The Cypriot government has approved an extension of financial measures aimed at alleviating the high living costs faced by households and businesses. This decision, spearheaded by Finance Minister Makis Keravnos, underscores the government’s commitment to addressing economic challenges exacerbated by the summer climate.

Key Measures and Financial Implications

The primary measure is the continuation of a staggered subsidy on electricity consumption from July to October 2024. This subsidy, targeting domestic, commercial, and industrial consumers, fully covers the increase in electricity prices for vulnerable groups. The cost of this extension is estimated at €12 million, benefitting 400,000 households and 100,000 businesses.

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Additionally, the government has prolonged the application of a zero VAT rate on essential items until the end of September, costing approximately €11 million. These measures are part of a broader strategy to support citizens amidst escalating costs.

Government’s Fiscal Prudence

Government Spokesperson Konstantinos Letymbiotis highlighted the administration’s responsible fiscal policies, which have positioned Cyprus as an attractive investment destination. The prudent management of finances has enabled the implementation of targeted measures to significantly enhance the quality of life for its citizens.

Future Directions

Looking ahead, the government aims to address long-term energy challenges, focusing on sustainable solutions like the green transition. This forward-looking approach not only aims to stabilise current economic conditions but also to ensure a resilient and sustainable future.

At least 500 thousand euros. That’s how much Ferrari’s first electric car will cost. The luxury brand is preparing to open a new factory that will increase production significantly.

KEY FACTS

• Sources of the “Reuters” agency indicate that the price of the electric car of the premium class is not yet known. It does not include features and personal items, which usually add 15-20%.
• However, the price is certainly much higher than the average selling price of a Ferrari in the first quarter of this year, which is around 350,000 euros. 
• The electric car will certainly be significantly more expensive than those of the competitors in the premium sector. By comparison, the price of Porsche’s less exclusive Taycan electric car starts at around 100,000 euros.
• The sources claim that Ferrari is also planning to open a factory in the luxury brand’s hometown of Maranello, northern Italy, where the model will be produced. It is estimated that this could increase the group’s production by up to a third.
• Although electric cars are generally silent, Ferrari engineers are developing “sound signatures” that will mimic those produced by the famous internal combustion engines.

IMPORTANT QUOTE

“When we talk about luxury cars like ours, we’re talking about the emotion we’re able to deliver to our customer, so we’re not talking about functional cars like the other electric cars you see on the road,” Ferrari CEO Benedetto Viña told CNBC.

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WHAT TO WATCH FOR

The sources indicate that a second electric car model under the Ferrari brand is also under development. The company predicts that by 2026, approximately 60% of the cars it offers will be electric or hybrid.

SURPRISING FACT

The luxury brand relies on its exclusivity and often the list of those who want to own a Ferrari is so long that the wait takes more than two years. Last year, Ferrari produced 13,221 cars, which is 18.5% more than in 2021. Demand still greatly exceeds supply.

In response to ongoing economic pressures, the Cypriot government is poised to extend key relief measures aimed at alleviating the financial burden on households and businesses. During a meeting on 19th June 2024, the Cabinet will decide on the continuation of a zero VAT rate on essential goods and the extension of subsidies to offset energy costs. These measures, initially set to expire on 30th June 2024, may be prolonged for an additional two months, subject to review and recommendations from the European Commission.

Zero VAT and Energy Cost Relief

The zero VAT rate on essential goods has been a critical policy tool in mitigating the impact of inflation on everyday expenses for Cypriot families. By removing the value-added tax on these items, the government aims to reduce the cost of living and ensure that basic necessities remain affordable. This measure is particularly important in the current economic climate, where inflationary pressures are affecting consumer prices across the board.

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In addition to the VAT relief, the government is also considering extending subsidies on energy costs. High energy prices have been a significant contributor to overall inflation, impacting both households and businesses. The proposed extension of these subsidies is designed to provide continued support to those struggling with high utility bills, thereby easing the financial strain and promoting economic stability.

These measures come at a time when Cyprus is experiencing a complex economic landscape, characterised by rising inflation and the need for strategic fiscal management. The government’s proactive stance in extending these relief measures reflects a commitment to supporting the economic well-being of its citizens. By addressing the immediate financial challenges faced by households and businesses, the government aims to foster a more resilient and sustainable economic environment.

Cyprus has experienced a notable increase in its harmonised inflation rate, which rose by 3.0% on an annual basis from May 2023 to May 2024. The data, released by the Statistical Service of the Republic of Cyprus, also indicated a month-to-month rise of 1.2% between April and May 2024. Furthermore, for the first five months of 2024, the Harmonised Index of Consumer Prices (HICP) increased by 2.2% compared to the same period in the previous year.

Analysing the Implications of Rising Inflation

This inflationary trend highlights several key economic dynamics. Firstly, the consistent rise in prices across a broad spectrum of goods and services reflects underlying pressures within the Cypriot economy. The increase in the HICP is significant as it measures price stability and inflationary trends in a manner that is harmonised across EU member states, allowing for a more accurate comparison of economic conditions.

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Economic Drivers and Sectoral Impacts

The inflation rate is influenced by multiple factors including global energy prices, domestic demand, and supply chain constraints. In Cyprus, energy prices have been a substantial driver, compounded by global uncertainties and regional market dynamics. Additionally, the rebound in consumer demand post-pandemic has exerted upward pressure on prices, affecting sectors such as housing, utilities, and transportation.

In a significant development for Cyprus’ financial sector, Standard & Poor’s (S&P) has upgraded the long-term credit rating of the Bank of Cyprus to BB+, just one notch below investment grade, with a positive outlook. This upgrade reflects the bank’s enhanced capital position and robust profit-generation capacity, coupled with a reduction in economic risks within Cyprus.

Strengthened Capitalisation and Profitability

S&P’s upgrade follows a similar improvement in Cyprus’ sovereign credit rating, signifying broader economic stability. The agency cited the bank’s strengthened capitalisation and its ability to maintain solid profitability, even in a challenging economic environment. Despite the anticipated decline in favourable conditions due to high interest rates, S&P expects the Bank of Cyprus to sustain a resilient net interest margin of 350-400 basis points in 2024 and 2025.

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Cost Control and Sustainable Profitability

S&P also highlighted the importance of strict cost control measures in maintaining sustainable profitability. The bank’s cost-to-income ratio is projected to move towards 44-46% by the end of 2026, a significant improvement from the high of 66% observed between 2018 and 2022. This reflects the bank’s strategic focus on efficiency and cost management.

Risk Normalisation and Asset Quality

The agency noted an ongoing normalisation of risk costs, including provisions for recovered real estate assets, which are expected to drop below 80 basis points. This decline is set to further fortify profitability as interest rates stabilise. S&P anticipates the bank will maintain a return on tangible equity above 16% for 2024, and around 12-13% from 2025 to 2026.

Broad Sectoral Recovery

The upgrade also reflects a broader recovery within the Cypriot banking sector. Following years of significant non-performing loan (NPL) sales, securitisations, write-offs, and recoveries, the sector has largely absorbed the impact of the 2012 financial crisis. Although the NPL ratio remains higher compared to other European banks, it continues to decline, reaching 7.3% at the end of March 2024, with a coverage ratio of 53.3%.

Future Prospects

Looking ahead, S&P expects Cypriot banks to gradually expand their operations as legacy issues from problematic loans diminish. The sector is projected to see an average lending growth of 2.5% from 2024 to 2027, marking a shift from the deleveraging trend observed in recent years.

The recent meeting of the General Affairs Council of the EU, held in Luxembourg, underscored the critical role of the EU Cohesion Policy in facilitating the green and digital transitions essential for sustainable development across member states. Cypriot Finance Minister Makis Keravnos highlighted the significance of this policy, advocating for its alignment with the EU’s strategic objectives for 2024-2029 to promote economic, social, and territorial cohesion.

Strategic Synergies for Balanced Development

Minister Keravnos emphasised the necessity of integrating the Cohesion Policy with the new EU Strategic Agenda. He argued that this alignment is vital to ensure balanced development across all EU regions. The policy’s investment in green and digital transitions is not merely a strategic choice but a legal obligation under the EU Treaties. It aims to foster economic, social, and territorial cohesion, which in turn reinforces the Single Market.

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Decentralised Decision-Making and Stakeholder Participation

The discussions also touched upon the importance of decentralised decision-making and active participation of stakeholders at all levels – European, national, and local. This approach ensures that the unique characteristics and potential of each member state are harnessed effectively, promoting overall growth and prosperity within the EU. Cyprus’ position advocates for a collaborative model where localised insights and initiatives drive the broader EU goals.

Addressing Challenges and Opportunities

The General Affairs Council’s meeting highlighted both the challenges and opportunities presented by the green and digital transitions. As the EU moves towards a more sustainable and technologically advanced future, the Cohesion Policy is seen as a key tool to address disparities and ensure that all regions benefit from these advancements.

Aristidis Vourakis, CEO of AstroBank, has been elected as the new Chairman of the Association of Cyprus Banks during its recent Annual General Meeting (AGM). Alongside him, Hellenic Bank’s Interim CEO, Antonis Rouvas, was appointed as Vice-Chairman. The AGM also introduced significant amendments to the Association’s statutes, extending the terms for both the Chairman and Vice-Chairman to two years.

Focus on Stability and Growth

Vourakis expressed his commitment to promoting financial stability and fostering economic development in Cyprus. He emphasized the importance of collaboration among member banks to navigate the challenges facing the banking sector. His leadership is expected to steer the Association towards a more robust and resilient banking environment.

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Collaboration and Support

Vice-Chairman Antonis Rouvas highlighted the necessity of cooperation within the banking community to bolster the overall financial system. He pointed out that through joint efforts, the banks could better support economic growth and meet the evolving needs of their customers.

Strategic Initiatives

Under the new leadership, the Association aims to implement strategic initiatives that will enhance the operational efficiency and competitiveness of Cyprus’s banking sector. These initiatives are expected to address regulatory challenges, technological advancements, and the need for sustainable growth.

European stock markets have shown resilience, posting gains after a turbulent start to the trading week. Key indices in Frankfurt, London, and Paris experienced increases of 0.6%, while Madrid and Milan saw rises of 0.3% and 1.1% respectively. Investors are keenly awaiting the Bank of England’s upcoming decision on interest rates, with expectations that rates will remain steady at 5.25%.

Meanwhile, overnight gains in the Asia-Pacific markets, buoyed by a positive performance on Wall Street, further reinforced market optimism. The Reserve Bank of Australia’s decision to maintain its interest rate at 4.35% aligns with market forecasts, reflecting a cautious but steady approach to economic stability.

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In China, industrial production continues to show robust growth, driven by advancements in technology and an increasingly skilled workforce. In Europe, business leaders are navigating complex political landscapes, particularly in France, where engagement with various political factions reflects broader economic and fiscal concerns.

This positive trend in European markets highlights a cautious optimism among investors, as they balance potential economic challenges with strategic opportunities in a dynamic global financial environment.

In an ongoing assessment, the International Monetary Fund (IMF) is scrutinising Cyprus’ public wage bill to propose optimisations aimed at fiscal sustainability. A delegation from the IMF is currently in Cyprus, engaging with key ministries including Finance, Health, Education, and Justice, as well as statistical and fiscal authorities. This review seeks comprehensive data on public sector employment, salary scales, and historical wage adjustments, including the Automatic Indexation of Wages (ATA).

The IMF’s focus includes the financial impact of restoring salaries and allowances cut during the economic adjustment period and evaluating the number of public sector employees. Preliminary indications suggest recommendations may involve a gradual reduction in public sector personnel and a tiered approach to wage adjustments based on productivity, although measuring productivity in the public sector presents challenges.

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This initiative follows a broader context where the IMF has consistently advocated for aligning wages with productivity to ensure economic efficiency. The outcome of this assessment will be critical for Cyprus as it navigates its fiscal policies and public sector management.

As Cyprus anticipates the IMF’s recommendations, the government is concurrently addressing workforce needs, evidenced by a recent request to unfreeze 1,311 public sector positions. This balance between maintaining public sector efficiency and ensuring fiscal prudence underscores the complexity of public wage management.

The IMF’s final report will likely shape future policy directions, aiming to enhance the sustainability of Cyprus’ public finances while addressing the intricacies of public sector employment and compensation.

Cyprus experienced a slight increase in tourist arrivals for May 2024, according to recent data from CySTAT. The island welcomed 421,400 tourists, a 0.3% rise compared to May 2023. The United Kingdom remained the largest source of visitors, accounting for 39.8% of total arrivals, followed by Israel, Poland, Germany, and Sweden. While arrivals from Israel and Sweden decreased, those from the UK, Germany, and Poland saw modest gains.

From January to May 2024, tourist arrivals totalled 1,170,214, up 1.2% from the same period last year. This indicates a steady but modest growth trajectory for the Cypriot tourism sector.

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Additionally, outbound travel by Cypriot residents saw a significant increase of 13.8% in May 2024, with Greece, the UK, and Italy being the most popular destinations.

These figures suggest a stabilisation of the tourism industry in Cyprus, reflecting both resilience and the potential for further growth. The government’s efforts to attract tourists from diverse markets and enhance travel infrastructure are likely contributing factors to this trend. As Cyprus continues to navigate the post-pandemic landscape, these incremental increases highlight the island’s enduring appeal as a tourist destination.