By Stelios Orphanides
On Wednesday, British prime minister Theresa May is expected to notify the President of the European Council Donald Tusk that the UK intends to leave the European Union, triggering article 50 of the European Treaty.
This step, the outcome of the June 23 referendum in which Britons decided in favour of Brexit, is expected to begin a two-year divorce negotiation period which will determine the future of relations between the EU and the UK, one of the main trading partners of the Cypriot economy which is still recovering from a prolonged recession and the effects of the 2013 banking crisis.
The terms of the agreement could also determine whether Cyprus can attract UK companies which will seek to maintain their access to the EU single market.
“Cyprus has close trade and investment links with the UK,” said Ioannis Tirkides, who heads the economic research division of Bank of Cyprus in an internal report seen by the Cyprus Business Mail. “Hence, its economy is particularly vulnerable to developments in the UK economy”.
Cyprus whose tourism industry accounts for about a quarter of its economy, directly or indirectly, attracted last year a total of 1,157,978 British tourists, which accounted for 36 per cent of total arrivals. The number of British visitors rose last year 11 per cent compared with an overall increase of almost 20 per cent.
Following the Brexit vote, sterling depreciated roughly 12 per cent against the euro, making the single currency bloc’s products and services, including vacationing in Cyprus, less affordable for British consumers. This appears to have already impacted the number of British tourists visiting Cyprus.
While the number of arrivals of British tourists continued to increase following the Brexit referendum last June, the rate of increase dropped from an annual 16 per cent in January to June last year to 8.1 per cent in the second half of the year.
As economic growth is expected to further weaken next year in the UK from an estimated 2 per cent last year to 1.5 per cent this year and 1.2 per cent in 2018, many questions remain open concerning the UK’s future relationship with the EU.
As one of the topics in the Brexit referendum was the free movement of citizens of other EU countries, one of the four freedoms enshrined in the rules of the European single market, it is considered unlikely that the UK will remain part of it following the divorce negotiations.
“The slowdown of economic activity in the UK in 2017 and the appreciation of the euro against the pound will reduce the competitiveness of the Cypriot exports to the UK,” Tirkides said.
He added that while the value of goods exported to the UK account for 7 per cent of total exports, the share of exported services to the UK is almost three times as much compared to the total.
“There will be prolonged uncertainty and we will have fluctuations depending on how negotiations are going,” said Michalis Antoniou, who manages the Employers and Industrialists Federation, a business group known widely by its Greek acronym OEB. “These fluctuations will impact sentiment and this in turn will affect consumption and other issues. But I am not expecting any concrete results in the first six months following the beginning of divorce negotiations”.
“Brexit should not be punitive,” Antoniou who was commenting on the phone said, adding that while the UK and the EU “should maintain their relationship as it is in their interest,” the EU should also rule out “cherry-picking”.
The director general of OEB said that the negotiated agreement should preserve bilateral trade ties, avoid placing unnecessary obstacles to trade transactions and “leave the door open for even stronger relations at a later stage”.
“Future trade relations could have many possible forms; (the UK) being merely a third country or enjoying a strong association,” Antoniou said. “The path we are walking on now is completely unknown”.
As uncertainty following the Brexit vote prompted British companies, including financial and shipping firms, relying on access to the single market, to seek alternative locations in order to maintain their EU-pass, the terms of the divorce agreement are likely to also determine whether they will also seek to relocate.
Still, Thomas Kazakos who manages the operations of the Cyprus Shipping Chamber and holds a seat in the board of directors of the Cyprus Investment Promotion Agency (CIPA), tasked with attracting foreign investment, said that while Cyprus is always “on the lookout,” to attract to the island, UK companies in the shipping sector and those in related financial services.
While his expectations are low regarding what can be achieved, even as Cyprus has a “competitive, lawful and EU-approved tax-regime,” able to offer aftersales service, any UK company in the shipping sector or offering related support services is welcome to the island, he said.