Cyprus basks in glow of economic recovery but CBI clouds gather on horizon

Foreign delegates attending the second Cyprus International Investors Summit, held at a beachside hotel in Limassol in September, could not help but feel the sense of optimism flowing through the island. And this was not just down to the weather, which the Cypriot hosts took every opportunity to point out had recently been rated the best in Europe.

It is not long since the Cypriot economy was hit by a near fatal banking crisis, tipping the economy into recession and prompting fears that the Mediterranean island could be on a similar path to nearby Greece.

But the island has managed to pull off a remarkable economic turnaround. The banks have been stabilised, tourism is booming and luxury developments are springing up along the coastline as well as in the island’s interior.  

The economy is doing well, explained minister of finance Harris Georgiades, growing at 3.5 per cent, considerably higher than the EU average, while the budget has been balanced for five years in a row. “Well-established sectors proved resilient during the recent crisis and retain significant potential for future growth, while developing offer diversity and new prospects,” he said.

Tourism is the island’s flagship industry and has been spearheading the strong recovery. “I sometimes hear that it is a vulnerable industry influenced by regional instability, but actually it has proved resilient for us,” said Mr Georgiades, explaining how significant investment in the hotel industry has resulted in an increase in bed capacity of 20 per cent over the past couple of years.

More airlines are now flying to the island, improving its connectivity, while research suggests that not only are more tourists visiting Cyprus, but they are spending more money as well.

Although the tourists are welcomed with open arms, it was foreign investment that the summit was hoping to snare.

“There is no doubt that Cyprus is a welcoming and safe place to spend a holiday, is an excellent place to live, to buy a holiday house or to enjoy retirement. But it is also an excellent place to do business,” he said, highlighting the country’s attractive tax regime and skilled workforce.

The government viewed the crisis as an opportunity, claimed Michalis Sophocleous, director at the office of the president, and did not shy away from facing up to the challenges it faced. Rather than raising taxes, spending was cut, while a great deal of reforms have been put in place, and continue to be implemented, he claimed.

“We have carried out market-oriented reforms to increase our competitiveness, but we now need to make public institutions leaner and more business friendly. We will carry out wide-ranging civil service reform, including looking at the wage bill and establishing mobility in public service. We will look at social welfare, healthcare, institutional transparency and our justice system.”

The banking sector was one area which needed drastic reform. “In 2010, the balance sheet of the banking sector was 800 per cent of GDP,” said Yannis Matsis, CEO at the Hellenic Bank Group.The banks took those deposits and gave them out as loans, but those loans turned bad, leading to the proportion of non-performing loans (NPLs) hitting 60 per cent by 2013.

The major banks were unable to repay their depositors who were forced into taking a haircut. “That was the wake-up call,” said Mr Mathis. “It forced the whole island to restructure so we can stand here today and say we are open for business.”

The banking sector has shrunk considerably, he reports. While it stood at €155bn ($182bn) in 2010, it is now just €42bn in size. “The banks have reformed their business models, attracting capital to make balance sheets healthy. Yes, NPLs remain high, but we are working on resolving them. And the banks now have ample liquidity to finance new projects.”

And there are projects aplenty. Delegates at the summit sat through presentations for luxury beachside apartments, golf courses, sports and health complexes, the redevelopment of the mountainous Troodos area, and even the establishment of a “city within a city” in Paphos.

The CBI scheme

Many of these developments are aimed squarely at those wealthy individuals considering the island’s citizenship by investment (CBI) programme. Make an investment of €2m in residential real estate and citizenship for the applicant and their family can be secured in three months, with the added benefit of gaining an EU passport to boot. And unlike many such schemes, this is a pure investment process, meaning the main investment can be sold after three years with the potential of generating some attractive returns.

The Cypriot scheme is proving incredibly popular with wealth Russians, explained Inna Iranyi, founding partner of Shorex Capital, a firm which helps individuals source second citizenships.

“It is just so much more attractive than the other EU schemes, such as Malta’s,” she explained on the sidelines of the summit. “So much so that I think it will come under pressure from the EU to either drop, or scale back, its programme. And if that happens there will be serious trouble for Cyprus. The island is one big building site at the moment.”

The scheme, in common with other CBI programmes, has proved controversial, with recent articles in The Guardian and Bloomberg alleging oligarchs from Russia and Ukraine who have been accused of corruption are among those who have acquired EU citizenship.

There has been negative coverage in the foreign press recently, admitted Marios Eliades, partner at Cypriot law firm Tassos Papadopoulos and Associates LLC, but he insists the programme is not about selling passports. “This is to drive solid investment provided by serious investors. It is hopefully a win-win situation for both the individuals and the country. And the selection criteria is stringent and followed to the letter.”

The global citizenship by investment industry has grown extensively over the last five years, explains Micha-Rose Emmett, CEO of CS Global Partners, a firm specialising in citizenship, residence, immigration and foreign investment law. 

“Individuals around the world have come to understand the importance of obtaining an alternative citizenship for their families, for their wealth planning and to capitalise on becoming global citizens,” she says, adding how CBI schemes provide governments with a wonderful tool to attract foreign direct investment and help diversify economies.

“But governments need to understand that programmes must be run well and that includes doing thorough due diligence on applicants, so they know who they are giving citizenship to.”