Economic Studies
Cyprus

Cyprus

Population 0.9 million
GDP per capita 28,341 US$
A4
Country risk assessment
A3
Business Climate
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Synthesis

major macro economic indicators*

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 4.5 3.8 3.1 -8.2
Inflation (yearly average, %) 0.7 0.8 0.7 1.6
Budget balance (% GDP) 1.7 -4.8 3.6 2.6
Current account balance (% GDP) -8.4 -7.0 -7.8 -7.4
Public debt (% GDP) 95.8 102.5 96.1 89.4

 

(e): Estimate. (f): Forecast. *Territory controlled by Turkish Cypriots excluded.

STRENGTHS

  • Centric geographical location between Europe, Asia and Africa favours transhipment industry
  • Offshore finance hub
  • Rich, unexploited offshore natural gas deposits
  • Skilled, English-speaking workforce
  • High-quality transport and telecommunication infrastructure

WEAKNESSES

  • Island divided since 1974, tense relations with Turkey
  • Highly dependent on Russia and the UK as export markets and sources of financing
  • Slow legal process, poor enforcement of contracts
  • Oversized banking sector with poor asset quality, very high public and private leverage
  • Weak industrial diversification (tourism, construction, natural gas, finance)

RISK ASSESSMENT

Construction, tourism and natural gas continue to sustain the economy

Growth will slow down slightly in 2020 but will remain firmly around the 3% mark. At 65% of GDP, private consumption is the main driver of demand and will decelerate slightly to 2.5% annual growth from 3% in 2019; owing to lower tourism revenues. Construction and professional services are becoming important contributors to growth. Construction in particular has benefited from a surge in private investment, which will grow at a slower pace in 2020 (6%, compared to 10% in 2019) but will remain adequate at 20% of GDP. The surge in FDI is explained by a citizen investment scheme encouraging foreigners to invest in property, and is accelerating prices of preferential real estate. Due to recently discovered maritime reserves (Aphrodite, Calypso and Glaucus-1 fields), we expect important investments in natural gas exploitation. Nonetheless, a disorderly Brexit would substantially depress FDI and tourist arrivals, as roughly a third of visitors hail from the UK. Moreover, the trans-shipping industry is exposed to global trade tensions.

 

Banking health improves but remains fragile

Thanks to the successful resolution of the Cyprus Cooperative Bank (CCB), progress has continued in cleaning the banking sector balance sheet. Non-performing loans (NPLs) have been reduced from 30% of total loans (50% of GDP) in Q1 2018 to 20% (33% of GDP) in Q1 2019. Furthermore, legal reforms have been instituted to encourage debt restructuring. The new law streamlines the procedure for seizing collateral assets, thus incentivizing borrowers to initiate restructuring negotiations. €3.5 billion worth of loans will benefit from a 1/3 state subsidy under the Estia scheme. Nonetheless, the banking sector remains vulnerable. With domestic bank assets at 200% of GDP, Cyprus remains one of Europe’s most overbanked economies, and low interest rates will harm profitability. Along with Greece, it remains the only Eurozone country with a double-digit NPL ratio (20%). The processing of bad loans remains hampered by pervasive uncertainties regarding the ownership of deeds, resulting in weak repayment discipline.

 

Fiscal consolidation continues its progress

Thanks to low interest rates and its newly regained investment-grade credit status, debt service costs have been substantially curtailed. Unemployment will continue to decrease (7%), providing stronger social security contributions and, along with better tax collection, compensate the rolling back of public sector wage freezes. Hence, a healthy primary surplus of 4.5% of GDP will help bring down the debt ratio below the 90% mark. With a poorly developed domestic manufacturing industry (cheese, medicine, electronics), the country is heavily reliant on imports and posts a substantial trade deficit of 20% of GDP, only partially covered by the surpluses in tourism and offshore financial services. The current account deficit will remain large (7% of GDP) and financed by FDI flowing into real estate, tourism and natural gas. With a still convalescing domestic banking sector, capital inflows must fund the growth necessary for reducing the debt of households (90% of GDP) and firms (120% of GDP, excluding special purpose entities). However, given an external financing requirement of 147% of GDP, this leaves the country vulnerable to a sudden tightening of global financial conditions. External debt remains at an extraordinary 460% of GDP, with the largest part corresponding to the private non-financial sector (around 200% of GDP).

 

Rising tensions over maritime gas reserves

President Nicos Anastasiades fronts a coalition government between his center-right Democratic Rally and the centrist Democratic Party, which should hold into the 2021 parliamentary elections. As in recent years, the main geopolitical issue in Cyprus will continue to be the relationship between the Republic of Cyprus (RC), Eurozone member state controlling the southern half of the island, and the Turkish Republic of Northern Cyprus (TNRC), which controls the north and is recognized only by Turkey. Since reunification talks broke down in 2017, tensions have escalated over contested waters with potential gas reserves. In response to Turkish ships penetrating into southern waters without authorization, the EU has threatened sanctions with an immediate cost close to €150 million. The island’s geopolitical stability will therefore depend on Turkey’s willingness to assert its interests despite the risk of confrontation.

 

 

 

 

 

Last update :  February 2020

Payment

Bills of exchange are used by Cypriot companies in both domestic and international transactions. In the event of payment default, a protest certifying the dishonoured bill must be drawn up by a public notary within two working days of the due date.

Although cheques are still widely used in international transactions, in the domestic business environment they are customarily used less as an instrument of payment, and more as a credit instrument, making it possible to create successive payment due dates. It is therefore a common and widespread practice for post-dated cheques to be endorsed by several creditors. Furthermore, issuers of dishonoured cheques may be liable to prosecution provided a complaint is lodged under both civil and criminal procedures.

Instead of promissory letters or notes, which are not usually used as a security or payment method in Cyprus, a written acknowledgement of debt may be obtained, which can be used as essential evidence during the hearing trials in a later stage to the court.

SWIFT bank transfers, well-established in Cypriot banking circles, are used to settle a growing proportion of transactions, and offer a quick and secure method of payment. In addition, SEPA bank transfers are becoming more popular as they are fast, secure, and supported by a more developed banking network.

 

Debt Collection

Amicable phase

Before initiating proceedings in front of the competent court, an alternative method to recover a debt is to try to agree with the debtor on a settlement plan. Reaching the most beneficial arrangement is usually achieved by means of a negotiating process.

The recovery process commences with the debtor being sent a final demand for payment by recorded delivery mail, reminding him of his payment obligations, including any interest penalties as may have been contractually agreed – or, failing this, those accruing at the legal rate of interest.

Interest is due from the day following the date of payment stipulated in the invoice or commercial agreement at a rate, unless the parties agree otherwise, equal to the European Central Bank’s refinancing rate, plus seven percentage points.

 

Legal proceedings

Introduced in 2015, cases with small claims (no more than €3,000) can follow a simplified and faster procedure. To engage such a procedure, the creditor must possess a written document substantiating the claim underlying his lawsuit, such as a Statement of Account, an acknowledgement of debt established by private deed, the original invoice summarising the goods sold and bearing the buyer’s signature and stamp certifying receipt of delivery, or the original delivery slip signed by the buyer.

For all other claims, the usual procedure is followed. The creditor files a claim with the court, who serves the debtor within twelve months. The hearing would be set at least eighteen months later. Cypriot law allows the court to render a default judgment if the respondent fails to file a defence. The ruling issued by the judge allows immediate execution subject to the right granted to the defendant to lodge an objection. To obtain suspension of execution, the debtor must petition the court accordingly.

Enforcement of a Legal Decision

Enforcement of a domestic decision may begin once the final judgment is made. If the debtor fails to satisfy the judgment, the latter is enforceable directly through the attachment of the debtor’s assets.

For foreign awards rendered in a European Union member-state, Cyprus has adopted advantageous enforcement conditions, such as EU Payment Orders or the European Enforcement Order. For decisions rendered by non-EU countries, they will be automatically enforced according to reciprocal enforcement treaties. In the absence of an agreement, exequatur proceedings will take place.

 

Insolvency Proceedings

Restructuring proceedings

This procedure aims to help debtors restore their credibility and viability, and continue their operations beyond bankruptcy, by aiming to negotiate an agreement between the relevant debtors and creditors. During this procedure, claims and enforcement actions against the debtor may be stayed, but the court will appoint an administrator to control the debtor’s assets and performances. The reorganization process starts with the debtor’s submission of a plan to the court, which conducts a judicial review of the proposed plan, while a court-appointed mediator assesses the creditors’ expectations.

 

Liquidation

The procedure commences with an insolvency petition either by the debtor or its creditors. The court appoints an administrator as soon as the debts are verified. In addition, a Pool of Creditors (three members representing each class of creditors) will be given the responsibility of overseeing the proceedings, which terminate once the proceeds of the sale of the business’ assets are distributed.

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