Harris Georgiades, Cyprus’s Minister of Finance, is taking a well-earned victory lap. After the eastern Mediterranean island’s near death experience during its 2013 banking crisis, many observers cast it off as a head case that would be mired in economic stress for the remainder of the decade.
But a lightning set of reforms helped the island nation of less than one million inhabitants exit its recession in 2015, and the steady growth since has left its leaders awash in unexpected praise.
In Q2 2017, Cyprus had annualized growth of 3.5%, a full percentage point ahead of expectations. New forecasts call for a baseline of 3% growth from 2017-2020, pushing it into the top-tier of fast growing Euro economies.
Then in late September, Standard & Poor’s ratings agency changed its forecast on the Cypriot credit rating to ‘positive’ from ‘stable,’ foreshadowing a likely reevaluation next year to full investment-grade status.
S&P said that despite still high levels of non-performing loans, high economic growth would likely spur foreign interest in buying up bad loans, a move that would free domestic banks to lend more freely.
Georgiades is ebullient on the rating change. “We have been on a path of upgrades for a while and are almost at investment grade,” he said. “We are determined to do whatever is necessary, to convince not only the rating agencies, but everyone—the local business community, the international investor community—that we have fixed what was wrong with our economy and are now on a healthy sustainable path of recovery and growth.”
He doesn’t imply that the NPL situation is no longer a problem, but like his EU and IMF backers who aided the nation in its 2013 bailout, he is comfortable with the idea that unwinding these loans will be a decade-long process that will continue steadily rather than in one grand solution.
“The stock of Non-Performing Loans, a legacy problem from the past, will take time to be fully resolved but, progress is being made,” Georgiades said. “Confidence and a sense of financial stability have been reinstated.”
He points to new laws he believes will make it easier to securitize and sell off NPLs in the near future. Ultimately a growing economy will make investors feel safer in wading back into the Cypriot debt markets.
“The process will be gradual,” he said. “There is no quick fix solution. We should maintain momentum to ensure the recovery and growth of the economy, the key requirement to the problem of NPLs, because a growing economy better improves the capacity of households and business to repay their loans. This delicate balance should be maintained.”
One clear event that may be causing investors to stop and take notice is the US-based E&P Noble Energy’s confirmation of a 4.5 trillion cf gas field off the island’s coast. The Aphrodite field is currently being explored by ExxonMobil, Total, Eni and Qatar Petroleum, with production expected to begin in 2019. At current prices, some analysts have put the field’s worth at upwards of $50 billion. With that kind of firepower in the pipeline, other analysts and ratings agencies are beginning to grow less concerned about the outstanding €20 billion in NPLs.
But Georgiades views the Aphrodite field as only one of many positive growth streams in the post-crisis economy.
“We do not see the energy sector, and especially the off-shore natural gas, as a winning lottery ticket, to avoid the difficult but necessary reforms our economy needs,” he said. “Reforms should be a never-ending process. The energy sector will be hugely important, but it has a long timeframe. The revenue stream is a few years ahead of us, and it will be over a very long-term horizon.”
