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Herodotus: Economic planning should reflect geopolitical uncertainty

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He highlighted the improved resilience of the Cypriot banking system, expressing the assessment that it is able, for now, to cope with a possible crisis

Ηροδoτου: Ο &iot;κο ;νομικoς σχεδιασμoς να αντανακ&lambda τη γεωπολιτικor αβεβαιτητα

The great uncertainty created by the geopolitical upheavals which affect both the Cypriot and the European economy, was pointed out by the Governor of the Central Bank, Konstantinos Herodotou, underlining the importance of fiscal planning and the state budget to reflect challenges and uncertainty.

Speaking before the parliamentary Finance Committee, which started the examination of the state budget for 2024, Mr. Irodotou said that based on the forecasts of the CBC in September, the growth rate of the Cypriot economy will reach 2.4% this year and to accelerate to 2.7% in 2024 and 3.1% of GDP in 2025. He noted, however, that these forecasts were prepared before the war in Israel broke out, with the result that there is uncertainty as to the possible effects on the Cypriot economy which will depend by the duration, intensity and extent of the war.

“It is important that the planning and budgeting of the country takes into account this uncertainty, so that there is the flexibility to deal with the crisis depending on the extent and the time it will take”, he emphasized in statements after the Committee session, characterizing the budget's assumptions as satisfactory.

He also emphasized the improved resilience of the Cypriot banking system, expressing the assessment that it is able, for now, to cope with a possible crisis.

Speaking before the committee, Mr. Irodotou referred to the public finances which in the January-September period recorded a surplus of 3% of GDP, noting that the increased revenues of 16.8% are justified by both economic growth and increased revenues due to high prices.

Regarding public expenditures, Mr. Herodotou said that they showed an annual increase of 9.3% in the first eight months, which is attributed to staff salaries, social benefits. Regarding the risks to public finances, Mr Herodotou referred to pressures for further increases in staff salaries, expenditure related to the NHS, and increased interest payments, while acknowledging that there are high reserves in public coffers.

Resilient banks

Referring to the banking sector, Mr. Herodotou said that despite the challenges that continue to exist, Cypriot banks show high resilience. He referred to the liquidity coverage ratio which stands at 327% and is more than double the eurozone average, while the Common Equity Tier 1 Index (CETI1) of the Cypriot banking system stands at 18.9% compared to 15.9% which is the average term of the eurozone. He emphasized, however, that the higher capital is linked to the increased risk faced by Cypriot banks.

Mr. Herodotou also pointed out that until July 2023 no inflow of non-performing loans was recorded, with the NPL ratio for the Cypriot banking system at 8.7%. He also noted that loans in stage 2, which is considered the anteroom before a loan is classified as NPL, saw a 6.9% decline in the first half of the year.

Re-negotiation Boom< /h3>

The CBC Governor said in the first eight months of 2023 and amid high interest rates, loan renegotiations and restructurings approached €3 billion, compared to €1.4 billion in the corresponding period last year.

« We are still monitoring and pressuring the banks for renegotiations and restructurings to avoid the increase in NPLs”, he added.

New lending at the same levels, mortgages down

< p>Regarding the new lending, Mr. Herodotou said that in the first half of the year, €2.08 billion of new loans were granted, which is approximately at the same level as the corresponding period of 2022 (2.00 billion).

He noted, however, that there is an increase in business loans and a decrease in mortgages, which is partly linked to high interest rates. As he mentioned, new housing loans in the first six months of the year decreased to €469 million compared to €700 million in the corresponding period last year.

Moreover, Mr. Herodotou said that regarding the interest rates for new loans, Cypriot banks compare favorably with the average of the Eurozone, in contrast to deposit rates where the comparison is negative. He emphasized, however, that the two interest rates must be examined as a whole because they affect the financial results of the banks.

He noted, however, that a significant change in deposit rates affects Cypriot banks more due to the high liquidity.

< h3 class="bd_Title">44% of loans are related to Euribor

Regarding existing loans (end of December 2022 data), Mr. Herodotou said that only 13% are with a fixed interest rate. 44.4% of existing loans are linked to Euribor, which are significantly affected by the rise in interest rates, while around 30% are with a floating rate but based on the bank's base rate, which are less sensitive to ECB rate hikes.

Do not take dividend distribution for granted

At this point, Mr. Irodotou reminded that only one systemic bank was allowed to distribute a dividend from the ECB, while the banks supervised by the CBC are directed to use profitability to increase the credit risk coverage ratio.< /p>

“If the banks are not raising deposit rates because they think that next year the supervisory approach will change to give dividends, I say clearly the supervisory approach will not change. The supervisor must be convinced that profitability is sustainable, the banks should not think that the supervisor will see it in the short term,” he said.

Furthermore, to a question from MPs about the CBC's mechanism for handling NDEs, the Mr. Irodotou said that the CBC had prepared a document, but his submission was conditional on no changes being made to the legislative framework for NEDs. These changes passed, so there was no commitment for the CTC, he added.

Remarking that the mechanism was submitted as a law proposal by the coalition parties, Mr. Herodotou said that some changes were made, which “did not were discussed with us”.

Source: www.kathimerini.com.cy

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