Opening Keynote speech by the Minister of Finance Mr Constantinos Petrides at the 1st Annual Financial Markets Forum
November 24th 2022
I would like to welcome you to the 1st Annual Financial Markets Forum. The past few years, talking about economic developments and the financial sector has been far from boring, a period with constant changes and challenges, forcing policymakers and market participants to remain alert and active. Today, this forum is an excellent opportunity to talk broader about the economy and growth, taking, of course, into account the challenging context of the energy crisis and inflation, but not focusing solely on them.
Allow me to begin with an overview of the current state of play of the Cyprus economy through the lens of independent credit ratings. The Credit Ratings of the Republic of Cyprus, in recent years, followed a very positive and, I would say, remarkable, improvement because they have been achieved despite the uncertainty, recession and inflationary pressures that the global and especially the European economy is facing due to the energy crisis and the disruption of the supply chains which had already begun from the coronavirus health crisis and was seriously aggravated by the war in Ukraine.
In particular, all Credit Rating Agencies agree that Cyprus' economic performance, including public finances during 2021, but also the resilience it has shown in 2022 to date has been much better than anticipated and that medium-term conditions continue to support efforts to reduce the country's public debt.
At the same time, Credit Rating Agencies also register the significant challenges that the economy still faces, which need to be addressed, particularly NPLs in the banking sector and high levels of public and private debt.
Essentially, Credit Rating Agencies give a vote of confidence in the prospects and future developments in the Cyprus economy. They base their opinion not only on the quick recovery of the economy after the crisis of 2011- 2013 and the difficult health crisis of 2020, as well as the consequences of the Russia-Ukraine conflict in the current year but also on their belief that in the medium term there are strong drivers of underlying growth and robust prospects for a return to fiscal surpluses. The recovery can be achieved with the rational absorption and utilization of funds from the EU and the Recovery and Resilience Fund (RRF), as well as, in the longer term, with the exploitation of natural gas reserves.
The classification of the credit rating of the Republic of Cyprus at the investment grade since September 2018 is an excellent development. Standard & Poor's has a pioneering track record regarding credit ratings in the Republic of Cyprus. It was the first Agency to revise the rating downwards in Autumn 2011, downgrading the debt by 12 notches cumulatively in 2011-2013. But it was also the first Agency that upgraded the rating by a total of 11 notches from 2013 to the present. At this stage, the Republic is rated at triple-B (BBB) by Standard & Poor's (and by DBRS), two notches within the investment area.
S&P in their latest Report (Sept 2022), observes that the rating upgrade of the Republic of Cyprus reflects the relatively strong performance of the Cypriot economy over the last decade and its expectation that it will continue despite the effects of the war in Ukraine. Cyprus's economy proved relatively resilient to pandemic-related restrictions in 2020.
Following a significant increase of debt-to-GDP to 115% in 2020 caused by the pandemic, general government gross debt resumed its sharp downward trend, reaching 103% of GDP at the end of 2021. As the fiscal performance continues to improve along with solid nominal GDP growth, general government debt is expected to decline about to 75% of GDP in 2025.
The Government prudently maintains cash reserves equivalent to the financing needs of at least the following nine months, reducing any refinancing risk.
S&P expects that completing major infrastructure projects related to casinos and marinas will further boost the tourist industry. According to S&P, the stable outlook balances the risks of the fallout from the war in Ukraine against the economy's resilience to external shocks, and the Government's fiscal position will continue to improve.
In this setting described so far, the Cyprus government has the resources, tools, appetite and conviction to pursue growth by differentiating its production model and investing in high-value sectors, such as ICT and green energy. The new production model is well represented with investments and reforms in the recently published Vision 2035 long-term Strategy and in the Cyprus' Resilience and Recovery Plan.
The contribution of entrepreneurship and innovation to economic prosperity has grown with the shift of the global economy towards a mode of production in which knowledge has become a key input. The challenges of the knowledge economy are critical to growth. Vigorous entrepreneurship and SME development are among the necessary conditions for successfully meeting the challenges of a continuously evolving global economy.
Cyprus has, in recent years, made significant steps in the education, research and innovation sector, exhibiting one of the highest average annual growth rates in R&I investments among the EU Member States. Our universities rank high internationally, and our researchers are amongst the top in securing competitive European funds for their research programs.
As Minister of Finance, I have already signed a funding agreement with the European Investment Fund to establish the Cyprus Equity Fund, the first state-funded equity fund in Cyprus. Cyprus Equity Fund will capitalize on stakeholders' market expertise to adequately address the equity financing gap by supporting innovative entrepreneurship with the required initial and follow-on investments. It will benefit the emerging and growing Cyprus startups and innovation ecosystem powered traditionally by government grants, angel investors, incubators, and accelerators.
The Cyprus Equity Fund also provides a significant opportunity for the local Funds industry to take part in risk financing primarily targeted at Cypriot businesses. This is an excellent opportunity for me to reaffirm the Cyprus government's support for the development of the Funds industry in Cyprus, as it has been identified as a sector in which, Cyprus has a competitive advantage stemming from its skilled human capital, the competitive running and set up costs, as well as, its access to the European and regional markets, under the robust framework of the European Union for financial services.
Towards enabling alternative finance, essential in boosting innovative entrepreneurship, Cyprus Securities and Exchange Commission is also working towards upgrading the current Innovation Hub to a Regulatory Sandbox, which will provide RegTech and FinTech companies with detailed guidance in a safe regulatory space.
Innovation needs space to flourish. For this reason, the Government is currently examining the revamping of the grounds of the old EXPO, a valuable state-owned asset in a prime location a few minutes from here, into an innovation/business zone that will create a new economic growth pole. The specific area (250.000 square meters) fulfils a number of conditions: it is centrally located with easy access near higher educational institutions, medical/research centres and government services in an urban environment, which is expected to work synergistically with other measures that the Government is promoting for the development of the innovation ecosystem. The Government has commissioned a feasibility study and a master plan that will examine the prospect of creating an innovation/district zone and will soon be launching a call for selecting a strategic investor.
Ladies and gentlemen,
The well-coordinated actions by the state, enabled Cyprus to be upgraded to a strong innovator, according to the recently published European Innovation Scoreboard results. We further aspire to become a regional centre for ICT firms and a gateway for international businesses into the EU. To this end, we have prepared a Strategy to attract Business and Talent, approved by the Council of Ministers in late 2021.
The Strategy includes a series of reforms and actions in various intervention areas to enhance Cyprus' attractiveness for investments and high-value entrepreneurial activities. Some of the primary actions already implemented include the upgrade of the Fast-Track Business Activation Mechanism to Business Facilitation Unit as a form of a one-stop shop for international businesses, the revision of the Policy of employment for third-country skilled employees to make employment and work permit processes simpler and faster, and various tax incentives to both employees and businesses.
The Strategy also includes long-term actions such as upgrading ICT infrastructure, applying better regulation and investing in reskilling and upskilling the workforce.
The reception of the Strategy has been great, evidenced by the more than 1200 companies registered in the Business Facilitation Unit and the more than 9000 skilled employees who recently moved and currently work in Cyprus. Still, we keep our ears open and are aware of the challenges faced by international businesses and their workforce. Our efforts are focused on further promoting e-government to provide, among others, faster and more reliable services to businesses.
Ladies and gentlemen,
The road ahead is complex and challenging, both regionally and internationally. Being a part of an interconnected and interdepended economy is accompanied by both opportunities and risks for all nations and economies. Within this complexity, what is clear to me is that economic growth stems from knowledge and innovation, and this is where a significant part of our efforts and investments should be focused.
Relevant Press Releases
Annual National Accounts: First estimate for year 2023
Quarterly National Accounts: 4th Quarter 2023
Revenue from Tourism: December 2023
Turnover Value Index of Services: 4th Quarter 2023
Fiscal Accounts of General Government: January – December 2023