Eco­nomic man­age­ment of the last five years fol­low­ing the cri­sis

Financial Mirror (Cyprus) - - FRONT PAGE -

Five years have nearly passed since the banking cri­sis of March 2013 and we are get­ting close now to the next pres­i­den­tial elec­tions. This is a good time, I be­lieve, to step back and re­view the eco­nomic man­age­ment of the last five years. What is the cur­rent state of the econ­omy and how much progress has been made dur­ing this time?

The truth is that the govern­ment in­her­ited a very dif­fi­cult sit­u­a­tion that was al­most im­pos­si­ble to man­age – a coun­try in re­ces­sion, with a very high level of un­em­ploy­ment, fis­cal im­bal­ances, a ris­ing pub­lic debt level, pro­hib­i­tive in­ter­est rates to bor­row from fi­nan­cial mar­kets, ex­tremely high pri­vate debt level, and a banking sys­tem in ru­ins with huge losses for de­pos­i­tors and share­hold­ers. All th­ese have painted a very neg­a­tive pic­ture for the prospects of our econ­omy. So, how did things progress in the last five years and where do we stand now?

On the macroe­co­nomic front, the statis­tics look much health­ier and this is due to a large ex­tent to the pru­dent and sound eco­nomic pol­icy fol­lowed by the govern­ment.

Since 2015, we have pos­i­tive growth rates which are pro­jected to be in the re­gion of 2.5-3% for the next few years. Un­em­ploy­ment is de­clin­ing steadily and from a level of 16% in 2013, is now down to 11% (May 2017). In terms of fis­cal bal­ances, we moved from large deficits to small sur­pluses with a pri­mary sur­plus of around 2% ex­pected for the next few years (Moody’s re­port) which can help lower the pub­lic debt. We also had a num­ber of up­grades by the rat­ing agen­cies since 2013 and we are now one notch be­low in­vest­ment-grade cat­e­gory for S&P (BB+), three from Moody’s (Ba3), and three from Fitch (BB-). Th­ese up­grades have brought mul­ti­ple ben­e­fits to the econ­omy, a ma­jor one be­ing the low­er­ing of the govern­ment in­ter­est rates to lev­els be­low 3%, sig­nal­ing the con­fi­dence placed by in­ter­na­tional fi­nan­cial mar­kets to the lo­cal econ­omy (com­pare this to a level of 16% five years ago!).

A cause of con­cern, though, re­mains the high level of pub­lic debt (at EUR 19.3 bln or 107.8% of GDP for 2016) that has slightly in­creased in the last few years and is higher than the Eu­ro­zone or EU av­er­age (89.2% and 83.5%, re­spec­tively).

An­other ma­jor con­cern is the high level of pri­vate debt (es­ti­mated to be close to 300% of GDP for non-fi­nan­cial com­pa­nies and house­holds). Of course this was a prob­lem that was cre­ated many years ago with banks ac­cept­ing large de­posits (mainly for­eign money) prior to the cri­sis and pro­vid­ing th­ese funds out to com­pa­nies and house­holds as loans. This prac­tice led to a bub­ble in the real es­tate sec­tor at the time with the well known re­sults.

The prob­lem still ex­ists as com­pa­nies and house­holds were faced with sub­stan­tial loss of rev­enues due to the cri­sis, plus there was the ma­jor loss of de­posits. The high level of pri­vate debt led to the rise of the non-per­form­ing loans (NPLs) to ex­tremely high lev­els (around 50% of the to­tal loan port­fo­lio of the banking sec­tor). This is by far the most im­por­tant prob­lem faced by our econ­omy, although this level is grad­u­ally drop­ping through the many ef­forts ex­erted by the banks (still above 40% though). In my opin­ion, our law­mak­ers, po­lit­i­cal par­ties, in­de­pen­dent govern­ment author­i­ties, as well as labour unions need to un­der­stand that they should work with the banks and help them ad­dress this ma­jor prob­lem, rather than put­ting ma­jor ob­sta­cles in their way (as were the re­cent cases at Hel­lenic Bank and the Co­op­er­a­tive Cen­tral Bank). Solv­ing or at least al­le­vi­at­ing this prob­lem will be a ma­jor boost for the econ­omy.

In terms of struc­tural re­forms (pri­vati­sa­tion, pub­lic sec­tor re­forms, etc.), I be­lieve the in­ten­tion and the ef­fort was there by the cur­rent govern­ment and its of­fi­cials; how­ever, they did not have the nec­es­sary sup­port by the rest of the po­lit­i­cal par­ties (apart from the Na­tional Health Sys­tem). I think part of the blame for this out­come though should go to the Troika as well for not press­ing enough on th­ese is­sues (in a sim­i­lar way that they did for the other pil­lars of their pro­gramme).

Over­all, I would rate highly the eco­nomic man­age­ment of the last five years. Could things have been bet­ter for us? Have mis­takes been made? Cer­tainly, but we should not for­get the sit­u­a­tion and prob­lems we faced back in March 2013.

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