CountryRiskAnalysis:Cyprus

Introduction
When a creditor extends a loan to a debtor, therangeofoutcomesisknowntothelender
but not their probabilities. Thus, the decision to lend is subject to the risk of an unprofitable
outcome. Hence, countryrisk analysis is a comprehensive practical and theoretical guide to the
1

management of crossborder lending and international investment risk. The objective of the
analyst is to provide guidance as to the appropriate mix of domestic and international loans in
lenders portfolio and to identify which countries are associated with acceptable degrees of risk
(i.e. accessing both the risks inherent in the proposed loan or asset exposure and their effect on
theoverallriskoftheexistingportfolioofcrossborderassets).
The conceptual framework for evaluatingcountryriskvariesamongbanks.However,the
two broad approaches can be discerned: a qualitative analysis which involves an indepth
political and economic assessment of a country and a quantitative analysis which seeks to
2

identify certain key variables common to every country. Mainly speaking, the purpose of
preparing a structured qualitative report is to measure the countrys political and economic
preference relative to itself over time, where such analysis should begin with an examinationof
the structure of a country to expose its basic strengths and weaknesses and, hence, highlighting
certain key economic and financial variables that impinge directly and indirectly on a countrys
3

abilitytoserviceitsexternalfinancialobligationsonschedule. Forthepurposeofthisreport,the

http://www.quantcandy.com/blog/wp-content/uploads/2011/11/country_risk_analysis__a_handbook.pdf

, after
title page
2
Ibid, pg. 27
3
Ibid, pg. 27
1

main analysis will be Cyprus. Cyprus is the third largest and third most populous island in the
Mediterranean.

Overview
Cyprus is the less risky among the countries in the Middle East & North Africaregions,
however, it is one of the more risky countries in Eurozone. It has high levels of economic and
financial system risk and a low level of political risk. The process of debt reduction is 160% of
GDP for households and 200% for companies. Households are still suffering from the fall in
property prices, which is now 25% since the peak in 2008. The unemployment rate is at 16
percent of the active population (40 percent among young people). There is arestrictionagainst
public investment because of the downturn in public finances. The only positive contributionto
growth comes from external trade, namelythroughtourismandnonfinancialcorporateservices.
After three years of continuous contractions, Cyprus is expected to experienceaslightupturnin
2015.
RatingAgency
Standard&PoorscreditratingforCyprusstandsatCCC+.MoodysratingforCyprus
sovereigndebtisB3.FitchscreditratingforCyprusisBB.Ingeneral,acreditratingisusedby
sovereignwealthfunds,pensionfundsandotherinvestorstogaugethecreditworthinessof
Cyprusthushavingabigimpactonthecountry'sborrowingcosts.
EconomicStability
The disproportionate development of the banking sector has been Cyprus main
challenge. Restructuringthebanking system,tacklingnonperformingloans,increasingliquidity,

and fully lifting the remaining capital controls could benefit its economy. Also, the strong
tourism sector, the rapidly developing investment fund sector and the discovery of significant
quantities of natural gas in the Cypriot waters could transform the economy in the longrun. In
April 2014, tourist arrivals increased 11.4 percent yearonyear and revenues recorded a 20.4
increase. Likewise, the successful extraction of natural gas could allow the island to build an
LNG terminal and export to European and EastAsian markets. Moreover, Cyprus hosts the
largest ship management centre in the EU. They areclassifiedasthetenthlargestmerchantfleet
intheworldandthethirdlargestintheEU.
StructuralFactors
The Gross Domestic Product per capital in Cyprus 20516.80 US dollars in 2013. Thisis
equivalent to 162 percent of the worlds average. GDP Annual Growth Rate averaged 8.7
percentin2013.Inaddition,aftertherecessiondrivendroptolessthan665millionin2012,the
foreign direct investment (FDI) is assumed to recover as aresultofnewinitiatives underwayto
attract more investment particularly, investments relating to natural gas exploitation. Likewise,
the economic activity that attracted significant investments was the financial and insurance
activities sectors. Namely, an increase of 1,186 million in 2012, compared with an increase of
982 million in 2011. On the other hand, inflation fell from 3.3 percent to 2.4 percent in 2012
and to 1.5 percent in the first quarter of 2013, despite the minor change to taxation in January.
The change to taxation with the standard rate of valueadded tax (VAT) being raised from 17
percent to 18 percent in January 2013 and corporate tax increasing from 10 percent to 12.5
percent are expected to put a longterm public finances on a more sustainable path at the same
time as improving competitiveness. However, by April 2014, the inflation decreased atarateof

0.4 percent compared to 0.9 percent in March and so far stands at 1 percent for 2014. The
inflationrateisexpectedtoremainsubduedasaresultofweakdemand.
Exports to Cyprus reached an all time high of 257,476 Thousand EUROs in January
2015 (Appendix 1). More than half of their trade in goods isdonewiththeEuropeanUnionand
even during recession, Cyprus exports of good increased by 2.8 percent in January to March
2014 compared to the same period in 2013. Their main export partners are Greece, the United
Kingdom, Germany, and Lebanon. The main domestic export commodities would include
pharmaceutical products, photosensitive devices, and raw and manufactured food products.
While, imports decreased to 352324 EUR Thousand in January 2015 from 379940 EUR
Thousand in December 2014 (Appendix 2). Cyprus is a net importer of fuels, raw materials,
heavy machinery and transportation equipment. The three leading import partners are Greece,
Israel and the United Kingdom. Lastly, thelittleislandisexperiencingaCurrentAccountdeficit
of318.10EURMillionasofthethirdquarterof2014(Appendix3).

CyprusTrade

Last

Previous

Highest

Lowest

Unit

BalanceofTrade

94,848

2,682,61 1,931

672,592

EUR,Thousand

Exports

257,476 111,697

257,476 5,946

EUR,Thousand

Imports

352,324 379,940

784,701 13,481

EUR,Thousand

CurrentAccount(CA)

318

44.3

395.3

1,541.4

EUR,Million

CA/GDP

1.9

6.9

3.10

15.6

Percent

Remittances

11.4

34

EUR,Million

TouristArrivals

41,799

56,863

381,955 16,748

GoldReserves

13.9

13.9

14.48

13.87

Tonnes

The island has witnessed a massive growth in tourism over the years and as such the
property rental market in Cyprus has grown. Added to this is the capital growthinpropertythat
has been created from the demand of incoming investors and property buyers to the island.In
late 2013, the Cyprus Town PlanningDepartmentannouncedaseriesofincentivestohelpignite
the property marketandfurtherdrivegrowthinnewbuiltpropertydevelopmentsintowncentres
across the country. This followed earlier measures for new and faster immigration permits to
thirdcountrynationalsinvestinginCyprusproperty.
In Cyprus, Housing Index is measured by Residential Property Price Index.
Housing
Index in Cyprus decreased to 74.30 Index Points in the fourth quarterof2014from75.70Index
Points in the third quarter of 2014. Housing Index in Cyprus averaged 90.68 Index Points from
2006 until2014,reachingan all timehighof106.90IndexPointsinthethirdquarterof2008and
a record low of 69.80 Index Points in the first quarter of 2006. Housing Index in Cyprus is
reportedbytheCentralBankofCyprus.

FiscalPerformance

Cyprus
InterestRate
M1
M2
M3
FER

Last
0.05
4,429
18,440,158
23,374
850.60

Previous
0.05
4,209
18,178,113
22,649
735.30

Highest
4.75
4,429
18,440,158
23,374
4,452.70

Lowest
0.05
792
6,024,459
4,451
174.70

Unit
Percent
EUR,Thousand
EUR,Thousand
EUR,Thousand
EUR,Million


The Euro decreased to 1.05 US dollars in March from 1.12 in February of 2015. The
Euro averaged 1.35 from1957until2015,reachinganalltimehighof1.86inJulyof1973anda
record low of 0.69 in February of 1985. The euro was only introduced asacurrencyonthefirst
of January of 1999. However, synthetic historical prices going back much further can be
modeledifweconsideraweightedaverageofthepreviouscurrencies.
InCyprus,ForeignExchangeReservesaretheforeignassetsheldorcontrolledbythe
countrycentralbank.Thereservesaremadeofgoldoraspecificcurrency.Theycanalsobe
specialdrawingrightsandmarketablesecuritiesdenominatedinforeigncurrenciesliketreasury
bills,governmentbonds,corporatebondsandequitiesandforeigncurrencyloans.

Foreign Exchange Reserves in Cyprus increased to 850.60 EUR Million in January of

2015 from 735.30 EUR Million in December of 2014. Foreign Exchange Reserves in Cyprus
averaged 1321.32 EUR Million from 1980until2015,reachinganalltimehighof4452.70EUR
Million in December of 2006 and a record low of 174.70 EURMillioninJuneof1980.Foreign
ExchangeReservesinCyprusisreportedbytheCentralBankofCyprus.

The European Support Mechanism (ESM) provides financial assistance that will fully
cover Cyprus fairly steep debt repayments and expected budgetary requirements for the next
three year. In addition, this financial assistance offers atenyeargraceperiodwithalowinterest
rate of 2.5 percent for their loans. These two elements combined mean that Cyprus will bewell

past the crisis before it has to find its own resources to pay back public debt. In 2013, the
estimated public debt was 113.1 percent of GDP compared to 85.6 percent in 2012. With this
significant increase, the most important determinant of debt sustainability during the grace
period will be the primary balance the budget balance excluding interest payments since a
primarysurplusallowscountriestostartreducingtheirdebtstock.
The Government Debt to GDP reached an all time high of 111.70 percent in 2013
(Appendix 4). However, before the crisis hit, the government was fairly close to eliminating its
primary deficit. By 2014, the breakeven point of primary deficit was reached despite the
incompleteness of fiscal consolidation. Therefore, the authorities could opt out early from the
adjustment programme in order to regain their independence. The government debt remained
stable at 18.45 billion at the end of March 2014 compared to 18.4 billion at the end of
December2013,accordingtotheMinistryofFinance.
There are also longterm reductions in public sector expenditure and intentions to raise
income. With the updated macroeconomic scenario, the budget balance rose approximately 5.8
percent of GDP in 2014 compared to 5.4 percent the year before. The primary balance is
estimated toexhibitanimprovementtolastyearslevel,asapercentofGDP,fallingto about1.7
percent in 2014 from 2 percent the previous year. It is expected that the primary balance will
reach1.2percentby2016.
Employment
Cyprus went from a nearly full employment of 3.9 percent unemployment rate 2007 to
10.8 percent by 2012. As of now, the unemployment rate is approximately 16 percent of which

40 percent is youth and 30 percent is nonCypriot. At the same time,laborcostsareexpectedto

fallsignificantly(Appendix5).

CyprusLabour
UnemploymentRate
Unemployed
Rate(LongTerm)
Employed
Unemployed
Vacancies
YouthUmemployment
Wages
LabourCosts
Population

Last
16.10
375.10

Previous
16.40
376

18,440,15
8
23,374
850.60
32.80
1758
103.49
0.86

Highest
16.90
389.10

Lowest
3.20
135

Unit
Percent
Percent

18,178,113 18,440,158

6,024,459

Thousand

22,649
735.30
32.80
1797
81.03
0.87

4,451
174.70
7.6
1409
69.79
0.66

Percent
EUR/Month
IndexPoints
Million

23,374
4,452.70
40.30
2289
128.15
0.87

The number of employed persons in Cyprus decreased to375.10Thousandin2013from

376 Thousand in 2012. EmployedPersonsinCyprusaveraged 273.81 Thousandfrom1970until
2013,reachinganalltimehighof389.10Thousand in2008andarecordlowof135Thousandin
1975. Employed Persons in Cyprus is reported by the Statistical Service of the Republic of
Cyprus.
Appendix
Appendix1


Appendix2:

Appendix3:


Appendix4:

Appendix5:


References
http://globaledge.msu.edu/countries/cyprus/risk
http://www.coface.com/EconomicStudiesandCountryRisks/Cyprus
http://www.cyprusprofile.com/en/economy/
http://www.tradingeconomics.com/cyprus/indicators
https://www.cia.gov/library/publications/theworldfactbook/geos/cy.html
http://www.cyproman.com.cy/cyproman/corporateservices/cypromannews/economicsalertcyp
ruseconomyupdate.html