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The Cyprus economy six months on: Turning the corner or worse to come?

By Fiona Mullen

Director, Sapienta Economics Ltd

Partner, Strata Insight energy advisory fiona.mullen@sapientaeconomics.com

www.sapientaeconomics.com

www.stratainsight.com

+357 99 338 224

First, the bad news…

Bank of Cyprus still vulnerable

-18,000

-16,000

-14,000

-12,000

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

Jan-12 Jul-13 of which BOC estimate

1,304

-16,541

-9,000

Funding gap (deposits minus loans, EUR bn)

GDP worst since 1974 (-16% & -19%)

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

2011 2012 2013 2014 2015 2016

Real GDP growth forecasts (% change)

European Commission, Sep 2013 Sapienta Economics, Aug 2013

Debt more than doubles (x2.5)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

128.4

48.9

126.9

Debt/GDP ratio (%)

Sapienta Economics, Aug 13 European Commission, Sep 2013

Unprecedented unemployment

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2001 2003 2005* 2007 2009 2011 2013 2015 2017

4.7

17.2

25.1

Unemployment rate % (break in series 2005)

The lost generation

0

5

10

15

20

25

30

35

40

2012 Q1 2013 Q1

26.7

37.5

Youth unemployment (% of 15-25s)

Gas export date too optimistic?

• Government expects first gas exports: 2020

• Sapienta expects first gas exports: 2028

But there is some better news…

Five surprises on the upside

• Budget deficit

• Pace of GDP decline

• Capital flight

• Liquidity stress in the banking system

• Exports of goods (also shipping?)

H1 budget deficit cut in half

-450

-400

-350

-300

-250

-200

-150

-100

-50

0

2012 H1 2013 H1

-440.8

-202.9

Budget deficit, Jan-Jun (EUR m)

GDP decline less than feared

• Real GDP declined -5.3% in first half of 2013

• Troika says -8.7% whole year

• Means -12% in H2!

• Q3 wasn’t that much worse than Q2

• So mathematically nigh impossible

My forecasts have been improving

-15.0

-6.1

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

2011 2012 2013 2014 2015 2016

Sapienta Real GDP growth forecasts (real % change)

Apr

May

Jun

Jul

Aug

Sep?

Capital flight (ex haircuts) is easing

-3,752

-956

-4,000

-3,500

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

Jan-13 Feb Mar Apr May Jun Jul

Drop in deposits (net of haircuts) EUR m

ELA is falling

11,400

9,850

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

Emergency Liquidity Assistance (EUR m)

Exports of goods are booming

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2

Nominal growth in exports of goods y/y % change

Shipping up?

• Turnover up 54% y/y in Q1

• But only 3% y/y in Q2

Turning the corner or worse to come?

• Positive view:

• Unemp. rise = few barriers to adjustment

• Traditionally resilient economy?

• Negative view:

• The worst is yet to come?

• Ireland took 9 quarters to reach bottom

Now for the shameless plug…

• You need

• Sapienta Economics for :

Macroeconomy, fiscal, political stability

• Strata Insight for:

Hard to get info on govt’s energy policy

What’s going on behind the news

Thank you for listening

Fiona Mullen

Director, Sapienta Economics Ltd

Partner, Strata Insight energy advisory fiona.mullen@sapientaeconomics.com

www.sapientaeconomics.com

www.stratainsight.com

+357 99 338 224