The Pandemic Is No Longer An Issue For Cyprus, The Economy Issupport
Cypriot authorities have managed to contain the COVID-19 pandemic to a significant degree, with the implementation of strict public health measures. In recent weeks, the number of cases has remained at single digits, which raises the optimism that a new outbreak of the pandemic will not happen.
Although no one admits it, most people are now worried about the country’s economy, which is heavily dependent on external factors. Namely; Tourism, foreign property buyers, and professional services provided to foreigners. These vital pillars of the country’s economy have been hit hard.
Official data reveal the following:
- GDP growth rate at constant prices for the second semester: -11,9%
- Tourist arrivals up to July: -88.2%
- Revenue from tourism up to April: -98,1%
- Inflation in August: -1,2%
To safeguard the national health system and mitigate the economic effects of the crisis, the Cypriot ministries of Finance and Labor decided to protect businesses, jobs, and incomes through a package of fiscal measures. The Ministry of Finance estimates that the recession for the whole of 2020 will be around 7.5%. However, there were some more optimistic forecasts, which put the recession at 5%.
Undoubtedly, the most important measures the government implemented were the partial subsidization of salaries and payment moratoria on performing loans. Also, the government allowed companies to postpone their VAT tax obligations.
Additionally, in order to boost the liquidity of businesses and, in particular, small and medium-sized enterprises, the government announced three plans: standard intermediated lending for SMEs and Midcaps, the enhancement of the Cyprus Entrepreneurship Fund, and the use of the Pan-European Guarantee Fund in response to COVID-19.
It also introduced an interest rate subsidy scheme for new business loans and a direct subsidy for micro-enterprises and the self-employed.
Private debt rates in Cyprus are between the highest among developed countries, and many companies, mainly related to the tourism sector, are on the verge of suffocation. Of course, there are financially healthier businesses, which have benefited from the very positive growth rates of recent years, by reducing their borrowing and increasing available cash.
As expected, the aforementioned measures had a high cost to public finances. There was an increase in government spending and public debt and, at the same time, a decrease in government revenues. Between January-July 2020, total government expenditure increased by $698,2 million (+12,8%) and amounted to $6.146,5 million, compared to $5.447,2 million in the corresponding period of 2019.
It is noted that this significant increase in expenditure, is attributed to the support measures taken to address the effects of the COVID-19 pandemic on employment, which amounted to $512,5 million. On the other hand, total government revenue decreased by $863,2 million (-14,6%) to $5.010,2 million, compared to $5.903,4 million in the corresponding period of 2019.
Rating agency Standard & Poor’s recently affirmed its `BBB-/A-3` long- and short-term foreign and local currency sovereign credit rating on Cyprus, with a stable outlook.
Standard & Poor’s report expresses the view that Cyprus` eurozone membership, strong cash position, solid growth prospects, and historically prudent fiscal policies will mitigate the COVID-19 impacts on the sovereign’s creditworthiness.
As the report points out, authorities are implementing measures to curb the virus’s spread while safeguarding incomes and shielding businesses from a temporary, albeit critical, liquidity shock. However, the report adds, the COVID-19 fallout has pushed Cyprus’ tourism-dependent economy into a severe recession and prompted a large deficit.
The agency explains that the stable outlook exemplifies its view of Cyprus’ solid long-term growth prospects, improving public debt dynamics, and track record of running budgetary surpluses against high stocks of public and private debt. However, it raises concern about the inherent vulnerability of the country’s small open economy, given its large tourism sector and exposure to external shocks, such as the ongoing COVID-19 pandemic.
Standard & Poor’s assessment gave backing to the Cypriot government, regarding the measures it has taken to deal with the pandemic, but the problems are far from over. Public and private debt is well above 100% of GDP, external demand remains limited, and the prospects for tourism and foreign property buyers for 2021 remain uncertain. With no more labor market support measures on the way, many employers already say they will soon be laying off staff as their turnover has dropped significantly. Given this, it makes sense for the government to be more concerned about the pandemic’s economic impact than about its consequences for public health. At least, for now.
Link to the official article: https://www.forbes.com/sites/antonisantoniou/2020/09/16/the-pandemic-is-no-longer-an-issue-for-cyprus-the-economy-is/