(Adds background in eleventh paragraph, minister comment in forteenth paragraph)
By Stelios Orphanides
Finance Minister Harris Georgiades said the Cypriot economy will expand 4 per cent this year, up from a previous forecast of 3.5 per cent, and will continue growing an average 3 per cent over the next three-year period.
The finance minister, who was addressing lawmakers in his annual budget speech, said that the government, whose term expires in February, aims at reducing unemployment to a single digit and ultimately achieve full employment by 2020, from 10.2 per cent in October.
The budget, which provides for €7.5bn in spending and €7.7bn in revenue –roughly one per cent of gross domestic product (GDP)–, is the fifth submitted by Georgiades who took the helm in April 2013, days after the island agreed to the terms of its bailout which provided for a bail-in of depositors.
He has since overseen Cyprus’s fiscal consolidation and economic recovery, which led to an earlier than expected return to financial markets after having been shut out in 2011.
The performance of the economy and public finances has proven wrong, scaremongers who had predicted a complete financial meltdown four years ago, he said.
The banking sector has turned the page,” he said, partly on a stronger supervisory framework with four Cypriot lenders being jointly supervised by the Central Bank of Cyprus and the European Central Bank’s (ECB) Single Supervisory Mechanism.
The capital adequacy of Cypriot lenders, the minister added, rose from below 5 per cent in 2012 to over 15 per cent.
This, in turn, helped generate fiscal surpluses in recent years allowing the government to repay debt earlier, starting with partial repayments to the International Monetary Fund and the Central Bank of Cyprus of €280m in July, and €614.9m in November respectively.
This “virtuous circle” allowed public debt to fall below the 100 per cent mark compared to economic output and trigger credit rating upgrades, the minister said.
The government, which generated a fiscal surplus of €82.4m, or 0.5 per cent, of the economy in 2016, expects to generate a surplus of at least twice as much this year. In the first eight months of 2017, the government recorded a surplus of almost €0.5bn on a cash basis. Public debt peaked last year in absolute numbers at €19.4bn, or 107.1 per cent, of GDP compared to 107.5 per cent in 2015 and 2014.
Borrowing costs were reduced to all-time lows, he added.
Next year, the repayment of the €2.5bn Russian loan will begin, negotiated by the previous administration as part of efforts to avoid a bailout, he said.
Georgiades said budget cuts introduced in 2013, when the administration submitted its first budget with an overall reduction in spending of 10 per cent, enabled the state to avoid new tax hikes.
This, he added, strengthened investor confidence, allowed households to better plan ahead, benefiting economic recovery, and helped the government provide tax relief and tax incentives.
Because of the better than expected fiscal improvement, there is no longer a need for the government to sell state-owned telecom Cyta “to generate revenue,” Georgiades told the plenum.
On Friday, the yield of the government bond maturing in November 2025, stood at 1.53 per cent.
Moody’s Investors Service rates Cyprus Ba3, Fitch Ratings BB and Standard & Poor’s BB+, all in in the non-investment grade area.
Still, Cyta, which is losing market share at an alarming rate to private competitors, does need a strategic investor even with a minority stake, the minister said.
In reference to Cyprus’s Co-operative Bank, the lender bailed out by the government with €1.5bn in 2014 and €175m in 2015, the finance minister said the fact that the state owns a 99 per cent stake in it, makes it dysfunctional and causes distortions.
“That is why I consider the involvement of institutional and strategic investors in the Cyprus Co-operative Bank very important, through a procedure that the bank has put in motion,” Georgiades said.
The lender is currently preparing for a listing at the Cyprus Stock Exchange (CSE) as part of the government’s commitment towards the European Commission’s competition watchdog to reduce the state’s stake to 25 per cent or below, with successive capital increases starting as early as next summer.
The minister had to place on ice his plan announced a year ago to hand over free of charge shares of the bank to its customers, both depositors and borrowers after the supervisor intervened.
He said in this year’s budget speech that he considers “maintaining bonds with a widened domestic ownership basis as necessary” and a draft legislation is undergoing legal vetting.