The advent of the COVID – 19 Virus could not have come at worse time for Cyprus. It has decimated Cyprus’ biggest earners of external investment the tourist sector, foreign investment in real estate and the services sector.
These sectors combined account for over 60% of Cyprus GDP which stands at around Euro 25bn per year and employ well over 35% of the total workforce.
In a bid to contain the spread of the virus Cyprus has closed its schools, hotels, airports, construction sites, cinemas, shopping malls, restaurants, gymnasiums etc. Cyprus is in effective lockdown and under curfew from 9pm to 6am daily and is likely to be so for the rest of April and possibly into May.
Economic activity has drastically declined keep money in the economy the government has decreed that repayment of bank loans has been postponed on an interest free basis until the end of the year, and the payment of income tax and VAT have been postponed.
More than 50% of the workforce is working that still has work is working remotely in varying degrees of efficiency and economic activity has understandably declined severely.
Pay-cuts and layoffs are the order of the day despite various government schemes that are aimed at encouraging employers to retain staff. These schemes are however not generous enough to encourage bravery in employers especially in the light of the uncertainty that prevails over how long the economy will remain crippled by the containment measures and how the virus will affect Europe and Eurasia and the Middle East and the Far East and for how long.
Additionally, the measures adopted by government for government guaranteed loans to businesses are yet to have any discernable effect as the uncertain economic forecast is not conducive to the undertaking of additional burdens by local businesses at this time.
There are about 25 new infections daily, 500 infections in total and 9 deaths so far; in a population of 1 million. Not overwhelming figures by international standards but enough to stretch the health service to almost breaking point.
To cap it all on Friday the Supreme court of Cyprus is expected to rule on whether the 60.000 or so civil servants are entitled to be repaid the wages that they were docked as a result of the 2013 crisis. This could land the government with a bill of Euro 3,2 billion.
All in all, a bleak economic picture leaving Cyprus in urgent need of a cash injection. The government cannot finance its programmed “survival expenditure” by internal borrowing. Also, confidence is not high that the EU will be particularly generous to Cyprus, Cyprus has leaned to beware of Europeans baring promises of gifts.
In response to the above Cyprus has gone to the international lending markets and on 7th April 2020 Cyprus issued two government bonds – a seven-year bond for Euro 1,75bn at 1.65% interest return and a 30-year bond for Euro 500m at 2.015% interest return. The bond launch was successful. It was 2.6 times over-subscribed.
The Government presumably feels that the Euro 2.25bn it has raised will be sufficient to pull it through and to allow it to implement its economic rescue package.
The downside is that Cyprus has been slightly down-graded on the international ratings as a result of this increase in national debt by Fitch from BBB- positive to BBB- stable. Fitch point to a downgrading of economic performance from a surplus of almost 3% in 2019 to a deficit of 1% in 2020 as a result of the measures that the government is taking to support the economy in the face of the pandemic.
Fitch point out that Government debt is still at 95,5% of GDP (down from a peak of 109% in 2014 – the height of the financial crisis). The external borrowing as a result of the aforesaid bond launch will further increase government debt, but there is no other way.
Desperate times call for desperate measures.