PwC CEO Evgenios Evgeniou talks to Andrew Rosenbaum about the steps that should be taken to help the economy following the crisis
To what extent is a recovery in Cyprus tied to the evolution of recovery in Europe, which is expected to be very slow?
The Covid-19 pandemic escalated into a health crisis and now, according to the IMF, has developed into the biggest recession since the 1930s. The Cyprus economy, in line with the Εuropean and global economies, has also entered into a recession. The shape of the recovery, in Europe and in Cyprus, will depend on a number of uncertain factors, including the success of the lockdown exit strategy and the effectiveness of the government and private sector response. We launched last week an economic impact study that tries to quantify the recession and the recovery on the basis of two scenarios. The early lockdown measures and widespread testing seem to have controlled effectively the spread of the virus, buying valuable reaction time. Now we should focus on having a successful exit from the lockdown with no backtracking, and a well thought-out plan for the recovery of the economy. Cyprus’ recovery will depend to a large extent on the re-activation of the tourist sector as well as on the developments in the real estate sector, both of which are heavily dependent on the European and global economies’ performance. We are exploring this theme more in the ‘Restart Cyprus’ thought leadership publication launched recently. Once we handle the immediate liquidity and lack of demand issues in the economy we should focus on improving the economy’s productivity and competitiveness. In this regard the effective cooperation between the state and the private sector is key.
Business sentiment seems to be shattered in Cyprus. The poll taken by PwC of CFOs would seem to support this conclusion. How will this affect recovery?
According to the results of the latest PwC CFO Pulse Survey on the effects of Covid-19 on businesses and the wider economy, 83 per cent of CFOs from Cyprus expect a decrease in their company’s revenues and/or profits this year. At the same time, 52 per cent of the participants said that if Covid-19 were to end today, their company could get back to ‘business as usual’ within three months and more than half of them said that flexible working (59 per cent) and investments in technology (52 per cent) will make their company better in the long run.
The health crisis has been well handled to date. Now actions must be taken to instil trust and improve sentiment and a successful lockdown exit will be key. Significant economic measures have been taken to support employment and business cash flow. The legislation for loan repayment deferrals/freezing was important but the government guarantee scheme is taking far too long to implement. In phase two, measures to stimulate demand will be needed and all the reforms that will drive productivity and competitiveness are more important than ever.
Construction would seem to be suffering less than other sectors? Will construction recover faster, assuming financing is available?
Following the government’s decision to open up the entire construction sector, rather than just small-scale construction as initially rumoured, as well as the efforts to speed up due diligence on the Citizenship by Investment scheme may have a positive impact on the forecasted decline for construction. For the time being, the slow increase in flights, as well as the global downturn, will depress demand in the real estate sector. In the fourth quarter of 2019, the index of construction declined by 10.6 per cent year on year for civil engineering projects but rose by 13.6 per cent for building construction, yielding an overall increase of 9.8 per cent. Given the recent events as regards Covid-19, construction will be hit quite hard in line with the real estate sector and there is therefore a more imminent need to re-focus on different real-estate projects like affordable housing, elderly housing and various infrastructure projects. In addition, the provision of incentives to support the financing for the conversion of houses and offices to more energy efficient buildings is also an alternative to reinforce the sector. This will also contribute to creating an overall more sustainable economy as it addresses emerging macro-issues that have not yet been properly recognised – an ageing population, housing affordability and dependency on fossil fuels rather than renewables.
For Cyprus tourism to recover, the government must coordinate policy with other EU member states. The Commission has issued guidelines for this process, but they are very general. How can the government take the necessary steps to move forward?
With our actions this year we need to reinforce the view that Cyprus is a safe tourism destination. Our reaction to-date, the ability of our health system to deal with the spread of Covid-19, the maturity of industry participants in adhering to health measures, and the ‘open-air, outdoor’ living are only few of our advantages as a destination.
Shipping seems to be stalled entirely. Will contango provide a new market? Otherwise, how will shipping restart?
Shipping has always been an industry with highs and lows. It is true however that over the last few years we have been experiencing an extended recession in the industry, caused by various factors, with limited signs of recovery. The pandemic has not helped but it has raised the importance of the industry. When the world’s entire fleet of aircrafts has been grounded, when train journeys were limited and when the majority of cars has been practically stopped by the lockdown, ships continued to travel. Rates vary from ship to ship, with cargo ships suffering much more than tankers these days, and increase of the rates depends on many factors including consolidation to balance supply & demand of ships, price of oil, pick up of international trade, geopolitical and regulatory developments. Technology will also play a major role in the evolution of the industry and the speed of recovery.
Can Cyprus manage the vast additional debt it is acquiring?
Additional debt was necessary to support government measures to give liquidity to the market, to support employment as well as to facilitate future fiscal measures that will be needed to boost demand. This is a different crisis to 2013, when the state was in a much weaker position to support the economy, and the response required is different. The state guarantee scheme is essential as it will give liquidity to the market, especially to the smaller businesses and the self-employed where the level of the guarantee perhaps should be higher than 70 per cent. Cyprus can manage the additional debt only if the recovery is relatively fast. By which I mean return to growth in 2021. So very much depends on having no backtracking with regards to the pandemic, on government policy and political consensus that supports a fast recovery, on a banking sector that will play a constructive role and on a private sector that will be responsible and innovative. If ever there was a time when success depended on everyone working together towards a common goal that time is now.
What will Foreign Direct Investment (FDI) investors be looking for in Cyprus once the economy reopens?
Investors are looking for a stable economic and investment environment and good returns. Ideally investments should go to sectors with long-term productivity potential such as education, development of digital and technology solutions, healthcare, renewable energy and capital projects that improve the country’s infrastructure. Reforms that will drive productivity, competitiveness and will improve the business and investment environment are necessary to make Cyprus attractive for investments given the global slowdown. It’s for investors then to decide where to invest.