By Theodore Panayotou
From the ashes of its economic collapse, Cyprus is emerging as one of the best destinations for value investing.
Because of its economic troubles as a result of its large banking sector, its exposure to Greek debt and its overgrown public sector, the Cyprus economy has been downgraded by the rating agencies and put under a Eurozone bailout programme. The unprecedented haircut of bank deposits over €100,000 created a bitter taste and harmed the country’s reputation as a regional financial centre.
All these sound bad. But in every adversity there is an opportunity, and in Cyprus now there are plenty. First of all, both the overblown banking and public sectors which were claiming the lion’s share of resources and attention and distorted the economy are being cut down to size. The real economy and the private sector are at last receiving the attention they deserve. There is a genuine interest in promoting innovation and entrepreneurship and in attracting direct foreign investment into the real economy rather than footloose bank deposits and “offshore”, “virtual” or “fictitious” companies.
Labour costs have fallen and will continue to do so for a while under the pressure of 15 per cent (50 per cent among the young) unemployment. The power of the labour unions has been steadily reduced by the crisis and the memorandum with the troika; closed jobs are being opened up and the flexibility of labour market is being increased.
Government bureaucracy is being curtailed and procedures streamlined to reduce the delays and cost of public services to the private sector. A process of public sector reform and modernisation of the public service is part of the memorandum signed with the troika. A study of how best to do it is currently underway under way by the World Bank with input from the British government, which underwent similar reforms. The semi-public organisations and lumbering state enterprises are in the process of being closed or privatised. A new breeze of healthy competition is blowing and this is only the beginning.
There is a new pro-business government in power which, though strapped financially and constrained by the memorandum with the troika, is making genuine efforts to attract foreign investments with generous incentives including permanent residence permits and even citizenship for the right level of investment.
The mighty financial system of Cyprus may be no more but the world-class accounting, legal, and other business services are still available and highly competitive. And so are a host of engineering and other technical services, which are of equally high level. Cyprus has a highly skilled and disciplined labour force which is now available at much more competitive wages than it was a couple of years ago.
Land and real estate prices have been falling steadily in the past two years and are now 20-50 per cent lower than they were two to three years ago. Correspondingly, rents have dropped and further20-25 per cent reductions are being debated in parliament. The virtually impossibility of securing a loan from Cyprus banks today means that the real estate market is and will continue to be soft for a while and that there are good opportunities for those who have cash or have access to borrowing from other sources. The large number of non-serviced loans, loans in default or inadequately secured loans means that the supply of attractively priced land will increase in the near future.
The cost of electricity which was just about the highest in Europe has begun to fall (10 per cent in the last couple of months) and is expected to be reduced further as a result of the forthcoming privatisation of the Electricity Authority, increased use of natural gas and renewable energy, especially solar, which is actively being promoted and supported by the government. There is also a growing interest in investing in energy conservation through retrofitting and efficient new building design with expected savings of 20-30 per cent of energy use.
Of course, Cyprus continues to enjoy the many comparative advantages of its location in the Eastern Mediterranean and the crossroads between three continents. It is the only non-Muslim neighbour of Israel with excellent relations with both Israel and the Arabs, while being a member of both the EU and the Eurozone.
Its climate, infrastructure, telecommunications, and convenient air connections to Europe, Asia and the Middle East are other well-known attractions. Also, it should not be forgotten that English is spoken in Cyprus more than in any other European country outside the British islands. Cyprus also has one of the highest percentages of university graduates in the world, many of whom are now looking for new opportunities following the contraction of the traditional sources of employment in government, the state enterprises and the banks.
What Cyprus needs to do now is to convert its many comparative advantages into competitive advantages. How? First by reforming its economy to make it more efficient and responsive to local and global market changes; second, by applying high levels of technology and management to all its products and services; third by opening itself to the world and making its enterprises more outward looking and export oriented; and, fourth by investing more in research and innovation and promoting innovative entrepreneurship (start-ups).
The first, Cyprus is already doing as part of its compliance with the terms of its bailout. The reforms under way are expected to result in a leaner and more agile public sector; a more open and flexible labour market; and a more outward-looking and competitive business environment. Application of high levels of technology and management to existing and new products and services will add the level of quality, sophistication and differentiation required for penetrating global markets. It is here that foreign direct investment, accompanied by access to technology, management and markets, in partnership with local firms, can open up many profitable opportunities, previously untapped.
A yet another opportunity opening up is for business angels and venture capitalists looking for innovative start up opportunities to invest risk capital in exchange for equity in promising business ideas turned into products with high market potential. A couple of years ago those interested in innovative entrepreneurial ventures or start-ups in Cyprus were few and far in between. University graduates even in engineering, ICT, and business aspired for a government or bank job.
Today, hundreds and possibly thousands of university graduates from all fields have business ideas and aspire to start their own business, seeking mentors and support in events such as the Open Coffee Cyprus, Start-up Live Cyprus and the Global Entrepreneurship Week, among others. Local business angels and venture capital funds, totally absent in the past, are just beginning to emerge in response to strong demand for financing of entrepreneurial ventures in the making. Given the limited local tradition, experience and knowhow in this area and the lack of liquidity, there is an emerging and rapidly growing need for early stage, growth and expansion financing along with related knowhow that opens up another set of promising opportunities for the right investor.
While uncertainties and risks continue to exist, they pale by comparison to the potential return. Cyprus is a currently undervalued investment destination which offers the early investor value for money and a first-mover advantage, which may not be available later on when the perceived risk will be lower and opportunities recognised more widely. The discovery of large quantities of natural gas in the Cyprus EEZ is another boost to the value of investment and equity even though gas and revenues will not start flowing until 2020.
Indeed this is the best time to invest in Cyprus for investors who want to avoid regretting in a couple of years time not acting when Cyprus was still affordable and full of emerging opportunities. It is a common secret that Cyprus is today a grossly “undervalued stock” but far too few act on this knowledge and profit from it.
Dr Theodore Panayotou, director of the Cyprus International Institute of Management and professor of economics and the environment at Harvard University, served as consultant to the UN and to governments in the U.S., China, Russia, Brazil, Mexico and Cyprus. He has published and was recognized for his contribution to the work of the Intergovernmental Panel on Climate Change won the Nobel Peace Prize in 2007. Contact: [email protected]