ECONOMIST CONFERENCES H PARK NICOSIA 16TH FEBRUARY, … · 2012. 2. 16. · ECONOMIST CONFERENCES HILTON PARK NICOSIA 16TH FEBRUARY, 2012 Putting the European economy back on track

ECONOMIST CONFERENCESHILTON PARK NICOSIA16TH FEBRUARY, 2012

Putting the European economy back on trackCyprus Business Perspective

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CYPRUS BUSINESS PERSPECTIVE

This contribution presents: Cyprus economy - 2011 overview Identify some weaknesses –

serious concern for business community Make suggestions on government and central bank

action during 2012 Comment on issues concerning wider EU

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The end of 2011 found the economy in recession There will barely be any growth (+0,3%) Gainful employment forecast to shrink (-0,9%) Unemployment climbed to unprecedented levels

for whole year(8,0%) Continuing euro crisis – particularly Greek -adverse

repercussions for Cyprus Short run 2012 prospects – rather weak Business community expects stronger action by

Government Central Bank Banking sector Trends that characterize situation are:

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1. Gradual rise -monthly unemployment rate since September 2008 Unacceptably high

Cyprus has outstanding record 31 years full employment conditions (1977 – 2008).

2011 Cyprus experienced second highest % rise unemployment behind Greece (Diagram).

Gradually approaching EU average (Diagram). What is worrying

unemployment becoming endemic difficult to reduce

Urgent measures required - pursue growth aggressively

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CYPRUS BUSINESS PERSPECTIVECYPRUS MONTHLY UNEMPLOYMENT RATE (%) SEP.08 – DEC.11

53

4

5

6

7

8

9

10

Sep. 08 Jan. 09 May.09 Sep. 09 Jan.10 May. 10 Sep. 10 Jan. 11 May. 11 Sep. 11

COMPARATIVE ANNUAL UNEMPLOYMENT RATE (%) CYPRUS –EUROZONE 1997 - 2011

62

3

4

5

6

7

8

9

10

11

1997 2000 2003 2006 2009

Cyprus Euro area (17 countries)


2. Low level of Economic Sentiment Index o During 2010 - period of relative optimism

o but short livedo Since November 2010 declining trend

o Small ups and downso December 2011 hit bottom (Diagram) o Worrying - stands 20 points below

Eurozone average.

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3. Substantial decline - fixed capital investments 3 consecutive years (2009, 2010 and 2011 -

Diagram). End 2011 - estimated to be 25% lower than

2008 Fixed investments determine real growth. No sign investments could recover any

time soon Need-strong development measures.

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CYPRUS BUSINESS PERSPECTIVEECONOMIC SENTIMENT INDEXCYPRUS EUROZONE MAY 08- JAN 12

65,0

75,0

85,0

95,0

105,0

115,0

05-08 10-08 03-09 08-09 01-10 06-10 11-10 04-11 09-11

Cyprus Eurozone

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FIXED INVESTMENTS (% GDP) –REAL GROWTHRATE 1990-2011

-3

2

7

12

17

22

27

1990 1993 1996 1999 2002 2005 2008 2011

Fixed Investments Annual Growth

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4. High Current Account Deficits. Unacceptably high - 8 years (Diagram).• Up to now non threatening

Large inflow of foreign capital – property acquisition. investments in retailing deposit inflow -high interest rates.

• High Current Account Deficits • confirming weak competitiveness of production • Need enhanced competitiveness

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-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Current Account deficit % GDP 2000-2011

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5. Banking sector problems Recent measures in right direction

need further action to deal with: too many branches - Cyprus over banked many employees per branch high remuneration

Despite ECB policy - banking charges high interest rates

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2010 Cyprus Eurozone(17

countries)

EU (27

countries)Population per branch 882 1817 2171

Employees per branch 13.9 9.6 11.7


Above gave negative aspects But, some strong positive developments

1. One - strong growth Exports of goods 2010 17,1% 2011 22,1% (Diagram)

2. Second -two year expansion tourist arrivals and foreign exchange earnings

2010 1,5% 2011 10,1%

3. Third – Announcement finding natural gas in Cyprus Exclusive Economic Zone (EEZ) Impact long term Note cautious steps taken - correct handling Discovery created expectations Expression interest for investments Very encouraging for business community

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15700,0

800,0

900,0

1.000,0

1.100,0

1.200,0

1.300,0

1.400,0

1997 1999 2001 2003 2005 2007 2009 2011

Exports of goods (€ mln.) 1997-2011


Given low competitiveness weak economic sentiment -expect

Strong government measures Recent measures promising But continue fiscal reform – emphasis on reducing

expenditures reduce employment wider public sector- through

abolition vacant posts attrition- filling 1(one) in 4 (four) vacancies in 2012 and 2013 privatization of certain activities closing down of non essential services

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By economizing on staffing – Allows margin to implement development projects:

1. Upgrading infrastructure2. Strengthening research, innovation and technology

activities Within EU 2020 Horizon Programme.

Increase allocations - research and innovation Incentives to SMEs- undertake more research activities. Strengthen cooperation between research institutions and

business community 3. Improve productivity public sector – implement scheme

for simplifying regulations 4. Strengthen computerization plans - implement e-

government to more departments 17


5. strengthen SMEs help banks provide required funding Introduce scheme - providing guarantees for

borrowing Implement a de “minimis” programme for SMEs

6. reintroduce temporarily (2 or 3 years) system of accelerated tax deductions for productive investments

7. Encourage Public Private Sector (PPS) initiatives

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8. Strengthen banking sector Banks themselves -take drastic measures to reduce

costs through attrition of numbers employees closure of excessive branches. holding down staff costs - wages and bonuses

Government and Central Bank Strengthen bank capitalization Enhance supervisory oversight Aim reducing interest rates

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Finally - comments on wider EU and euro issues Developments in EU and Eurozone worryingo Support efforts to strengthen supervision

• Expect strong and decisive actions to save Euro Feel absence of common direction Euro must be rescued

Great achievement for economic integration positive development for small countries Euro demise - negate benefits of single market

Create mechanism for coordinated fiscal policies across 17 Euro nations

However, rules must be flexible deficits during time of recession are required otherwise getting out of recession extremely difficult

ECB - lender of last resort - creation Eurobond 20

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Thank you.

Documents

ECONOMIST CONFERENCES H PARK NICOSIA 16TH FEBRUARY, … · 2012. 2. 16. · ECONOMIST CONFERENCES HILTON PARK NICOSIA 16TH FEBRUARY, 2012 Putting the European economy back on track