CYPRUS: ESM chief economist calls for prudence as external risks loom

Chief economist of the European Stability Mechanism (ESM) called for keeping fiscal buffers as external risks, such as trade wars and Brexit, could affect Cyprus economic growth.

In an interview with the Cyprus News Agency (CNA), Rolf Strauch said despite the drastic reduction of non-performing loans (NPLs) in the Cyprus banking system, bad loans, along with high public and private debt, remain the country’s key challenges as they amount to 50% of GDP and continue to weigh on the economy.

He said Cyprus is one of the success stories of the ESM, posting high growth rates but growth is projected to decelerate to about 3% closer to the country’s long-term growth potential, as part of growth moderation that is not a Cyprus-specific phenomenon.

This is not a reflection of economic weakness. We see this moderation in growth as part of the normalisation phase after years of ‘above-potential growth’, leading to a cooling down also for other euro area countries and for the euro area as a whole, Strauch said.

He praised the Cypriot authorities for doing a good job in the post-crisis years in attracting investment and employment, which are important drivers of growth, but he added vulnerabilities remain.

Strauch called for caution as a small and open economy such as Cyprus could be exposed to external risks, such as trade wars, Brexit, and fluctuations in currencies like the Russian rouble and the Turkish lira.

These external risks may affect the development of the country. From that perspective, there is good reason to be prudent in terms of policies and to keep fiscal buffers.

Strauch highlighted the NPLs, high debt, both public and private, although public debt has already been declining and is expected to continue this downward trend going forward, which is a good achievement.

On NPLs, a key legacy of the 2013 financial crisis in Cyprus, Strauch said that despite the significant drop in 2018, which saw bad loans decline by 60% in the last years, a large stock of non-performing loans still weighs on the Cypriot economy.

But at the same time, their size is still about 50% of GDP. And this is clearly too high.

Strauch said last year’s significant decline in NPLs came from the orderly resolution of the state-owned Cyprus Cooperative Bank and the sale of an NPL portfolio by Bank of Cyprus, following a reform in the legal framework governing foreclosure, insolvency and sale of loans.

There are policy measures taken to develop a market for non-performing loans, but ultimately the responsibility lies with the banks.

On ESTIA, a government subsidy scheme designed to help homeowners who have defaulted on their mortgage, Strauch said we now need to see if it ensures a sound payment culture.

We will continue to assess the situation and will be seeking the feedback of the government and the Central Bank of Cyprus.

On whether offloading NPLs to asset management companies may lead to mass foreclosures and auctions, Strauch argued that banks need to comply with the regulatory requirements that are given to them, which requires an efficient management of non-performing loans.

But he noted the ESTIA scheme has been put in place foremost to protect homeowners.

Source: The Financial Mirror