Cyprus faces up to pandemic and Brexit

25 September 2020: Stavros Pantzaris, Partner and Chairman of the Board at EY Cyprus, says that Cyprus’s economy is battling through the impacts of pandemic and is squaring up to Brexit.

GDP growth in Cyprus had been healthy up until pandemic struck. It reached 4.1% in 2018, 3.2% in 2019 and the expectation was for around 3.5% growth in 2020…that is more likely to look like a contraction of 6.5% in 2020. A return to growth is expected in 2022. Meanwhile, inflation is very low, perhaps even in negative territory, and unemployment will clearly be impacted by the virus.

Not surprisingly, Cyprus has seen trade flows disrupted in recent months, partly caused by the decline in demand for consumer products perceived as more “discretionary” (eg. luxury clothing) than “necessities” such as food. It seems the Cypriot consumer has not turned to online retail therapy during the crisis.

“The relatively low technology adoption rate by the retailer sector in Cyprus has limited the mass transition of consumers to digital channels during the lockdown, unlike its European counterparts,” says Pantzaris. “However, local retailers with strong online presence saw online sales increase dramatically, which is an encouraging sign. Others with limited online infrastructure adapted to the circumstances by establishing call centres to help consumers order via phone.” All this will come as a huge surprise to British shoppers for whom online purchasing has largely become second nature. Overall, despite the progress that online shopping achieved during lockdown, the Cypriot retail landscape is still dominated by brick-and-mortar.

With the retail sector in the doldrums, it is not surprising that investments have been postponed, including the development of logistics hubs, with plans to revisit the situation once there is clarity around the nature and extent of the pandemic. Many analysts in Cyprus believe that the retail market will have to wait until 2022 for real recovery.

It has not helped that the tourism sector has been so depressed. “Arrivals in July fell by almost 90% compared to last year,” Pantzaris points out.  “A fall in activity of such magnitude is unprecedented and given the country’s dependence on the sector, the knock-on effects will take time to ripple through the economy.”

“Cyprus is an import dependent economy,” he reminds us. “There has been a sharp drop in imports of fuel and oil-related goods. This is expected to continue in 2020. Electricity consumption and sales of petroleum products were down by around 5% and 18% respectively during the first five months of 2020.”

“In terms of exports, during the first five months of 2020, two products stood out for their strong performance: pharmaceutical products, of course; and haloumi cheese! The export of pharmaceutical products in the first five months of 2020 rose by around 30%,” says Pantzaris. “The export of haloumi rose by 16%.” Nevertheless, the export of agricultural products, including the export of Cyprus’s famous potatoes, dropped significantly.

Against this backdrop, Cyprus has Brexit to consider: “Brexit will definitely have an impact,” says Pantzaris. “Our tourism industry mainly relies on two markets: the UK and Russia. The UK has 40% of the market and Russia has 20%. Cyprus is therefore exposed to foreign exchange fluctuations…the euro against the pound and the euro against the rouble.”

He continues: “Brexit will affect the exchange rate and will definitely affect the influx of tourists from the UK. There is a question mark over how other Cypriot exports may be affected. With so much volatility in our markets, it is difficult to predict the implications for the local economy.”

Despite their year-on-year decline in economic activity, some sectors have performed relatively well during the lockdown and continue to do so. “Food and beverage, electronics, information technology, vitamins and supplements, and DIY and gardening are all examples of sectors that fared well” he says.

Meanwhile, the banking sector continuous to struggle with non-performing loans that followed the financial crisis. Covid has not helped this situation and issues around property investment – especially those concerning Cyprus’s naturalisation and citizenship programme that has received negative press – have worried banks further.

Perhaps opportunities for Cyprus lie in digital transformation and the acceleration of e-commerce? Pantzaris concurs. “In fact, as EY, we have helped a number of our clients establish training in this area,” he says. “We also see opportunities in the higher education sector. Given the quality of our higher education institution, I believe that with careful management of the pandemic situation and proper marketing, Cyprus has a unique opportunity to outshine its peers” he points out.

“Of course, Cypriot professionals are also very well known for the quality of professional services, including accountancy,” he says. “This is the backbone of our economy. It is vital for this sector to prosper if there is to be GDP growth, good employment and tax revenues.” 

“We aim to attract real businesses that will create real substance, jobs and help the economy back onto a sustainable growth-path. Linking into new markets around the world – such as the US, China and India as well as leveraging our close relationship with the UK– will help Cyprus along that journey.”