CBC governor highlights geopolitical uncertainties impacting economy

Cyprus Central Bank Governor Constantinos Herodotou on Monday took part in a meeting of the House Finance Committee, during which he underlined the significant uncertainties stemming from geopolitical disruptions that affect both the Cypriot and European economies.

He stressed the importance of aligning fiscal planning and the national budget to address these challenges and uncertainties.

Herodotou revealed that according to the forecasts made by the Central Bank in September, the growth rate of the Cypriot economy is expected to reach 2.4 per cent in the current year, accelerating to 2.7 per cent in 2024 and further to 3.1 per cent of GDP in 2025.

However, he also noted that these predictions were formulated before the outbreak of the conflict in Israel, introducing an element of uncertainty concerning the potential repercussions on the Cypriot economy, dependent on the duration, intensity, and scale of the conflict.

“It is crucial that our country’s planning and budgeting take into account this uncertainty, enabling flexibility to address the crisis according to its scope and duration,” Herodotou stated during a press conference following the committee’s session. He expressed satisfaction with the budget assumptions in light of these uncertainties.

Furthermore, Herodotou highlighted the improved resilience of the Cypriot banking system, indicating its current capacity to withstand a potential crisis.

He stated that the banking system’s liquidity coverage ratio stands at 327 per cent, more than double the Eurozone average, while the Common Equity Tier 1 (CET1) ratio for the Cypriot banking system is at 18.9 per cent, compared to the Eurozone average of 15.9 per cent.

In addition, he noted that higher capital reserves are associated with the increased risks that Cypriot banks face.

Herodotou also reported that non-performing loans had not increased by July 2023, with the Non-Performing Exposures ratio for the Cypriot banking system at 8.7 per cent.

He mentioned a 6.9 per cent reduction in Stage 2 loans during the first half of the year, a classification that precedes non-performing loans (Stage 3).

Regarding the public finances, Herodotou noted that they recorded a 3 per cent surplus of GDP from January to September, attributed to both economic growth and increased revenues resulting from high prices.

He pointed out a 9.3 per cent annual increase in public expenses, primarily related to personnel salaries and social benefits.

Speaking about financial risks, Herodotou addressed pressures for additional wage increases, expenses related to the National Health Service (GeSY), and higher interest payments. However, he acknowledged the presence of substantial reserves in the public funds.

Transitioning to the banking sector, Herodotou stated that despite ongoing challenges, Cypriot banks continue to demonstrate resilience.

Negotiations and debt restructuring processes approached €3 billion in the first eight months of 2023, compared to €1.4 billion in the same period the previous year.

What is more, Herodotou emphasised the importance of continued monitoring and pressure on banks to carry out negotiations and debt restructuring effectively to avoid an increase in non-performing loans.

Regarding new loans, Herodotou mentioned that in the first half of the year, approximately €2.08 billion in new loans were granted, remaining at similar levels to the corresponding period in 2022, when they stood at €2 billion.

He noted that there is an increase in business loans and a decrease in housing loans, partially attributed to the high interest rates. Housing loans decreased from €700 million to €469 million during the first six months of the year.

Moreover, Herodotou also discussed interest rates, explaining that Cypriot banks offer favourable rates for new loans compared to the Eurozone average, although deposit rates are less favourable.

He highlighted the interdependence between loan and deposit rates as they influence the financial results of banks.

In the context of existing loans (as of December 2022), Herodotou stated that only 13 per cent have fixed interest rates. Around 44.4 per cent of existing loans are tied to the Euribor, which is significantly affected by interest rate increases, while approximately 30 per cent have variable interest rates based on the bank’s base rate, which is less sensitive to European Central Bank interest rate hikes.