The interesting development of the Cyprus economy in the past few years

Posted on 23 Oct 2018, by Polina Polycarpou

The Cyprus economy can generally be described as small, open and dynamic with the service sector being the driving force behind it. Interest rates have been liberalized, while price controls and investment restrictions, with full liberalization of foreign direct investment in Cyprus, have increased. In addition, other more wide-ranging structural reforms have been promoted, covering the areas of competition, finance and the business sector.

On top of everything, the peak phase was the fact that, it has been about a month now that Cyprus has a new, 10-year bond, issued by the Cyprus Government with an interest rate of only 2,4%. This was the result of the increased demand for the Cyprus bond, which ended up exceeding the amount of 5,7 billion euros with the country pumping 1,5 billion euros against the initial target which was 1 billion euros. At the opening of the bidding book, interest rate guidance was 2,6%, but high demand for the Cyprus bond led to 2,4%.

The order for release was officially announced via Barclays, J.P. Morgan, Morgan Stanley and Societe Generale. The Republic of Cyprus has designated the above banks for the issuance of the 10-year European Medium-Term Bond (EMTN) in Euro, based on market conditions.

This was as a result of the upgrade of an investment grade by the Standard and Poor’s rating agency. The high demand and the interest rate that was lower than the initial estimations, are a confirmation of the investors' confidence in the course of the Cyprus economy. The goal of refinancing existing debt at a better interest rate and increasing cash can now be achieved easier, following the current changes with the Cyprus Cooperative Bank.

The issue date of the bond was 25th September 2018 and the maturity date is 25th September 2028. Note that, the last exit to 10-year bond markets was in 2015 where 1 billion euros were raised, with the interest rate standing at 4,25%, the lowest level the country could achieve.

What does the future hold?

According to the Ministry of Finance's calculations, the state's available cash by the end of 2018 will be at 1 billion euros, with the money raised from the period of 10 years’ time to reach 2.5 billion euros. This amount provides liquidity in the economy of Cyprus.It is not precluded that, in 2019 (if it continues to present a primary surplus), further debt repayments will be made, in addition to pre-defined liabilities. It is possible that, in 2019, the government is facing close to 2,1 billion euros in maturities almost as much as in 2020, when it is scheduled to start repaying loans received from the European Stability Mechanism (ESM) and the International Monetary Fund (IMF) as part of the 2013 bailout.

International trust is gained

Commenting on the successful completion of the issuance of a ten-year bond of the Republic of Cyprus, there is great interest - since the issue was overlapped almost four times – as the historically more favorable performance for our country is a testament to the confidence of the international economic community in the Cyprus economy, in its prospects and the policies pursued. Undoubtedly, following the return of Cyprus to the investment grade and its inclusion in the government bond market program by the European Central Bank, today's successful edition, is a clear example of the new structure of the Cyprus economy.

Both the President of the Republic, Nicos Anastasiades, and the Minister of Finance, Haris Georgiades, characterize the result as a "vote of confidence for the Cyprus economy" and "vindication of the decisions of responsibility and the great effort of all our productive forces". Furthermore, the US-based Standard and Poor’s rating agency upgraded Cyprus' long-term credit rating from BB+ to BBB, which means the economy is able to maintain a stable stance, as well as Cyprus short-term credit ratings being upgraded from B to A-3.

Investment allocation 

Furthermore, geographically, the Republic of Cyprus has achieved a broad distribution of offers, mainly to international investors in Europe (28%) and the United Kingdom (28%). By category of investors; capital managers accounted for the largest category (42%), followed by banks / private banks (40%). Quantitative Easing (QE), also known as large-scale asset purchases, is an expansionary monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to stimulate the economy and to increase liquidity. Mario Draghi's Quantitative Easing (QE) program can run until December 2018, but it will not stop altogether. Cyprus, with the transition to the investment grade, is also expected to participate in the QE after-season, in reinvestment of maturing bonds. The investors will buy bonds, but they will not buy in the quantities they have bought so far. The amount of bonds bought was 60 billion with the QE program, it was reduced to 30 billion euros, and by 2019, only reinvestments will be active, hence the amount will further be reduced to around 18 billion euros. As a result, further cuts in interest rates will have additional advantages.

Returning the country to an investment grade will boost confidence in the Cyprus economy and specifically, the domestic banking system. At the same time, the use of Cyprus Government securities in Eurosystem credit operations and their reintegration into the Public Sector Purchase Programme - PSPP - is expected to help contain the borrowing costs of the Republic of Cyprus. In addition, the domestic banking system's ability to raise liquidity at low interest rates through Eurosystem credit operations will be expanded.  

In conclusion, the improvement of the economy reflects the striking progress in the fight against the crisis. The impact of the financial sector in the improvement of the economy will result in the decline of banks’ capital costs, as well as, the increased interest in the investment in Cyprus will also help banks, as capital revenue is expected to increase. This means that many of the financial sector’s customers will have higher revenues.

The content of this article is intended to provide a general guide to the subject matter. For further information, please contact Polina Polycarpou  at polina.polycarpou@kyprianou.com