The Association of Cyprus Banks has always played a “creative and productive part” in the island’s banking sector developments, particularly amidst the challenges of the past few years, Finance Minister Makis Keravnos said on Tuesday.
Speaking at the association’s annual general meeting, Keravnos said that the actions of the association have always been “within the bounds of rational representation of its members’ interests, as well as in the broader interest of the economy, fostering fruitful collaborations with entities, ministries, parliament, media, and primarily with European banking institutions, such as the European Banking Federation and other international banking associations”.
“Taking this opportunity, I would like to publicly express, once again, my satisfaction with the initial positive responses from the banks, each one utilising its own mechanisms and approach, always in collaboration with the Central Bank, regarding the absorption of the increased costs resulting from the interest rate hikes, as well as the formation of deposit interest rates,” the minister said.
Moreover, Keravnos referenced the latest interest rate increase by the European Central Bank, albeit to a lesser extent when compared to previous hikes, as inflation continues to remain at high levels across the European Union.
“I am confident that our banks will closely monitor these developments, and I anticipate that they will take further positive steps, collectively, for they are well aware that the continuous improvement of the financial sector is closely linked to economic stability, which, in turn, relies on the healthy economic situation and sufficient sustainability of our households and businesses, most of which are small and medium-sized enterprises,” Keravnos said.
“A decisive precondition for economic stability is the development of a stable economic policy that ensures sustainable growth within a framework of fiscal discipline and financial stability,” he added, noting that this is a “steadfast policy of the government”.
The minister also touched on his participation in the most recent Eurogroup and Ecofin meetings, where, among other matters, the situation of the Cypriot economy and its future course were analysed and discussed.
He explained that the assessment by European Union institutions is that the Cypriot economy remains reliable and capable of meeting all its European and international obligations.
“It is not a coincidence that three days ago, Fitch’s credit rating agency confirmed Cyprus’s BBB rating with a stable outlook, which is one notch above the investment-grade category,” Keravnos said.
“We welcome Fitch’s report and the confirmation that the government will be in a surplus during the next two years,” he added, noting, however, that “we also take note of all the indications that we will study carefully for any necessary adjustments”.
“Based on our main macroeconomic scenario”, he continued, “which aligns perfectly with the spring forecasts of the European Commission and the aforementioned midterm assessment, the Gross Domestic Product (GDP) will continue to grow at a positive rate of around 2.8 per cent”.
This rate is three times the Eurozone average, which has been estimated to stand at 1 per cent.
“The continuous increase in interest rates, as you know, hampers investments, and structural inflation remains high at around 4.9 per cent, despite the fact that inflation is currently slightly above 3 per cent and is expected to reach 3.2 per cent in 2023 and 2.5 per cent in 2024,” he said.
“Inflation, as you also know, reduces households’ disposable income,” Keravnos added, noting that “these factors are the main cause of the deceleration in GDP growth, which, however, remains relatively strong, and it is estimated to be around 3 per cent in 2024”.
In addition, the minister said that the fiscal balance continues to result in a surplus, and it is estimated to average 2.3 per cent of GDP during the period 2023-2026.
Public debt is expected to decrease to 81.1 per cent of GDP by the end of 2023, from 86.5 per cent in 2022, and is projected to continue its downward trajectory towards 60 per cent by 2026.
Unemployment is expected to continue its gradual decline, approaching 5 per cent in 2026.
“The government’s primary and consistent economic policy remains to ensure macroeconomic stability within the framework of fiscal discipline and financial stability, in order to sustain economic growth and create additional employment opportunities,” the Finance Minister stated.
“The government will continue its policy to address inflation and accuracy, in addition to the specific measures that have already been taken and announced,” he added.
What is more, he said that the government’s goal is not only to continue economic growth but also seeking to develop the real economy.
“Government policies and measures leading to the green and digital economy advocate for this direction,” he said, noting that “the government’s positions on reforms in local government, justice, and the public service “also support this direction”.
Additional government policies, he explained, are aimed at real development with qualitative elements, which have already started to be implemented, including tax reform and the encouragement of foreign companies in technology sectors to establish themselves in Cyprus, creating quality and sustainable employment opportunities while transferring expertise and know-how.
“The banking sector is expected to play a crucial role in this collective effort and must play its part as the nervous system of the economy, according to my experience as a supervisor and a member of the Board of Directors of the Central Bank,” Keravnos said.
“The banking sector of Cyprus has made significant progress in recent years, with a strong capital base and liquidity, however, challenges and risks remain present,” he added.
Keravnos further elaborated by referencing the recent banking fluctuations in the US and Switzerland, saying that these serve as a reminder of the aforementioned risks.
In addition, he noted the risks that have emerged from inflationary pressures and geopolitical risks arising from the Russian invasion of Ukraine and the tension in US-China relations.
“Challenges for our banks include effective risk management implementation, technological innovation directly related to cybersecurity, and obligations arising from the implementation of the European Central Bank’s guidelines and supervisory mechanisms,” Keravnos said.
