Investor Presentaiton
C. Operating Environment
According to the IMF's revised World Economic Outlook published at the end of January, the global economy is expected
to slow in 2023 before picking up again in 2024. Growth will remain weak by historical standards as a result of tighter
monetary conditions in the fight against inflation and the negative impact of the war in Ukraine. Global growth is expected
to slow from 3.4% in 2022 to 2.9% in 2023, before recovering to 3.1% in 2024. In the euro area, despite signs of resilience
to the energy crisis, a mild winter and generous fiscal support, growth is expected to be around 0.7% in 2023 resulting from
tighter monetary conditions, a negative terms-of-trade shock from higher energy prices and increased uncertainty as the
war in Ukraine is expected to escalate further.
As expected, the ECB continued to raise interest rates at the start of 2023. At the most recent Governing Council meeting
on 8 February 2023, the ECB raised its main refinancing operations rate by 50 basis points to 3%. The ECB raised its
marginal lending facility to 3.25% and its deposit facility to 2.5%. Rising inflation and a more aggressive monetary policy
stance by the Federal Reserve are expected to force the ECB to take a more aggressive approach. The ECB began raising
rates in July 2022, when the main refinancing operations rate was zero and the deposit facility was at -0.5%. Financing
conditions are expected to tighten further in 2023 and interest rates to remain high throughout the year.
In a challenging international environment, the Cypriot economy has shown considerable resilience. The contraction of
4.4% in 2020 was modest compared to other southern countries. The economy rebounded strongly in 2021, with real GDP
growing by 6.6%. Growth remained strong in 2022 averaging 5.7% which is well above the euro area average. In the fourth
quarter of 2022, economic growth stood at 4.4%. However, growth is expected to decelerate in 2023, towards 3%, according
to the Ministry of Finance.
On the fiscal side, the recovery in 2021 is underpinned by a significant increase in general government revenue and a
relative decline in government expenditure. As a result, the budget deficit narrowed to 1.7% of GDP from a deficit of 5.8%
of GDP in 2020, reflecting government measures to support the economy in the midst of a deep recession induced by the
Covid pandemic. Developments in 2022 were favourable for public finances. Revenues grew by 16.7% in the first three
quarters of the year, while expenditures increased by 1.3%, indicating a significant surplus in the period. Part of the increase
in revenues is a windfall related to the energy crisis, but overall, the current state of public finances is positive. Public debt
is sustainable and firmly on a downward path. With a budget surplus in 2022 and inflation at around 8.1%, the debt-to-GDP
ratio is expected to fall towards 87%, according to the Ministry of Finance. In the longer term, public debt dynamics will
depend on interest rate developments, inflation, and growth.
On the supply side, growth in the first three quarters of the year for which data are available, was almost entirely driven by
services. Trade, transport, and accommodation services accounted for more than half of the growth over the period.
Information and communications and professional and administrative services also made significant contributions. In the
industrial sector, growth came from the utilities, electricity, and water sectors, with only a marginal contribution from
manufacturing. Construction activity declined slightly and made a negative contribution.
On the demand side, growth in the first three quarters was driven by private consumption and investment, especially
inventory accumulation, while the external sector made a negative contribution due to faster growth in imports. Total
investment includes transport equipment, which includes ship registrations.
Tourist activity recovered strongly during the year. Arrivals reached 3.2 million persons, or 80% of the corresponding arrivals
in 2019. Receipts reached an estimated €2.4 billion in the year, or 90% of corresponding receipts in 2019. The increase in
arrivals was mainly due to increases from the United Kingdom and, to a lesser extent, from other European countries and
Israel. Travel from Russia and Ukraine has been affected by the war and sanctions.
Rising energy costs, exacerbated by the war in Ukraine, are affecting both consumers and businesses. The government
has taken initial steps to mitigate the impact. The government lowered VAT rates on electricity and reduced excise duties
on petrol and diesel for a limited period until June 2022. The latter remained in force until the end of January 2023. In
September 2022, the government introduced a graduated system of subsidies for electricity consumption to replace the
reduced VAT.
Cyprus received the first disbursement from the Recovery and Resilience Facility of €157 million in September 2021,
following the approval of the National Recovery Plan in July of the previous year. This was a pre-financing of 13% of the
total disbursements for the period 2021-26. Furthermore, the European Commission disbursed the first payment of €85
million to Cyprus under the Recovery and Resilience Facility, in December 2022 following the passage of conditional
legislation in parliament. The release of the funds is conditional on the strict implementation of the reforms agreed in the
National Recovery Plan. The funds will be used, among other things, to increase investment in the digital and green
transition and to improve the efficiency of public and local administrations, and of the judicial system.
Harmonised inflation in Cyprus fell from 10.6% in July 2022 to 7.6% in December 2022. The annual average was 8.1% in
Cyprus and 8.4% in the euro area. Average inflation was higher in the EU, reflecting strong inflation increases in some
Member States, mainly in Central and Eastern Europe. In Cyprus, energy contributed 2.6 percentage points and food 0.5
percentage points to total harmonised inflation. Other influences accounted for 5 percentage points. Cyprus does not use
gas for energy consumption or electricity production and is entirely dependent on oil, the price of which has not risen as
much as that of natural gas.
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