Constantinos Herodotou, Governor of the Central Bank of Cyprus (CBC) called for the preservation of fiscal space, as the economic prospects are deteriorating due to Russia’s war in Ukraine.
Addressing an event held on Thursday by YPO Cyprus chapter titled, “The global debt trap – the implications for growth and possible solutions to tackle it,” Herodotou also called for increased vigilance to avert private debt defaults that would lead to increased private debt levels.
Referring to Cyprus’ public debt, Herodotou said that following its downward trajectory after the 2012 -2013 economic crisis public debt spiked due in 2018 and 2020 due to related to the Cyprus Cooperative Bank, and in 2020 due to the outbreak of the pandemic.
Noting that Cyprus’ debt-to-GDP ratio dropped below 90 percent at the end of 2022 due the reopening of the economy and the recovery that followed, Herodotou cautioned that “risks remain elevated due to Russia’s war in Ukraine and the deterioration in the global economic environment.”
“At the current juncture,” he said, “preserving fiscal space is crucial, as government intervention is important to support the digital and green transition, improve competitiveness and promote social cohesion.”
He noted that the NextGenerationEU, which allocates around €1.2 billion to Cyprus in grants and loans, can support these goals and will have a favourable impact on real growth, adding that the successful implementation of structural reforms and the green and digital agenda will be key for transforming our economy to a sustainable and more resilient one.
Turning now on the private sector debt in Cyprus, Herodotou noted that default rates of loans with stricter loan origination guidelines following the 2013 crisis is quite low, adding however that “the domestic private debt levels are still burdened with legacy loans that are more difficult to tackle and require special attention.”
He also noted that Cyprus’ private to GDP fell to 236% in the second quarter of 2022 from its peak of 353% of GDP in the first quarter of 2015 but pointed out that despite this significant reduction, the domestic non-financial private debt ratio is still relatively high compared with an average of 140% for the euro area.
“Both households and non-financial corporations’ debt exhibit a passive deleveraging behaviour, given that their decline is mainly driven by increases in nominal GDP, known as a denominator effect,” he said.
The CBC governor stressed that today, in an economic environment of high inflation, high interest rates and weakened growth prospects, the risks for a deterioration in asset quality leading to even higher private debt levels and a higher crowding out effect are considered to be on the upside.
He also pointed out that the high percentage of loans in Cyprus with floating interest rate, makes them particularly sensitive to the higher interest rate era that we are entering.
Noting that at the current juncture, the prudent CBC supervisory Debt-Service-to-Income ratio (DSTI) tool, defined as a household’s total monthly debt payments divided by its monthly net disposable income that is in place in Cyprus, is expected to somewhat mitigate the negative impact of higher lending rates, Herodotou concluded saying that “extra vigilance and concerted action is required at all levels to address these debt risks and minimise any crowding out effects.”
Source: Cyprus News Agency