By Jean Christou
The European Bank for Reconstruction and Development (EBRD) laid out its first official plan of action for Cyprus on Wednesday, saying it would focus on repairing banks, privatisations and key infrastructure like ports.
The EBRD agreed a five-year deal to invest in Cyprus just over a year ago, making it the first bailed-out eurozone country to receive the bank’s assistance.
“The proposed strategy assumes significant early operations to support financial sector restructuring, privatisation, and corporate restructuring,” the EBRD said.
With over 50 per cent of all loans on the books of Cyprus’ banks classed as non-performing (NPL), the EBRD said it would take equity stakes, help provide other forms of finance and possibly co-invest in distressed property portfolios.
The EBRD projects will be islandwide with those in the north carried out through the EU and possibly including bi-communal projects.
The strategy defines three priorities that aim to restore confidence and improve corporate governance. The plan is temporary and envisaged to last until the end of 2020.
According to the EBRD report, the key remaining structural challenges in Cyprus include restoring the soundness of the Cypriot banking sector and rebuilding depositors’ and market confidence. “This will require a thorough restructuring of financial institutions, the strengthening of supervision and the attraction of fresh capital into the banking system,” it said. Also, governance and internal controls in banks lagged behind international standards and needed to be improved.
“The stabilisation and successful restructuring of Bank of Cyprus is critical for the full recovery of the country’s economy and the rest of the financial sector,” it said, adding that the successful capital increase at BoC had been a positive signal to the markets.
On privatisations the EBRD said it was important “to make visible progress in the coming year in the privatisation of the telecoms company and port concessions, and to make preparations for privatisation in the energy sector”.
Privatisations currently on the horizon include telecoms company CyTA, the Electricity Authority (EAC), ports and possibly the stock exchange.
For the corporate sector, the EBRD said business development has been held back by problems with enforcing contracts, and previous laws on insolvency and foreclosure that were totally inadequate.
The bank said the island’s corporate sector was suffering from fundamental flaws and was in urgent need of restructuring, “partly as a result of previous indiscriminate lending practices”.
“Restructuring in the corporate sector is also needed to support banking sector restructuring and NPL workouts,” it said.
The competitiveness of the Cypriot SME sector was also limited, with the majority having remained micro-enterprises with no international competition and overreliance on the banking and real estate sectors. This had led to “relatively low levels of productivity and business sophistication in some areas” and limited managerial skills.
“A small number of larger companies (construction, tourism and real-estate development companies in particular) constitute a majority of the value of NPLs in banks’ balance sheets. Deep restructuring is needed… however, the corresponding know-how and experience are missing and the legal framework needs improvements…”
The EBRD said the short-term economic outlook remained “very challenging” despite the resilience of the economy. “The financial sector remained a significant drag on economic recovery, notwithstanding major reforms,” it said, adding that that further fiscal adjustment may be needed to ensure long-term sustainability.
“The outlook is subject to significant risks. Exports have not yet shown a robust recovery and the tourism sector and FDI [foreign direct investment] could be adversely affected by regional instability and yet another eurozone downturn,” the bank said.
Possible obstacles ahead that could stymie its Cyprus strategy, the EBRD said, included insufficient progress in legal and regulatory reforms necessary to work out NPLs and resume financing for the corporate sector and possible delays in the privatisation programme. Other challenges include potential reversals in political commitment as well as potential abandonment of intentions and potential adverse developments in inter-communal relations that could hinder the ability of the Bank to work across the whole island.