IMF urges Cyprus to re­duce one of Europe’s high­est NPL rates

Financial Mirror (Cyprus) - - CYPRUS -

Cyprus has to fur­ther bring down its high NPLs ra­tio and its bulging pub­lic and pri­vate debt, the In­ter­na­tional Mon­e­tary Fund Ex­ec­u­tive board con­cludes.

“Pri­vate and pub­lic debt re­main large while NPL ra­tios are still among the high­est in Europe. They en­cour­aged the au­thor­i­ties to make fur­ther ef­forts to ad­dress these legacy prob­lems and strengthen eco­nomic growth over the medium term,” said an IMF state­ment on Mon­day.

It said the “Di­rec­tors em­pha­sised the im­por­tance of fur­ther mea­sures to fa­cil­i­tate a steady de­cline in NPLs on a durable ba­sis”.

The IMF called for stead­fast im­ple­men­ta­tion of the amended leg­isla­tive frame­work on fore­clo­sure, in­sol­vency, sale of loans, and se­cu­ri­ti­sa­tion, sup­ple­mented by a strength­en­ing of the court sys­tem and re­moval of un­cer­tain­ties re­lated to ti­tle deeds.

Di­rec­tors also stressed the need gov­er­nance and su­per­vi­sory frame­work estab­lished as­set man­age­ment com­pany.

“They rec­om­mended that to limit moral haz­ard, the pro­posed Es­tia scheme aimed at en­cour­ag­ing dis­tressed bor­row­ers to be­gin ser­vic­ing their loans be bet­ter tar­geted and based on ap­pro­pri­ate as­sess­ment of bor­row­ers’ ca­pac­ity to re­pay,” the IMF said.

Di­rec­tors high­lighted the need for banks ef­forts to strengthen their bal­ance sheets.

Banks were urged to di­ver­sify in­come sources and con­sol­i­date op­er­a­tions to im­prove cost-in­come ra­tios and bet­ter po­si­tion them­selves against in­creased com­pe­ti­tion.

Strength­en­ing reg­u­la­tory guid­ance on loan re­struc­tur­ing and ex­er­cis­ing vig­i­lance over bank lend­ing poli­cies, the ad­e­quacy of pro­vi­sion­ing, and debt-to-as­set swap poli­cies, was rec­om­mended.

“Di­rec­tors wel­comed Cyprus’s ro­bust fis­cal per­for­mance and em­pha­sised that strict spend­ing dis­ci­pline should be main­tained.”

They cau­tioned against re­ly­ing on tran­si­tory rev­enues from cycli­cal gains and one-off mea­sures to fi­nance per­ma­nent spend­ing ini­tia­tives and took pos­i­tive note of the au­thor­i­ties’ com­mit­ment to cap ex­pen­di­ture in­creases, in­clud­ing the pub­lic wage bill, in line with the medium-term GDP growth rate, in or­der to cre­ate room for growthen­hanc­ing spend­ing.

The IMF board agreed that “fis­cal struc­tural re­forms are needed, and rec­om­mended strength­en­ing pub­lic fi­nan­cial man­age­ment, mon­i­tor­ing risks from lo­cal gov­ern­ments and the state-owned sec­tor, and i mprov­ing the cor­po­rate gov­er­nance of com­mer­cial state-owned en­ter­prises”.

Di­rec­tors stressed the need to un­der­take in­sti­tu­tional re­forms and fur­ther en­hance the in­vest­ment cli­mate and raise medium-term growth po­ten­tial.

They agreed that re­forms to in­crease the ef­fi­ciency of the courts, speed up the en­force­ment of com­mer­cial claims, and clear the back­log of cases should con­tinue. to for en­hance the the re­cently-



They also rec­om­mended ex­pe­dit­ing leg­is­la­tion to strengthen the gov­er­nance and au­ton­omy of the Cen­tral Bank of Cyprus and en­cour­aged fur­ther ef­forts to mit­i­gate AML/CFT risks.

Di­rec­tors noted that ac­tive labour mar­ket poli­cies and in­vest­ment in higher value-added sec­tors can help re­duce high youth un­em­ploy­ment and skills mis­match, thereby pro­mot­ing more in­clu­sive growth.

How­ever, Moody’s said the near-term out­look for the econ­omy is favourable, with growth ex­pected to re­main at around 4.2% in 2018–19, sup­ported by the ser­vices sec­tor and largely for­eign-fi­nanced in­vest­ments.

Over the medium term, eco­nomic growth is pro­jected to slow to its long-run po­ten­tial rate of around 2.5%, “as the tran­si­tory ef­fects of the in­vest­ment boom grad­u­ally dis­si­pate”.

Fis­cal per­for­mance is ex­pected to im­prove with a pri­mary sur­plus of around 5% in 2018–19.

“Pub­lic debt is thus ex­pected to be on a firm de­clin­ing path, fall­ing be­low 70% of GDP by 2023, de­spite a sharp in­crease ear­lier this year fol­low­ing the res­o­lu­tion of the Cyprus Co­op­er­a­tive Bank.

The eco­nomic out­look could weaken if im­ple­men­ta­tion of NPL res­o­lu­tion is de­layed, while pub­lic debt sus­tain­abil­ity could be un­der­mined by re­al­i­sa­tion of con­tin­gent li­a­bil­i­ties or ero­sion of fis­cal dis­ci­pline.”

Ex­ec­u­tive Di­rec­tors wel­comed the strong post-cri­sis eco­nomic re­cov­ery, which has sup­ported large fis­cal sur­pluses and low­ered the un­em­ploy­ment rate.

Di­rec­tors also wel­comed the re­cent re­forms un­der­taken to ad­dress key vul­ner­a­bil­i­ties in the bank­ing sec­tor, in­clud­ing the res­o­lu­tion of a large sys­temic state-owned bank.

Di­rec­tors rec­om­mended strength­en­ing reg­u­la­tory guid­ance on loan re­struc­tur­ing and ex­er­cis­ing vig­i­lance over bank lend­ing poli­cies, the ad­e­quacy of pro­vi­sion­ing, and debt-to-as­set swap poli­cies.

Di­rec­tors noted that the tran­si­tion to pub­lic in­sur­ance in

the health sec­tor should be care­fully man­aged.

Gov­ern­ment Re­ac­tion

Ro­bust growth of the econ­omy will lead to zero un­em­ploy­ment in two years, gov­ern­ment spokesman Pro­dro­mos Pro­dro­mou said about the IMF’s Ex­ec­u­tive Board con­sul­ta­tion.

Pro­dro­mou noted that the IMF ap­proved the re­port by wel­com­ing the strong – post-cri­sis - re­cov­ery of the Cypriot econ­omy, which at a rate of 4.2% al­lows for sig­nif­i­cant fis­cal sur­pluses and leads to a de­crease in un­em­ploy­ment.

He added that the IMF wel­comed the re­cent de­ci­sions taken by the Cypriot au­thor­i­ties to ad­dress vul­ner­a­bil­i­ties in the bank­ing sec­tor and that they re­ferred to mea­sures that the gov­ern­ment has taken as re­gards the Co-op­er­a­tive Bank.

The spokesman said that while wel­com­ing the gov­ern­ment`s fis­cal per­for­mance, with a record sur­plus of EUR 852.8 mln be­tween Jan­uary-Oc­to­ber, the IMF notes that fis­cal sta­bil­ity pol­icy should be main­tained.

“The gov­ern­ment pro­ceeds with a plan…with em­pha­sis on the com­pet­i­tive­ness of the Cypriot econ­omy and the im­prove­ment of the growth model, so that we con­tinue hav­ing pos­i­tive re­ports and eval­u­a­tions by the rat­ing agen­cies,” said Pro­dro­mou.

He agreed NPLs con­sti­tuted the big­gest prob­lem, but noted that ac­cord­ing to the Euro­pean Com­mis­sion, Cyprus has recorded the great­est im­prove­ment.

Point­ing out that Cyprus and Greece are the two coun­tries of the Mon­e­tary Union with a high NPL rate, he said that the im­prove­ment achieved, fol­low­ing the Co-op sale, has led to a dras­tic re­duc­tion of the prob­lem.

He added that with other tools, such as leg­is­la­tion and re­forms, NPLs should drop fur­ther.

“Dur­ing the re­ces­sion there was no pos­si­bil­ity to ab­sorb NPLs while to­day, the rapid growth cre­ates bet­ter con­di­tions to ad­dress NPLs.”

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