Speech by Panicos Demetriades, Governor of the Central Bank of Cyprus at the Cypriot-Lebanese Banking Day
Limassol, 14 February 2014
Ladies and gentlemen,
I would firstly like to thank the organisers and participants of this event which hopefully will result in further co-operation between the Cyprus and the Lebanese banking sector.
Introduction
The mutually beneficial cooperation between Cyprus and Lebanon goes back many years, to the Lebanese civil war, when Cyprus offered a safe haven for Lebanese entrepreneurs to establish businesses primarily in the commerce and tourism sectors. Lebanese banks have had a presence in Cyprus for more than 30 years now and it was thus a natural outcome that strong ties would have developed between the two countries throughout this period. It would not be an exaggeration to say that Cyprus and Lebanon have supported each other in overcoming particular problems during difficult times. Both countries, inspired by the fundamental rights of people to live in peace and freedom to enjoy independence, have strengthened their friendship.
Main reforms and enhancement of cooperation between the two countries
Since 2012, Cyprus has been confronted with an unprecedented financial crisis that has necessitated drastic corrective measures. To address the short and medium-term financial, fiscal and structural challenges, the country has been following an ambitious reform programme, agreed with the European Commission, the ECB and the IMF, backed by substantial financial support. The purpose of the MoU signed with the Troika is to restore financial stability and achieve sustainable public finances to support economic recovery. The key objectives of the reform programme include the restoration of soundness of the Cypriot banking sector and strengthening of supervision through the implementation of structural reforms to enhance the resilience of banks. In this context, new prudential requirements have been introduced by the Central Bank of Cyprus, including loan origination processes, management of arrears and non-performing loans. Moreover, Cyprus is committed to enacting legislative changes aimed at:
1) Removing legislative and administrative hurdles, which impede the balance sheet adjustment of banks and the private sector, thus contributing to the restoration of the key role of the financial system, i.e. to channel credit to the real economy and hence foster sustainable growth. Legislative changes aimed, inter alia, at deterring strategic defaults while encouraging debt restructuring for viable borrowers have been planned for submission to the House of Representatives for enactment by the end of February 2014 and for implementation by the end of 2014.
2) Creating a central credit register listing all borrowers and their beneficial owners, of both commercial banks and cooperative credit institutions, to enable the institutions to check new loan applications against the register. The credit register will identify the borrowers who are or were in arrears and will help monitor credit risk and large exposures. The legal framework for the credit register should be in operation by the end of September 2014.
The above measures constitute only a part of the actions that will be implemented so as to restore the soundness of the banking sector and strengthen supervision. This is an opportunity for Lebanese branches established in Cyprus to grow. Opportunities may exist in financing various sectors of the economy, such as shipping, tourism, infrastructure projects, education, health, research and development. There are roughly 61.000 SMEs in Cyprus that dominate the island’s economy.
Potential good quality and secured lending of funds in the Cypriot economy constitutes an important element in reactivating the Cypriot economy, restoring its growth potential and improving its competitiveness but at the same time provides a good opportunity for international banks to expand their banking business in the island.
Our two countries cooperate closely for the exploitation of their respective Exclusive Economic Zones and the discovery of natural gas reserves within the Cyprus Zone has created new potential for cooperation between Cyprus and Lebanon.
Furthermore, Lebanon and Cyprus can both benefit from an exchange of knowledge and experience. An example is the Lebanese Credit Public Registry, managed by the Central Bank of Lebanon, that collects information on the creditworthiness of borrowers in the financial system and makes it available to financial institutions. Credit information is basic to expanding access to credit. Cyprus is still in the initial stages of creating such a registry.
It should be further stressed that the tax regime in Cyprus remains business friendly, even after the recent small increase in the rate of corporation tax, whereas the professional services offered in Cyprus are of excellent quality. Thus, doing business in Cyprus is easy and cost effective. Given its important geostrategic location, Cyprus can work as a business hub for foreigners to invest in the island, the EU or internationally.
As you may be aware, as a consequence of the recent financial crisis, Cyprus has been obliged to impose temporary restrictive measures including capital controls. Obviously the imposition of these measures poses significant costs to economic activity. These controls are being relaxed gradually, based on a published roadmap agreed with the European Commission, the ECB and the IMF. It should be emphasized however that Cyprus, in consultation with the Troika, has succeeded in exempting international banks and international customers from the restrictive measures.
All in all, significant headway has been made to date on the implementation of the measures laid down in the Economic Adjustment Programme of Cyprus and this assessment has been documented in the three Programme reviews carried out so far. To quote from the Third Review Mission: "...Cyprus’s programme remains on track, with the macro-fiscal outturn better than expected. Fiscal targets for 2013 have been met with considerable margin, due to both continued prudent budget execution and a less severe recession than anticipated...". More specifically, output and private consumption in 2013 are estimated to have contracted by a considerably lower rate than forecasted at the time of the last review, while tourism and professional services have proven resilient. Important progress has been achieved towards restoring financial sector stability, including the completion of the recapitalisation of the two largest banks, the imminent recapitalisation of the cooperative sector and the implementation of their restructuring plans in progress. The financial sector has also exhibited remarkable signs of stabilisation, as evidenced by the gradual dampening of outflows.
Having said that, I recognise that there are significant risks to the economic outlook. Therefore, there is no room for complacency and all of us should bear in mind that the resolute implementation of the Programme is the only feasible way out of the Programme. Nevertheless, I remain cautiously optimistic. As soon as the banking system is fully stabilised and confidence re-established, the removal of controls can be completed and, consequently, a faster recovery of economic activity can be achieved. As noted in the Third Review Mission "...with key milestones in the authorities roadmap now completed, the second phase of gradual relaxations of restrictions is expected to start shortly." The aforementioned phase of the roadmap foresees the abolition of the restrictive measures relating to fixed-term deposits and of the current limit related to transfers within the Republic, regardless of the purpose, subject to certain milestones, namely the disbursement of funds under the macroeconomic adjustment program for the recapitalisation of the Coops, the submission of the Coops restructuring plan to the European Commission, the recapitalisation of Hellenic Bank and the approval of Bank of Cyprus’ restructuring plan by the Central Bank of Cyprus. The disbursement of funds for the recapitalisation of Coops is the only major milestone pending and is expected to be met soon.
In addition, some support to the economic outlook may come from investments in the energy sector, which could prove beneficial to the banking sector and the economy in general, as well as from better prospects for key sectors such as tourism and professional services, which, as in 2013, are expected to have a positive contribution to economic activity. Last but not least, I also take note of the resumption of the talks for the solution of the Cyprus problem which could lead to new prospects for economic reconstruction and a stronger recovery.
Concluding remarks
Looking forward, Cyprus is confronted with a challenging road ahead. However, after a long period of uncertainty, there is now at last a paved path towards financial stability and economic recovery. Major steps have already been taken so as to address the challenges and we are sure that Cyprus will overcome all its problems, as in the past, and emerge with stronger foundations.
We hope that this conference will act as catalyst for stronger links and cooperation between the Lebanese and Cypriot banking sector. The two central banks are committed to encouraging these closer links, which we believe would be to the benefit for both countries.