances.
As regards the economic outlook of the economy, following an unavoidable significant contraction of activity in 2020 which is expected to hover around -5.5%, a rebound is expected to materialise in 2021, of the magnitude of around 4.5%. I have to emphasise though that forecasts in such turbulent times are accompanied with a great level of uncertainty connected to the pandemic evolution.
In the labour market, the level of unemployment increased in 2020 given the recession, but the increase was less than initially anticipated and is expected to be around 8% of the labour force. With the resumption of economic activity in 2021, unemployment is expected to start declining again to round 7% of the labour force.
As regards public finances, there has been a significant deterioration in 2020, given the slump of economic activity and government revenues, together with significant increase of public expenditure in order to assist the economy. As a result, there has been a significant increase of public debt, which increased to 120% in comparison to 95.5% in 2019, due to additional bond issuances in order to increase the state’s cash buffers during these turbulent times. Even though borrowing was the correct approach under the circumstances, we have set a ceiling for public debt at 120% of GDP, taking into account that the markets consider it as a benchmark for the sustainability of public debt. Our policy is to place it on a declining trend as of 2021 onwards, expecting public debt to decline to around 98% of GDP by 2023.
As regards the banking sector, our goal is to tackle the remaining challenges including “legacy” NPLs, but also new challenges that may arise due to the pandemic and the repercussions to the economy. As regards “legacy” NPLs, there has been substantial reduction up until the latest available data (September 2020) with the ratio of NPLs to total loans dropping to around 21%, mainly through restructurings, debt to asset swaps and sale of loans. These figures include the recent package of NPLs sold by Bank of Cyprus, in the context of the project “Helix 2”.
In particular, since the end of 2014, there has been a significant reduction of the NPL ratio by around 78%. We acknowledge that the ratio of NPLs is still high and in this context the Government has prepared an action plan to address the remaining stock of non performing loans. Peak of NPLs was recorded in 2014 at 28 billion euros, equivalent to 45% of loans. Latest available data of Sept-2020 indicates a stock of 6,3 billion euros, equivalent to 20% of loans. In 2021 we expect a further reduction to be recorded.
Ladies and Gentlemen,
Despite the pandemic setback, our policy priorities remain the same, that is achieving macroeconomic stability, implementing prudent fiscal policies, ensuring financial stability and establishing a competitive, business-friendly regulatory environment of high standards.
In this context, the Government's broader strategy for economic recovery includes the implementation of much needed structural reforms for the development of key sectors, fully exploiting newly established european mechanisms known as “the “Recovery and Resilience Facility”. This instrument, which will provide a mix of grants and loans to member states, is expected to be instrumental in the revamping and the resilience of our economy, including actions related with green and digital economy. We believe that the additional funds, up to 1.0 billion euro allocated to Cyprus, will be key for our economy to become more competitive in the global economic stage. To this end, we are currently preparing our Recovery and Resilience Plan following extensive consultation with all involved stakeholders. This Plan, will basically constitute the blueprint for our growth policies for the next years, includes a combination of investments and reforms. It takes into account the need to mitigate the economic and social effects of the current economic crisis and the need to strengthen the resilience and the competitiveness of the economy, through a new growth model based on green and digital transition.
In fact, having a competitive economy is a catalyst for attracting corporations and investors that are looking for investment destinations which can provide high returns on their investments. And it goes without saying that in today’s challenging economic environment, foreign investments are all more important for the overhaul of our economy.
As part of a package of incentives to promote the island’s economic recovery, investors are able to take advantage a favourable environment towards investments and a Fast Track Business Activation Mechanism for setting up a business in Cyprus by third-country nationals, approved by the Cabinet in September 2020. This framework aims to facilitate businesses to re-locate or expand in the country, allowing company registration and incorporation to be completed in seven working days. Moreover, investors and businesses looking to set up European headquarters in Europe, can enjoy Cyprus’ competitive advantages, which include transparent and modern legal system, based on common law, a highly trained workforce of lawyers, accountants and corporate service providers, excellent telecommunications, transport and logistic infrastructure and a favourable tax environment. In fact, there are currently numerous opportunities for investments in Cyprus, including greenfield real estate projects in hospitality and tourism, higher education and healthcare.
Ladies and Gentlemen,
It’s up to us to modernize our economy and enhance its productive base in admittedly very difficult economic times.
In this effort, it is imperative that we work together combining our forces, in order to restart the Cyprus economy in the post COVID 19 era. I am confident that we will deliver.
Let me conclude by wishing you success to this event.