Important steps but major challenges still ahead

[Accountancy Cyprus, No. 116, September 2014.]

Two important financial milestones marked the summer of 2014. In June, Cyprus tapped international capital markets for the first time since January 2010, raising €750 million of fresh funds. The return to the markets after a 4.5 year absence was certainly a significant and gratifying event, not because it took place just 15 months after the big shock of March 2013.

One of the reasons for this success is that the Cypriot economy is faring much better than almost anyone expected; the fiscal situation has improved substantially and the recession is not as deep as feared. The strict implementation of the Memorandum of Understanding (MoU) has proven successful in bringing stability to the country and has contributed to the improvement in the international image and credibility of Cyprus.  

The return of investor confidence in international markets was another important contributing factor. The markets are flush with liquidity, bond yields are very low and international investors are looking for investments that will deliver some return without undue risk. The timing was very good for Cyprus and the government wisely seized the opportunity. The success improved the image of Cyprus abroad and at the same time provided a psychological boost at home.

But perhaps the most important consequence of the bond issue is that it paved the way for Cypriot banks – particularly the Bank of Cyprus – to tap international markets themselves. The Finance Minister made this point emphatically at the time, which suggests that pushing the banks in this direction might have been one of the government’s prime motivations all along.

Intentional or not, the Bank of Cyprus got the message and quickly moved to issue new capital. This process was concluded at the end of August, when the bank’s shareholders approved the injection of €1 billion in additional share capital. The successful conclusion of the capital increase was the second major event of the summer. It puts the bank in a very strong position with a core Tier 1 capital in excess of 15% that will allow it to absorb any losses due to declines in the value of its assets, particularly the loan portfolio. 

These developments are certainly positive, but the road ahead is still long and full of challenges. In a sense, fixing our fiscal house was the easy part. Raising tax rates and cutting expenditures are relatively straightforward things to do. Implementing structural reforms is much more difficult, both for practical and for political reasons.

The practical aspect is that structural reforms (such as privatizations, implementation of the national health system, public sector reform, etc.) are complex endeavors that require resources and commitment from the government. Politically, these issues are also much more sensitive because they impact powerful entrenched interests that will not go down without a fight. We have already seen this in the vocal protests against privatizations; but opposition to reform is working in more subtle ways in other areas also.

The difficulty of reform is exacerbated by the fact that the government does not have a majority in parliament. This has been made painfully obvious in the endless wrangling about the foreclosure law. In any other country, the government would only have to convince its coalition partners. In Cyprus the government has to struggle to convince one or more of the opposition parties to support its bills. This state of affairs has been an almost permanent feature of our political system and is probably the main reason why practically no major reforms have ever been implemented in Cyprus in the absence of outside pressure. Political uncertainly could be a major obstacle as we try to implement the most difficult aspects of the MoU.

The improvement in public finances and the successful return to the markets have led to suggestions that Cyprus may be able to exit the program ahead of time, in 2015 instead of 2016. It is true that a key objective of the MoU is to support Cyprus until it can finance itself. But an equally important objective is to reform the economy and to build the foundations that will put Cyprus on a path of sustainable growth. Major challenges still lie ahead: privatizations; public sector reform; implementation of the national health system; further stabilization of the financial sector; and thorny negotiations over COLA and civil service pay and benefits.

We must not get ahead of ourselves. The measure of our success should not be the time that we will exit the program but the extent to which we will improve the institutions and strengthen the foundations of the Cypriot economy. 

Θετική η έξοδος, οι προκλήσεις παραμένουν

[Φιλελεύθερος, Κυριακή 22 Ιουνίου 2014]

Η πετυχημένη έξοδος της Κύπρου στις αγορές είναι σημαντική τόσο για συμβολικούς όσο και για ουσιαστικούς λόγους. Ο συμβολισμός είναι προφανής. Η Κύπρος τέθηκε τυπικά εκτός αγορών τον Μάιο του 2011 όταν η πιστοληπτική της ικανότητα υποβαθμίστηκε σε μη επενδυτική βαθμίδα και από τον τελευταίο μεγάλο οίκο αξιολόγησης. Όμως ουσιαστικά η χώρα ήταν ήδη εκτός αγορών αρκετούς μήνες πιο πριν αφού τα επιτόκια ήταν απαγορευτικά. Ο τελευταίος δανεισμός της Κύπρου από τις διεθνείς αγορές είχε γίνει τον Ιανουάριο του 2010. Αναμφίβολα, η επιστροφή στις αγορές μετά από 4,5 σχεδόν χρόνια έχει μεγάλη σημασία για την Κύπρο.

Είναι επίσης αξιοσημείωτο ότι αυτό συμβαίνει μόλις 15 μήνες μετά το μεγάλο σοκ του Μαρτίου 2013. Δύο κυρίως παράγοντες κατέστησαν δυνατή αυτή την εξέλιξη. Ο πρώτος είναι ότι η πορεία της Κυπριακής οικονομίας εξελίσσεται αρκετά καλύτερα από ότι αναμενόταν και παρατηρείται σημαντική βελτίωση στα δημοσιονομικά δεδομένα. Η πιστή υλοποίηση του μνημονίου έχει αποφέρει και με το παραπάνω τα προσδοκώμενα αποτελέσματα στους οικονομικούς δείκτες και έχει παράλληλα συνδράμει στην βελτίωση της αξιοπιστίας και φερεγγυότητας της Κυπριακής Δημοκρατίας.

Ο δεύτερος παράγοντας είναι η αλλαγή του κλίματος στις διεθνείς αγορές. Υπάρχει παγκοσμίως πάρα πολλή ρευστότητα και πολλοί επενδυτές που κυνηγούν αποδόσεις. Η συγκυρία ήταν πολύ θετική για την Κύπρο. Η άντληση €750εκ. με απόδοση 4.85% δημιουργεί ένα θετικό κλίμα για την Κύπρο στο εξωτερικό και συνάμα βελτιώνει την ψυχολογία και στο εσωτερικό.

Οι οικονομικές επιπτώσεις αυτής της κίνησης είναι συνάρτηση του τρόπου αξιοποίησης των αντληθέντων κεφαλαίων. Αν – όπως έχει λεχθεί – ο εξωτερικός δανεισμός χρησιμοποιηθεί για τη μερική αποπληρωμή του ομολόγου κεφαλαιοποίησης της Λαϊκής Τράπεζας που κατέχει τώρα η Τράπεζα Κύπρου, τότε τα οφέλη που θα προκύψουν είναι αρκετά. Το κυριότερο είναι ότι βελτιώνεται το προφίλ ωρίμανσης του Κυπριακού χρέους, αφού το ομόλογο της Τράπεζας Κύπρου θα πρέπει να αποπληρωθεί μέχρι το 2017 και δεν καλύπτεται από το μνημόνιο. Παράλληλα προκύπτουν και άλλα οφέλη: μειώνεται ελαφρώς το κόστος δανεισμού του κράτους (το ομόλογο πληρώνει 5,15%), δίνεται μια ένεση ρευστότητας στην οικονομία και αυξάνονται τα κεφάλαια της Τράπεζας Κύπρου με την εισροή μετρητών αντί του ομολόγου.

Η Τράπεζα Κύπρου έχει και άλλους λόγους να είναι ευχαριστημένη από αυτή την εξέλιξη. Η Τράπεζα χρειάζεται επιπλέον κεφάλαια για να βελτιώσει τους δείκτες κεφαλαιακής επάρκειας. Η επιτυχής έκδοση του ομολόγου δείχνει ότι οι επενδυτές εμπιστεύονται την Κύπρο και άρα αποτελεί θετικό προμήνυμα για την προσπάθεια της Τράπεζας Κύπρου – αλλά και άλλων τραπεζών αν χρειαστεί – να αντλήσουν κεφάλαια από διεθνείς επενδυτές.

Χωρίς αμφιβολία, η έκδοση χρέους από την Κύπρο καταγράφεται ως μια σημαντική θετική εξέλιξη. Όμως ο δανεισμός από τις διεθνείς αγορές δεν είναι το τέλος του δρόμου αλλά ένας ενδιάμεσος σταθμός. Είναι σημαντικό να θυμόμαστε ότι όλα αυτά είναι δυνατά επειδή η Κύπρος βρίσκεται ακόμα σε πρόγραμμα το οποίο καλύπτει τις χρηματοδοτικές της ανάγκες για την επόμενη διετία και δίνει στους επενδυτές μια εξασφάλιση ότι η χώρα θα ακολουθήσει συνετές πολιτικές, τουλάχιστον για κάποιο διάστημα. Η δυνατότητα δανεισμού από τις αγορές ίσως δημιουργήσει πιέσεις στο εσωτερικό για γρηγορότερη έξοδο από το μνημόνιο - ήδη έχουν ακουστεί κάποιες φωνές προς αυτή την κατεύθυνση. Θα ήταν μεγάλο λάθος να βιαστούμε. Ασφαλώς κύριος στόχος του μνημονίου είναι να στηρίξει την Κύπρο μέχρι την επάνοδό της στις αγορές. Εξίσου σημαντικός όμως είναι και ο στόχος της μεταρρύθμισης της οικονομίας και της οικοδόμησης ισχυρών βάσεων που θα διασφαλίζουν μια πορεία βιώσιμης ανάπτυξης. Πρέπει να παραμείνουμε προσγειωμένοι και προσηλωμένοι στην υλοποίηση των μεταρρυθμίσεων που θα θωρακίσουν τη οικονομία μας. Μέτρο της επιτυχίας μας δεν πρέπει να είναι το πότε θα εξέλθουμε από το μνημόνιο αλλά το πόσο βελτιώσαμε τις δομές, τους θεσμούς, και την ανταγωνιστικότητα της Κυπριακής οικονομίας.

Restoring Cypriot competitiveness

[Accountancy Cyprus, No. 115, June 2014.]

The divergent path taken by the Eurozone’s economies since the new currency’s inception is one of the fundamental underlying causes of the recent crisis. A number of European countries – mostly in the north - pursued policies aimed at raising productivity and improving their competitiveness. Several other countries – mostly in the south – experienced rapid credit expansion that fueled asset price inflation (primarily in the form of housing bubbles) and led to large current account deficits and a decline in competitiveness. Cyprus falls into the latter category. It has had a current account deficit every year since 1999; the deficit has exceeded 5% every year from 2004 to 2010 and it averaged a staggering 12% between 2007 and 2010. 

The OECD defines competitiveness as “a measure of a country's advantage or disadvantage in selling its products in international markets.” It is a relative notion that depends on a country’s productivity relative to the productivity of other countries. As such, it is closely related to what in everyday language we call “value-for-money”. A more competitive economy – just like a more productive company – can deliver greater value (quality) at a given price. A loss of competitiveness results from a combination of insufficient investment – which keeps quality stagnant – and excessive wage increases, which push prices upwards. This is what happened in Cyprus over the last 15 years before the crisis. Wages consistently rose faster than productivity, eroding the country’s competitiveness and leading to enormous current account deficits.

Cyprus’ malaise was the result of a credit-induced boom and dominant unions in the public and banking sectors. Essentially Cyprus in the 2000s suffered from Dutch disease. Excessive activity and economic rents in the banking, construction and real estate sectors drove up wages and the prices of goods, services and assets. This led to a deterioration of the country’s competitive position and made it difficult for other sectors to compete internationally. Tourism is a prime example. While the rest of the economy was booming, a deteriorating tourist infrastructure meant that Cyprus was offering declining quality at an increasing price. Unable to compete with newly emerging destinations, it was forced to rely on cheap, imported labor, which further exacerbated quality problems.

Countries with their own currency can quickly and effectively restore their competitiveness by allowing their currency to depreciate. Greece and Italy have often used this tool, much to the frustration of their trading partners. Cyprus, on the other hand, never used the devaluation option, opting instead for a stable currency policy. Of course, this option is no longer available as the country is now a member of the Eurozone. Countries that do not control their currency can only boost competitiveness by raising the quality and/or decreasing the price of their goods and services. The latter can be achieved by cutting costs, including wages in the process known as internal devaluation. But cost-cutting has its limits and reducing wages has negative repercussions on social welfare and can strain the financial system as borrowers are unable to pay off their loans. The alternative of increasing quality is a much more appealing strategy but it is no quick fix as it requires productive investments and structural reform. The former are difficult to finance in times of crisis and the latter are politically difficult to implement; both take time to bear fruit.

The Cypriot economy has proven quite flexible. An internal devaluation is taking place, with prices and wages following a downward trend since the events of March 2013. This flexibility has allowed for a somewhat smoother and speedier adjustment than what was widely expected, but internal devaluation alone will not solve the competitiveness problem. In the longer term, this issue has to be addressed in two ways.

First, Cyprus needs productive investments (as opposed to investments in financial assets or real estate) that will expand the country’s productive capacity and improve productivity. As credit from the domestic financial sector will be tight for the next few years, such investments will have to come from overseas. It is imperative therefore that Cyprus cuts down bureaucratic red tape and makes itself a friendly destination for investors and entrepreneurs.

Second, the wage determination system must be radically changed. Union power in the public and banking sectors must be curtailed. Automatic wage increases must be abolished and wages should be linked to productivity, not to prices. In the public sector, for example, wage increases could be indexed to GDP growth. In the banking sector, collective bargaining must be done at the individual bank level rather than the sectoral level. This will reduce union power and foster healthier competition as banks can differentiate themselves in an effort to attract talent. The same principle should apply to all sectors, at least for large companies.

Cyprus must invest to improve the quality of the goods and services it sells to the outside world and it must keep costs in check so that it can offer an attractive price. It is really a very simple recipe.

A time for reform

[Accountancy Cyprus No. 114, March 2014.]

In March 2013 Cyprus experienced the shock of the depositor bail-in. Bad banking practices, excessive construction activity and a general culture of over-consumption had created huge imbalances during the boom years of 2004-2008. The global financial crisis burst the bubble and a painful adjustment was inevitable. The pain was made much greater by a string of policy failures that culminated in the bail-in, causing in a tremendous loss of wealth, the destruction of the banking sector, a loss of trust and credibility, and significant economic hardship. The economic outlook in March 2013 was extremely bleak.

One year later, things are not as bad as many feared. The contraction in 2013 was about 6%, much smaller than anyone expected. Unemployment has risen but seems to have leveled off and currently stands at 16.8%, not that much higher than the 14.8% it had hit in March 2013. Fiscal targets are being met, with room to spare. The banking sector is moving in the right direction, although the process will be long. The sector’s return to normalcy remains the biggest single challenge Cyprus faces as it strives to emerge from the recession.

With the fiscal situation in check and the banking sector’s reorganization nearly complete, the focus must now shift to structural reform. Cyprus’ track record in this respect is miserable. The political system has an extremely difficult time designing, agreeing to and implementing important reforms. It is not an exaggeration to say that the only major reforms implemented in Cyprus over the last twenty years were those associated with EU accession. It is difficult to think of a single major reform that came from within the system.

The Memorandum of Understanding requires Cyprus to implement a number of major reforms.  Many of those are much-needed, by Cyprus’ own admission; they have been considered and debated by the Cypriot political system, but never carried through to fruition. Examples include the national health system, social security, tax collection, local government, property titles, semi-governmental organizations, and public administration. The MoU provides an opportunity and the seemingly necessary outside pressure to push ahead with reforms that will modernize the economy, increase efficiency and improve competitiveness.

Public sector reform is particularly important. In the World Bank’s 2014 Doing Business report, Cyprus ranks 39th in the world overall but scores much lower in several aspects of public service provision: 86th in dealing with construction permits, 108th in getting electricity, 103rd in registering property, and 110th in enforcing contracts. These are unacceptable outcomes for a country that markets itself as a business center.

Beyond the MoU, Cyprus needs to refocus its economy and correct the economic distortions that built up over many decades and culminated in the boom and bust of the 2000s. The image of Cyprus as a business and financial center took a big hit in March 2013. But the sector has held up very well and there was no mass exodus of international businesses. This remarkable resilience pays tribute to the quality of services provided by Cyprus’ accountants, lawyers and financial advisors and gives hope that Cyprus can maintain and build on its status as a business center. In order to do so, Cyprus must do three things:

• First, it should focus on the provision of business services and play down the financial dimension (which was probably exaggerated anyway). As a business center Cyprus can continue to provide good quality and cost-effective legal, accounting and other services without requiring a large domestic banking sector and the associated risks. 
• Second, it should play down its low tax regime and focus on the quality of its services and the other benefits that are truly unique to it. Cyprus has well-trained and highly experienced professionals and a good legal framework (and its location is still great). It would also do well to specialize in particular niches – the success of shipping provides a good model. 
• Third, it needs to become a model in implementing regulations on financial transparency, money laundering and tax evasion. The laxity of the 1990s still haunts Cyprus; a clean image can attract reputable businesses and bring many benefits to the country. 

It is often said that every crisis is an opportunity. It is a cliche, but it is a good one. Cyprus must use this opportunity to push through reforms that will correct the mistakes and excesses of the past and put the economy on a path of steady and sustainable growth.

Σχόλια σε θέμα του Stockwatch με την ευκαιρία της επετείου του κουρέματος:

Ο αναπληρωτής καθηγητής οικονομικών, Σωφρόνης Κληρίδης σημειώνει ότι η κυπριακή οικονομία επιδεικνύει πολύ μεγαλύτερες αντοχές από ότι περιμέναμε.

«Πριν ένα χρόνο κανείς δεν προέβλεπε ότι η Κύπρος θα έβγαζε το 2013 με μια ύφεση μικρότερη του 6%. Μικρότερη ύφεση σημαίνει και καλύτερες επιδόσεις στα δημοσιονομικά», αναφέρει.

Σύμφωνα με τον κ. Κληρίδη, δύο είναι οι μεγάλες προκλήσεις. Η πρώτη είναι ο τραπεζικός τομέας.

«Τον τελευταίο καιρό έχουν γίνει μια σειρά από θετικές κινήσεις, όμως τα προβληματικά δάνεια είναι σε πολύ ψηλά επίπεδα και η διευθέτησή τους θα πάρει πάρα πολύ χρόνο. Μέχρι να γίνει αυτό, οι τράπεζες δεν θα είναι σε θέση να προσφέρουν το δανεισμό που χρειάζεται η οικονομία. Η περιορισμένη ρευστότητα είναι η μεγαλύτερη πρόκληση που θα αντιμετωπίσει η οικονομία μας μεσοπρόθεσμα», σημειώνει.

Πέραν την προσφοράς, συνεχίζει, πρόβλημα υπάρχει και στην πλευρά της ζήτησης.

«Οι κυπριακές επιχειρήσεις και τα νοικοκυριά είναι υπερχρεωμένα και βρίσκονται σε φάσηαπομόχλευσης. Η δυνατότητά τους να δανειστούν για να προβούν σε επενδύσεις είναι περιορισμένη, ακόμα και αν υπάρχουν επενδυτικές ευκαιρίες και τραπεζικά κεφάλαια. Αυτό θα καθυστερήσει την επάνοδο της οικονομίας σε ψηλούς ρυθμούς ανάπτυξης, εκτός και αν μπορέσουμε να προσελκύσουμε επενδύσεις από το εξωτερικό. Αυτή πρέπει να είναι και μια από τις κύριες προτεραιότητες της κυβέρνησης».

Η δεύτερη πρόκληση είναι οι διαρθρωτικές μεταρρυθμίσεις. «Η πρόσφατη αναστάτωση δείχνει ότι οι ιδιωτικοποιήσεις θα αποτελέσουν μεγάλο πονοκέφαλο, ενώ εξίσου μεγάλες προκλήσεις θα είναι η μεταρρύθμιση του δημόσιου τομέα, η εφαρμογή του ΓΕΣΥ και η έκδοση τίτλων ιδιοκτησίας. Η πολιτική βούληση της κυβέρνησης και της βουλής να τα βάλουν με ειδικά συμφέροντα θα δοκιμαστούν σκληρά. Όμως πρέπει να αντεπεξέλθουν γιατί η κυπριακή οικονομία έχει μεγάλη ανάγκη αυτές τις μεταρρυθμίσεις», τονίζει ο κ. Κληρίδης.