Tassos Yiasemides: Economic challenges to intensify in 2024

2023 proved to be a year of developments and changes for the Cypriot economy, as important events shaped the country's financial landscape.

The acquisition of investment grade by Moody's, the election of the new government, COLA, the increase in interest rates, the passing of the new framework for divestments, and international tensions, were key developments that left their mark on the Cypriot economy.

In a recent interview with InBusinessNews, economist and management consultant at KPMG Cyprus, Tassos J. Yiasemides, lists the events that affected the economy of Cyprus, while predicting that the challenges for 2024 will be even more demanding.

He also records the positive impact created by companies relocating to the country, highlighting, however, the resulting problems, such as high rents, which now require careful management by the government.

Regarding the challenges of 2024, Yasemides points to the impact of rising interest rates and the potential negative consequences of sanctions on Russia. In addition, he notes the uncertain landscape regarding developments in Israel and Gaza, which affect tourism and investment.

Among other things, he states that the increase in inflexible spending in the state budget may cause issues if the growth of the economy is not at the levels budgeted for.

"The Cypriot economy as an exogenous one is significantly affected by political and economic events that occur in Europe and in the world in general, with the big bet remaining the ability to absorb negative developments," Yasemides concludes.

Yasemides’ interview with InBusinessNews follows:

What do you consider to have been the most important events to have marked the course of the Cypriot economy in 2023?

Among the important events for the economy in the past year are the acquisition of the investment grade by the Moody's rating agency after eleven years and the positive evaluations by the other agencies, the surpluses it shows and the reduction of the public debt ratio compared to the GDP.

The election of a new President of the Republic of Cyprus and the formation of the new Council of Ministers are important political and economic events in themselves.

The implementation of the governance programme, as for example with the concession of the Cost of Living Allowance (COLA), and the simultaneous maintenance of fiscal stability is a difficult endeavor.

The large increase in interest rates during the year as a result of the tightening of monetary policy by the central banks, the high cost of living, the high cost of energy, and in general the shrinking of businesses’ profit margins are important events.

On the positive side, there is also the passing of the foreclosures framework, with its practical implementation remaining a challenge, the improvement of the banks' balance sheets with the alienation of the NEDs, without this meaning that society's problems were solved, and the approval of the revised plan for the Recovery and Resilience Fund by the European Commission.

Events such as the continuation of the war in Ukraine, the sanctions that were imposed, as well as the flare-up in the Middle East, albeit externally, significantly affect the Cypriot economy.

To what extent do you think that the Cypriot economy proved resilient against the challenges it was called upon to face?

The Cypriot economy has shown significant positive numbers in recent years, showing positive albeit decelerating growth rates. The effort made by expanding the productive base of the economy makes it more resilient.

The relocation of companies to our country or the expansion of their activities together with their staff has helped the country's economy on a horizontal basis, despite the problems it may have created such as increased rents, things that need to be managed.

Traditional sectors of the economy, such as tourism, real estate and shipping, continued to boost the country's GDP, while education and the health sector are gradually strengthening. It is noted, however, that the trend of the last months of the year recorded a slowdown.

The financial sector was significantly restructured under strict guidelines and can more easily absorb any shocks.

How do you judge the decisions taken to deal with the resulting impacts within 2023, both for businesses and households?

Any measures taken in relation to inflation and accuracy are temporary as market forces must be allowed to work for balance to be found. Some of them, such as the reduction of VAT on certain goods, have already been absorbed by the market.

An important issue is the high cost of borrowing in which the state can hardly intervene, while difficulties arise in housing matters pending the full implementation of the measures announced by the government.

It is also noted that there was an increase in government spending, with a significant part being inelastic spending that is expected to affect the following years as well.

Possibly some of this boosted consumption, slowing further declines in inflation.

Digitisation and green transition are still in the pipeline despite the fact that the former could facilitate businesses and households and improve citizens' quality of life, and the latter could curb energy costs.

What important events will the Cypriot economy face in 2024?

The challenges are expected to intensify. We expect to see the full impact of rising interest rates and the removal of significant liquidity from the markets, with the European economy and especially its core countries showing signs of fatigue and slowdown.

Potential negative consequences from the sanctions imposed on Russia are expected to intensify, with the services sector being called upon to readjust and seek new markets and financial products. The adoption of the single supervisory authority and the highlighting of the important steps taken by the country in relation to the best international practices are immediate priorities.

The continuation of hostilities in Israel and Gaza are a major question mark for the economy of Cyprus since a significant number of tourists and real estate investments come from this country. A prolonged period of war and even worse of heightened tension will have negative consequences.

The increase in inelastic spending in the state budget may cause issues if the growth of the economy is not at the levels budgeted for.

The country's borrowing costs rose in line with the general mood in bond markets, but for now it is not a major source of concern due to the layering of public debt and fixed-rate borrowing. Tthe results of the next bond issue by the Republic of Cyprus are of particular interest.

Something that is also recorded in the reports of the rating agencies is the country's ability to draw funds from the Reconstruction Fund through the promotion of reforms that will require political consents.

At the same time, we must not forget the great reform of local government and how it will work in its new form. That is, if it will enable better service to citizens and businesses or if it will strengthen the bureaucracy, especially in relation to licensing.

The Cypriot economy as an exogenous one is significantly affected by political and economic events that occur in Europe and in the world in general, with the big bet remaining the ability to absorb negative developments.

(Source: InBusinessNews)