By Stelios Orphanides
Cyprus should focus on restoring its sovereign credit rating to investment grade as early as possible in order to not only reduce its borrowing costs and attract more foreign investment but also to improve the chances of its companies on the global market, the Employers and Industrialists Federation said.
Michalis Antoniou, who on February 1 became, director general of the business group, widely known by its Greek acronym OEB, said that he included in his top priority lists three items; monitoring Cyprus’s fiscal performance, the resumption of the reforms process – also in the area of labour relations – and curbing wage increases to within what the economy can afford in an attempt to improve competitiveness.
“We shall closely monitor the government’s budget performance in achieving the objectives of generating primary surpluses and a gradual debt repayment and refinancing of maturing debt at an increasingly lower cost,” Antoniou who was commenting in a Cyprus Business Mail interview said. “This requires that the government’s credit rating returns to investment grade, the sooner the better for the coming generations which will inherit a heavy burden”.
Antoniou, who was, prior to assuming his new duties in charge of the industrial relations division at OEB, said that a reform package prepared by undersecretary to the President Constantinos Petrides aiming at modernising the wage structure in the public service by linking pay to productivity.
Cyprus, which was three years ago forced to accept the onerous terms of a bailout that included considerable losses for depositors at its two largest banks, managed to issue new debt three times since the summer of 2014, effectively restoring market access lost in May 2011. The 10-year bond issued in October at an average yield of 4.25 per cent was traded on Friday at 3.91 per cent, compared to 0.31 per cent of respective German securities. Petrides submitted his reform package in September to the parliament. Debate is pending.
“It is important for the reforms to pass as this will speed up the upgrade of the sovereign credit rating which affects borrowing costs,” Antoniou said.
parliamentWhile Antoniou praised Cyprus’s political parties for acting more responsibly “when our house was on fire”, he went on to say that there has been “a slowdown in the reform pace and we must speed up the reform process, complete everything that already had to be done” and remains pending.
Cyprus, which emerged from a prolonged recession last year, is currently rated ‘junk’ with its highest rating set at BB- by Standard & Poor’s in September, which is three notches into the speculative area. Fitch Ratings and Moody’s Investor Service assigned Cyprus in October and November a B+ and B1 rating respectively which is four grades below investment while DBRS gave Cyprus a B rating which is five notches into the junk area.
Antoniou said that a further upgrade of Cyprus’s sovereign rating could also eventually make guarantees issued by Cypriot banks acceptable by correspondent banks abroad which in turn would help the chances of Cypriot export companies. Bank of Cyprus, the island’s largest lender, is rated Caa3 by Moody’s and CCC by Fitch, while the respective ratings for Hellenic Bank, third largest lender, is Caa2 and BB-.
“We have companies which could have a strong presence abroad and I am not just talking about the European Union market but also other regions, such as the Middle East or North Africa, but for this to happen we need to be able receive bank guarantees, which in turn requires that Cyprus returns to investment grade,” he said. “What foreign banks charge for such services, is prohibitive”.
According to preliminary Cystat figures, Cyprus’s exports rose 20 per cent in 2015 compared to 2014 after falling 10 per cent the previous year. The value of domestic exports in 2014, which includes total exports minus re-exports, was €733.8 which was 2.5 per cent higher compared to 2013. In 2010 to 2014, domestic exports rose 9 per cent on average every year.
Companies which manage to have, under the current circumstances, operations abroad “are true heroes,” the OEB director said. Antoniou urged moderation in wage disputes. “The economy remains fragile and any repetition of mistakes of the past will take us back to the tragic situation of the past,” he said. A gradual improvement of the standard of living of workers and the performance of companies is possible within the economy’s limits, which means we have to avoid extravagance, distortions and the criminal mistakes of the past”.
Average employee monthly earnings in the third quarter of 2015 stood at €1,873 which is comparable to the fourth quarter of 2009, after peaking at €1,993 in the second quarter of 2012, according to Cystat. In 2014, average wages fell 2.8 per cent compared to 2013.
Unemployment in January stood at 15.3 per cent compared to 16.3 per cent a year before, according to Eurostat.
Antoniou said that while labour peace had been repeatedly disturbed in the public sector with the recent strike by nurses at public hospitals and the frequent strikes at the Limassol port, private sector unions were more pragmatic.
“While there is aggressive rhetoric in the private sector, there is no equally aggressive tactic at the negotiation table,” he said. “While unions make threats ahead of negotiations, when we sit down at the table, negotiations are taking place based on the situation on the ground and not based on slogans and bombastic declarations”.
He said that OEB prepared a draft bill regulating the strike law in essential services “that goes deep into the essence and we shall come to that after the parliamentary elections as we are constantly witnessing abuse”.
“Unless we regulate the right to strike we shall witness an increase in the frequency of abusive strikes and behaviours,” he added.
The OEB director said that Cyprus needs to simplify the bureaucratic procedures governing the issue of licences and permits by government departments in order to encourage more investment.
“It takes too long for related applications to be reviewed and approved,” he said. “Bureaucracy deters both existing and developing business initiative”. A separate “ground-breaking” reform initiative launched by undersecretary Petrides to set up an undersecretariat for growth “will make a huge difference if implemented the way it is designed,” Antoniou said.
He added that banks need to further reduce borrowing rates on corporate loans and so encourage investment. “A Cypriot entrepreneur will borrow in Cyprus at a rate twice as much compared to Germany with all other things being equal,” he said. “Let’s keep in mind that today banks offer loans to those who are able to repay their loans, not those who can offer collateral”.
Antoniou said that banks and corporate borrowers have found following the “storm” in the banking sector an equilibrium which now favours “decent restructurings,” necessary for the non-performing loan stock, roughly half of the overall loan portfolio in the system, to fall.
“OEB acts as a catalyst both for the reduction of borrowing rates and restructurings so that both borrower and lender can serve the interests for the country,” he said. “It may take a while, but is a matter of time to see the non-performing loans ratio drop to a sustainable level. Incoming information shows that restructurings are done, the atmosphere between banks and borrowers has improved even though there are (still) some problems including some strategic approaches by some borrowers, including businesses”.