By Stelios Orphanides
A decision in the June 23 referendum in favour of ditching the UK’s European Union membership could have wide range of possible impacts on Europe’s and subsequently Cyprus’s economy, three experts in the area of economy and banking, real estate and financial services said.
The most direct notable impact could come from a drop in the exchange rate of the British pound sterling vis-à-vis the euro, while further side effects in the form of political uncertainty in Europe cannot be ruled out, they said.
A devaluation of sterling following a decision in favour of a British EU exit, widely referred to as Brexit, could affect Cyprus’s revenue from tourism, economist and former banker Marios Clerides said in a telephone interview on Thursday. “The highest stakes are in tourism,” he said. “British pensioners leaving in Cyprus will also be affected”.
In 2015, Britons made up 39 per cent of the 2.7 million tourists who visited Cyprus, making the UK Cyprus’s traditionally most important source of incoming tourism, which in turn accounts directly or indirectly for one quarter of Cyprus’s economy. According to Cystat, in 2011, some 31,495 British citizens lived in Cyprus, by far the largest non-Cypriot ethnic group, with 7,239 of them over the age of 65.
Property valuator Pericles Markaris said that a change in the exchange rate of sterling could affect both demand and supply on the property market. While the number of British property buyers dropped in recent years, a possible devaluation of the British pound could further reduce demand from the UK for property in Cyprus, at least in the short term, he said.
“The immediate effects will be negative and the extent will depend on sterling which was always a factor in demand from the UK,” he said.
On the other hand, a probable sterling devaluation in the event of a Brexit could make the sale of existing property in Cyprus and the repatriation of the proceeds more attractive, he said.
As Britons are no longer a major buyer group in Cyprus, after often falling victim to insolvent or delinquent developers which delayed the issue of title deeds, the largest impact will be in Paphos, and to a lesser degree elsewhere, including certain areas in the Limassol district such as Pissouri or Souni, he said.
Asset manager Elena Constantinou said that a probable Brexit could signal the beginning of a perceived breakup of the European Union, which in turn could lead to a repricing of bonds and an increase in borrowing costs for sovereigns – to start with.
“Investors will think ‘what is going to happen if also a euro area member, after the UK left the EU, something considered unimaginable until now, also leaves the euro?” which is also considered unimaginable, she asked. “It will trigger a selloff” and “a turmoil” on financial markets, added Constantinou, chief asset manager at the Nicosia-based Ultimate Performance Management Ltd.
The increase in bond yields could subsequently affect European banks depending on “what kind bonds” banks bought, she said. “It is not just Cyprus that would feel an impact. The bonds of major euro area countries could be affected, including those of Italy, Spain or even France”.
Interbank money could become more expensive, which in turn would affect the rates of new loans or restructurings, Constantinou said. To what extent an increase in interbank rates could affect the ability of borrowers to service their loans, will depend on the percentage of loans at a floating rate, she said.
This may be bad news for Cyprus’s banking system struggling to recover from the 2013 crisis which resulted in an increase of the value of non-performing loans to around half of the banks’ loan portfolio. Also, the Fiscal Council, an independent body tasked with monitoring the drafting and execution of Cyprus’s government budget, said on Wednesday that a possible Brexit is one of the factors threatening the viability of public finances.
“We are currently in a paradise with respect to freedom of movement and capital movement,” Constantiou said. “We hate uncertainty as it is difficult to quantify risk”.
Economist and former banker Clerides added that even as the largest risk stemming from a possible Brexit is that it could signal the breakup of the EU, there is little anyone can do at this stage to minimise the impact.
“Nobody can forecast in the cases of such events how things will develop and therefore there is not much you can do to protect yourself,” the former Hellenic Bank executive said.
With respect to Bank of Cyprus’s intention to pursue a listing on the London Stock Exchange, Clerides said that no one can forecast the impact of a Brexit as it remains unknown whether the share will be traded in euros or sterling.