When a country goes through a crisis – be it economic, political or otherwise – often one of the hardest things to overcome post-recovery is the reputational damage. Headlines have the power to wound, and they linger for a long time; the words hovering over the afflicted country like a dark cloud.
In perennially sunny Cyprus, those words were 'tax haven' and 'money laundering'. The banking crisis that struck the country in the spring of 2013 and precipitated a bail-out by a group of international lenders referred to as the ‘Troika’ – the EU, the European Central Bank and the International Monetary Fund – hurt the economy, and the Cypriot people. But the labels that the country was tarred with in the international media continue to cast a dark shadow.
“Cyprus has unfortunately been hit with a lot of bad publicity during the past 18 months or so. In most cases it was actually proved afterwards that it was totally unsubstantiated and unfair – I’m referring of course to allegations like money laundering," says Charis Papacharalambous, director-general of the Cyprus Investment Promotion Agency (CIPA). "As part of the Troika deal two very in-depth reviews [were carried out], the findings of which are proof that Cyprus was at least as good as its European partners and probably in many cases even better. It has to be said that such in-depth reviews haven’t been done in any other country.”
The comeback trail
After keeping a deliberately low profile in the aftermath of the crisis, Cyprus is now going on the offense to counter some of the more unflattering claims and to deliver the message that, despite the upheavals in its banking sector, the country’s business environment remains stable – and attractive. The message is that the fundamentals that made Cyprus a draw for inward investment pre-crisis still exist and in some respects have even been improved upon.
“It is important to emphasise that Cyprus, despite its current economic difficulties, still remains an attractive investment destination and a highly competitive centre for international businesses, offering them a platform for their operations and preferential access to markets such as Europe, Russia, the Middle East, India and Asia,” says the president of Cyprus, Nicos Anastasiades.
He cites as these advantages: a strategic location at the crossroads of Europe, Asia and Africa; well-developed infrastructure; almost 50 double-taxation treaties in place; a highly qualified and professional workforce, especially in the financial services field; ease of doing business; a fully internationally harmonised tax and legal system; and, of course, one of the lowest and most competitive corporate tax rates in Europe at 12.5%.
“One of the main strategic pillars of economic policy of this government is to maintain those advantages and further improve the competitiveness of the economy, in order to ensure that it will not only retain the substantial comparative advantages it offers to foreign investors, but will further develop this conducive environment,” says Mr Anastasiades says.
“This can only be achieved by boosting innovation and enhancing the efforts of the business community to operate in a more effective, business-friendly – and ultimately more competitive – environment in collaboration with Cypriot and foreign companies.”
Mr Papacharalambous says CIPA has witnessed an uptick in interest from foreign investors into Cyprus over the past 12 months. He puts this down to trust returning to the country as Cyprus has been doing what was required to stabilise the economy and has worked hard to meets its obligations. “It is clear what needs to be done to a very large extent is being done and the results are quite positive, as also indicated in both reviews conducted up to now by the Troika team. This will certainly continue and clearly things will start to move forward positively and confidence in the economy, as well as its banking system, will continue to grow,” he says.
“The return of trust can also be seen from a recent example where foreign investors [a US fund in this case] were part of the recapitalisation of the second largest Cypriot bank, thereby making them a key shareholder. Furthermore the structural measures introduced at the moment assist in improving the country’s competitiveness while also improving transparency and credibility, which are very important credentials to have for the investment environment.”
Speaking at an Economist conference on Cyprus in late November, IMF mission chief for Cyprus, Delia Velculescu, praised Cyprus’s crisis-recovery efforts and said the economy is displaying signs of resilience.
“The [Cypriot] authorities have a full agenda ahead. The difficulty of their task should not be underestimated, as the recession continues and large risks remain. Nevertheless, one should not forget that the most difficult decisions have been taken to address the root of the problems in Cyprus. The authorities have now a unique opportunity to use this momentum and turn their economy around,” she said.
Cyprus came to the brink of financial collapse earlier in 2013 after the country’s exposure to Greek sovereign debt sparked a banking crisis. The Troika’s controversial €10bn rescue package warded off bankruptcy at the expense of uninsured depositors who saw some of their deposits of more than €100,000 converted into equity in the Bank of Cyprus, now at the centre of a major restructuring programme as part of the Troika deal. The deal also includes conditions on government fiscal policy and capital controls on the banking sector, which are gradually being eased.
Cyprus’s finance minister, Harris Georgiades, has been quick to point out that while the economic contraction has been painful – particularly with regards to rising unemployment – it has been less severe than was expected. He forecasts a 7% drop in output for 2013, roughly 2% less than lenders’ predictions.
The next year will be a difficult one, with a forecasted 3.9% contraction, but modest growth is expected from 2015. Recently discovered reserves of offshore natural gas have caused excitement, meanwhile.
The government has announced a number of measures aimed at alleviating the jobs problem, such as the provision of national grants and incentives for flexible employment as well as for hiring unemployed people in the tourism industry.
In the financial sector, the two biggest short-term challenges are the restoration of lending to the economy and the relatively high interest rates. “The private sector constitutes the main engine for economic growth but the existence of limited funds at high cost is very detrimental for the economic recovery,” says Mr Anastasiades.
The board of the European Investment Fund recently approved a €150m trade finance facility for Cyprus that will re-activate credit lines with international banks and support short-term trade-related instruments. The board also approved a loan of €150m for the establishment of a Cyprus Entrepreneurship Scheme to finance small and medium-sized enterprises. In the banking sector, some banks have already announced a reduction in lending interest rates, which many interpret as an encouraging sign.
Cutting red tape
Another priority for Cyprus is the reform of public administration and reduction in governmental bureaucracy, which, the president says, also includes the attitude towards foreign investors, both existing and prospective.
To this end, additional tax incentives are being offered for existing or new companies doing business in Cyprus, and friendlier regulations for residency and citizenship are hoped to entice investors from outside the EU, including the provision of residency to non-EU citizens for investments greater than €300,000.
The IMF’s Ms Velculescu says Cyprus’s business model will need to move away from financial services and towards other services where the country has a comparative advantage. “Tourism and business services [legal, consulting, accounting] are expected to support the recovery and medium-term growth. These sectors benefit from a low corporate tax regime, educated labour force, strong institutions, and low structural barriers to growth. Prospects from the exploitation of gas reserves provide an upside for long-term potential growth,” she says.
Cypriots for the most part accept the island’s role as a financial centre will change, perhaps for good; but that does not mean it cannot continue to be a centre for international business.
“If by the term ‘financial centre’ we mean global activity within the banks and a lot of foreign money coming to Cyprus to stay there for long periods of time, then yes, for the foreseeable future that is the end of Cyprus playing that role. However, businesses using Cyprus as headquarters for their business operations, holding companies and marketing activities, etcetera, have not left Cyprus, or at least not any more than they would have done in normal circumstances,” says Phidias Pilides, president of the Cyprus Chamber of Commerce.
Evgenios Evgeniou, chief executive of PwC Cyprus, agrees with Mr Pilides about Cyprus’s continuing competitiveness as a business hub, and also makes the case that the crisis has demonstrated something valuable about the character of the country.
“Considering what happened to Cyprus and the fact that it went through what was potentially the worst crisis in the eurozone, there has been social peace throughout,” he says. “From the perspective of a foreign investor it is useful to see that only a few months after the crisis you can go about your business normally. This demonstrates the resilience of the people of Cyprus, but also shows that despite the problems there is a commitment to rebuild the economy on a stronger footing and come out of the situation stronger.”