Cyprus – on the road to recovery

“John – tell me about Cyprus, is the program as good as I hear?”

Why are so many clients asking me about Cyprus? Possibly because it has a fantastic citizenship by investment program, taking less than 90 days to grant Cypriot citizenship, has some incredible real estate, and is also considered not that “far” from Dubai.

Offered in accordance with the Civil Registry Laws 2002-2013, is the “Naturalization of Investors by Exception Scheme” – the program is the fastest to lead to residence and citizenship in Europe.

What about the last few years in Cyprus?

Cyprus hit the news in March 2013 in a shocking way: it became the 1st country in the world where the bail-in was enforced (and tested). Cyprus had been in a 50-year boom following independence from British rule in 1960. This transformed it from a poor, mainly agricultural nation to a developed one which fully qualified to join the Eurozone in 2008. It developed into modern service economy with tourism, construction, property development, shipping, legal, auditing, banking and financial services being the main sectors.

This state of continuous economic growth came to an end in 2010 as a result of the world economic crisis, overspending by the former government and the large exposure of the two largest local banks to Greek Bonds which suffered a haircut.  Hence, Cyprus sought help from the EU and the IMF. The TROIKA imposed a bail-out package totaling €10 billion coupled with a €7billion bail-in for the two banks. The bail-in involved the closure of the second biggest bank (Laiki) and its absorption by the largest one (Bank of Cyprus). Although these figures might seem easily digestible, they were not in the case of Cyprus which has a GNP of about €16 billion.

The package included salary cuts, bank and civil service restructuring and a rationalisation of social benefits. The GDP was forecast to decline by about 15% in 2013 & 2014 (some predicted 20%!) Unemployment was forecast to reach 20% (or even 27%). Credit became very tight and restrictions were imposed in the movement of capital. Hence, a mass departure of foreign companies was forecast.

The disaster that did not happen

The doom and gloom of these forecasts made by the IMF and others proved to be extreme. The actual decline in GDP in 2013-14 was only 7.6%. Unemployment rose to 16.9%. The March 2016 figure fell to 12.5%. Growth has resumed in Q4 2014. Moreover, the Government did not take up the full €10billion aid but only €7.8 billion. Cyprus returned to the capital markets successfully in 2015, its ratings have been continuously improving and property sales have been rising. Property values have stopped declining while those for the foreign market segment (i.e. high-end, prime residential property) kept rising despite the Crisis. Virtually no companies left Cyprus and new companies keep coming taking advantage of new tax laws.

Restructuring, remodeling and the coming boom

Changes in civil service pay, conditions and working hours would normally take decades to pass through Parliament and earn social acceptance. Yet, they were implemented in 6 months with negligible unrest. Cypriots put their heads down and got busy recreating what was been lost, much like what they did in 1974 when 70% of the economic resources were lost, practically overnight, after the Turkish Invasion (the country was then back on its’ feet in 3 years in what was then termed as “Cyprus’ Economic Miracle”).

The full lifting of capital controls in 2015, the early success in the money markets and the upgrading of Cyprus by the rating agencies have led to increasing foreign investment.

A major game changer is the discovery of substantial natural gas deposits in Cyprus’ Exclusive Economic Zone (EEZ) in the Eastern Mediterranean but also in those of Israel and Egypt.

The natural export market for these deposits is Europe and Cyprus is the natural hub for the processing, storage and forwarding of these fuels. Its location and the fact that it offers political stability, an EU jurisdiction and military infrastructure, make it an indispensable local partner, even if it had no oil & gas deposits of its’ own.

Foreign and local investments in relation to the exploration process are gathering pace and will take full effect in the next 2-3 years. Income from gas is anticipated in 2020. Foreign investment has also been gushing in banks, hotels, energy and property being the main sectors benefitting. Investment in hotels is taking place both for the renovation and updating of existing units and the development of new ones with a 5+ star rating.

It is now clear, even to past unbelievers, that the worst is over, that Cyprus has proved to be a small economic tiger and that the foreseeable future is bright.

More on this topic soon.

 

John D. Hanafin

TEP, Chartered MCSI

Founder & CEO at Huriya Private

 

 

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