The Cyprus Comeback for Publication in Newsweek 2015

CYPRUS Open for Investment

Irena Georgiadou Chairwoman, Hellenic Bank

Yiorgos Lakkotrypis Minister of Energy

Nicos Anastasiades President of Cyprus

Harris Georgiades Minister of Finance

1

John Hourican Outgoing CEO, Bank of Cyprus

The Cyprus Comeback Investment opportunities abound in an economy that has defied all odds

J

ust two years after a financial sector meltdown that almost bankrupted it, the historic Mediterranean island of Cyprus is poised for a return to growth in 2015. The Government has seized the opportunity provided by the crisis to push through an agenda of reforms that are now changing the face of the economy. Savvy investors are already making their moves in a country where the pace of change is putting its larger neighbors in Southern Europe to shame.

“As a result of the commitment and zeal of the Cypriot people and the hard work of the Government I can state with certainty that we have turned the page,” says President Nicos Anastasiades, who has led the reformist drive since the dark days of March 2013. “The Cypriot economy is now moving towards the end of recession, and on the road to recovery.”

Cyprus’ s journey along the road to recovery has been faster than anyone predicted two years ago, when the country became the fifth European Union member state to receive a bailout from the EU and the International Monetary Fund. Since Cyprus signed up for the bailout program, the rapid pace of reform has helped to almost eliminate the The content of this report was produced by:

fiscal deficit well ahead of schedule, resurrect the banking sector and attract record levels of foreign investment. Such has been the speed of the recovery that Cyprus was able to re-access international capital markets as early as 2014 and to abolish all capital controls earlier this year. Unemployment has also begun to decrease, and the IMF is estimating a return to growth this year, after three years of recession.

The Cypriot economy is now moving towards the end of recession and on the road to recovery.”

Nicos Anastasiades President of Cyprus

With its financial house in order again, the Government is now pushing through economic reforms that will maximize the country ’s growth potential and deliver new investment opportunities to the private sector. “The focus of my Government is on making administrative structural reforms with the overall aim of setting the foundations for sustainable growth in the long run, attracting foreign direct investment and eventually creating a new economic model

for the country,” the President says.

The Government ’s rapid and effective reaction to the economic crisis of 2013 has earned it international credibility and restored the confidence of foreign investors.

Like many southern European countries, in the years after Cyprus joined the EU and the eurozone its economy experienced an unsustainable boom in construction and credit and its banking sector grew out of proportion. However, unlike its peers in the Mediterranean, when the global financial crisis took hold and the bubble burst the Government took decisive and unprecedented action.

When President Anastasiades was elected into office in early 2013, he was forced to take the dramatic step of ‘bailing in’ bank creditors and uninsured depositors to recapitalize the banking system, while protecting Cypriot taxpayers and public finances. The new Government then signed up to an ambitious program of economic reform and privatization, paving the way for financial support of €10 billion euros from the IMF and European partners.

“We had to take bold and painful measures to prevent our economy from collapsing,”

President Anastasiades remembers. “It is my Government ’s conviction that Cyprus is now not only capable of bouncing back, but of creating a new model of economic viability, investment opportunity, and social welfare based on all of our comparative advantages.”

Those advantages include one of the most attractive tax systems within the EU, an enviable quality of life, and a strategic position as a beacon of stability and prosperity in the Eastern Mediterranean region, where major natural gas reserves have been discovered in recent years.

As Cyprus goes about the job of reinventing its economy, it is the island ’s highly qualified, professional and flexible workforce that may be its greatest asset. President Anastasiades says that the resilience and unity of the Cypriot people has played a crucial part in ensuring the country ’s rapid recovery out of crisis. “I have absolute confidence that the spirit of unity and drive to succeed already demonstrated by the people of Cyprus will ultimately prevail. My Government will do its utmost to provide a more stable, prosperous and promising future for all Cypriots.”

In collaboration with:

CYPRUS Open for Investment

2

CYPRUS BANKING & FINANCE

3

Financial sector ready to power growth

A

fter weathering the storm of 2013, the Cypriot banking sector has raised capital faster than anyone anticipated, brought in entirely new boards and management teams, restoring the confidence of depositors and investors. The banks are now focused on further strengthening their balance sheets and extending credit to a fast-reviving economy.

“We need to have the ability to provide credit to the Cyprus economy,” says John Hourican, the Irish banking executive who has rebuilt the island ’s largest bank, the Bank of Cyprus, since joining as

There has never been a recovery of an economy without the provision of credit.”

John Hourican, Outgoing CEO Bank of Cyprus

CEO in 2013. At the end of last year, the bank raised €1 billion in share capital from investors including Wilbur Ross, passed the stress tests of the European Central Bank, and appointed one of Europe ’s most preeminent bankers, former Deutsche Bank CEO Josef Ackermann, as its new Chairman.

As a result of these actions, Hourican leaves the bank this summer having successfully restored confidence in an institution which is a key player in the Cyprus comeback story. As an indicator of that confidence, even though the Government has now lifted all capital controls, the Bank of Cyprus has still been recording quarterly increases in its customer deposits - deposits which the bank will use to fund a new lending drive. As well as building up deposits, Hourican has cut dependence

on funding from the Central Bank and has also drawn up plans to access international capital markets.

“We now have the capital in place to talk to our customer base with confidence about how we can support them and create growth in the wider economy,” Hourican says.

“The new legal framework for foreclosures and insolvency is a major improvement.”

Harris Georgiades, Minister of Finance

The Government is playing a major role in helping financial institutions contribute to the rebooting of the economy. At the beginning of the year, it passed new legislation on foreclosure and insolvencies that will make the job of loan restructuring easier for the banks. “The aim of the

legislation is to encourage loan restructuring, which will allow a more effective workout of the high level of private debt that is still hanging over the economy,” Minister of Finance Harris Georgiades says. “The complete overhaul of the banking sector, which now has new capital, new shareholders, new boards and new management, has been a major factor in building confidence in Cyprus and restoring economic stability,” he adds. “There have been some very positive improvements.”

With balance sheets restored and the right regulatory conditions in place, the country ’s banks are well set to create value both for their shareholders and for society at large.

“The Bank of Cyprus is now fully capable of being a good investment and of supporting an economy in recovery,” Hourican says.

Hellenic Bank transforms for the future

T

he third largest bank in Cyprus, and the only bank not to need bailout cash, Hellenic Bank was the first on the island to receive new funds from private investors, including foreign shareholders. Following its successful recapitalization, the bank is now radically reinventing its business model and pursuing a strategy of growth based on innovation.

It is a massive change for an institution that was founded and controlled by the Church of Cyprus. When Irena Georgiadou joined the bank as Chairwoman in 2014, she became the first woman ever to hold a senior role at the bank; previously, women weren’t even allowed on the top floor.

Georgiadou, who is still under 40 years old, says her appointment symbolizes the change in culture at Hellenic Bank and sends a powerful

message about its new direction.

Replacing the Church, the two largest shareholders in Hellenic Bank are at the cutting edge of the 21st century economy; hedge fund Third Point, based in New York, and online gaming company

The economy has started to heat up, demand for loans is rising, and we are very well placed to support the recovery.”

Irena Georgiadou Chairwoman, Hellenic Bank

Wargaming, founded in Cyprus by a Belarusian entrepreneur.

The two shareholders believe that the banking sector will be at the heart of the Cyprus recovery story, Georgiadou says. They are committing both their capital and their know-how to make sure

that Hellenic Bank spearheads the turn-around.

“They both bring valued expertise,” Georgiadou explains. “From Third Point, we have access to a lot of financial technology and know-how in investment banking and capital markets. For its part, Wargaming contributes a lot of innovation in online technology.”

Investment in innovation is one of the cornerstones of Hellenic Bank’s growth strategy. “The traditional banking model is probably obsolete,” Georgiadou says. “Customers don’t need to go to the bank branch anymore - the bank is in their pocket, on their smart phone. We are working very hard to be ahead of these trends.

We have completely reinvented our working practices, brought in a new Board and new management, and we are investing in technology

and in going digital. We cannot go back to business as it was before the crisis.”

At the end of 2014, Hellenic Bank raised further capital from its new shareholders to fund its growth drive. At the same time, because it was never involved in the ‘bail-in,’ the bank also benefits from the continued confidence of depositors, and deposits are rising at a yearly rate of around 20%. The institution is now in a prime position to help finance the turnaround of the island’s economy and to raise its market share in lending.

“Our main strategic target is double digit growth in lending,” Georgiadou says. “The economy has started to heat up, demand for loans is rising, and we are very well placed to support the recovery.”

CYPRUS Open for Investment

4

CYPRUS Open for Investment

5

Foreign investors deliver vote of confidence

T

he crucial factor in the outperformance of the Cypriot economy since 2013 has been the reaction of the country’s policymakers and ordinary people to the crisis. Rather than blaming their economic troubles on foreign creditors, Cypriots understood that many of the problems were of their own doing, and they quickly set about correcting the indecision and complacency which had crept into their policymaking system over the years. International investors have responded positively to this strategy, with record levels of capital; since 2014, nearly €3 billion of foreign direct investment has been committed to growth sectors such as energy, tourism, real estate, education, R&D and others.

“Investors realized pretty soon after the crisis that things were moving in the right direction,” Charis Papacharalambous, Director General of Invest Cyprus says. “By the end of 2013, credibility began to return to the system, and investor interest has significantly improved in the last two years. Interest from foreign investors is now higher than it was before the crisis, because Cyprus is offering medium term and long term opportunities in a more solid and business friendly macroeconomic environment.”

Clear indicators that investor confidence has returned can be found both in the financial sector including a €400 million investment in the recapitalization of Bank of Cyprus from US billionaire Wilbur Ross - and in the sovereign debt markets, where two Government bond issues since the bailout have been heavily oversubscribed.

Papacharalambous says that Cyprus has treated the challenges of the economic reform program as an opportunity to move forward, a chance to capitalize on the high quality of Cyprus’s workforce and

Significant offshore reserves were found in 2011.

services by making the island an easier place for investors to do business. Policymakers have seized the moment to develop a more versatile economy by introducing urgently needed structural changes and reforms.

The Government has established a new series of incentives to investors.

It has relaxed planning legislation for large-scale projects, increased the flexibility of rules for new buildings, instituted tax breaks or other benefits for companies investing in fixed assets in research, IT, communications and renewable energy, and launched various employment schemes. At the same time, it is reducing bureaucracy throughout Cyprus, allowing business to be done more quickly

Cyprus is offering medium term and long term opportunities in a more solid and business friendly macroeconomic environment.”

Charis Papacharalambous Director General of Invest Cyprus

and effectively. These measures have helped grab the attention of some of the Mediterranean region’s largest enterprises; at the beginning of 2015, Egyptian conglomerate Orascom announced plans to invest €220 million in the construction of a marina in the southeastern resort of Ayia Napa. The Government is also

talking to developers from the US and Asia about building what will be Europe’s largest integrated casino resort, including a convention center, shopping malls and entertainment venues, providing visitors to the island with an experience unlike anything else in the Mediterranean.

As well as increased investor interest in the tourism industry, there has also been significant traction in FDI in the energy sector. Since significant offshore gas reserves were found in 2011, multinational investors from the US, France, Italy and South Korea have all committed to exploring Cyprus’s natural gas potential. The monetization of these resources and the development of the island as a regional energy services hub has the potential to transform the Cypriot economy.

“Our strategy for the oil and gas sector is not limited just to exploiting our natural resources,” Yiorgos Lakkotrypis, the Minister of Energy, Commerce, Industry and Tourism explains. “Over the longer term, we want to capitalize on the strong human talent that we have in Cyprus by developing a knowledge-based economy centered around the oil and gas industry. There is a lot of offshore activity in our neighboring countries, and we believe we can export our services to them.

Many international oil companies and services companies have now started to use Cyprus as a base for

their operations in the entire Eastern Mediterranean region.”

The country’s privatization program provides another source of attractive opportunities for foreign investors. The Government is currently pursuing plans to privatise state-owned assets such as telecommunications firm CyTA, electricity supplier EAC, and the Cypriot Ports.

In addition to these new openings for foreign investors, many of Cyprus’s traditional economic strengths from before the crisis endure. Cyprus remains an important international quality business center, with a simple, modern and fully compliant tax system that includes an attractive corporate tax rate and a network of over 55 double tax treaties. Thanks also to the transparent and businessfriendly legal system which is based on English common law, the island remains a popular springboard for foreign investors to do business throughout Europe, the Middle East, North Africa and beyond.

This has led countless international companies to choose Cyprus as their home away from home in the Eastern Mediterranean. It is a stable, friendly, strategically located hub to do business.

Finally, it is perhaps the people of Cyprus and the quality of life on the island that hold the secret to the resilience of the Cypriot economy and the strength of the rebound.

“Cyprus is one of the best places to live and work anywhere in Europe,” Charis Papacharalambous says. “The highly educated and internationally experienced work force, supported by the quality of professional services, the inherent hospitality of the people, the low crime rate, and world-class communications and infrastructure, are some of the key factors behind the economy’s resilience. These factors are now helping to attract new interest in opportunities to invest in Cyprus.”

CYPRUS STRATEGIC FUTURE ROLE

6

Historic island looks to the future

F

or thousands of years, Cyprus has been a trading center and meeting place for cultures and civilizations from East and West.

Today, the island is drawing investors and leisure travelers both from its traditional economic partners, such as the UK and Germany, and from newer markets including countries in the Middle East and Eastern Europe.

We need to make sure that our visitors have a unique and unforgettable experience.”

Yiorgos Lakkotrypis, Minister of Energy, Commerce, Industry & Tourism

“We have a long-term tourism strategy of growing our traditional markets, at the same time as developing emerging markets

such as Israel and Russia,” Yiorgos Lakkotrypis, the Minister of Energy, Commerce, Industry and Tourism says. “For example, we have introduced numerous flights from the Gulf countries, while also improving existing agreements with tour operators in the UK and Germany.”

In recent years, Cyprus has developed close economic and cultural ties with Russia, which in 2013 was the island ’s second largest source of tourists. So far, the impact of the depreciation of the Russian ruble on the Cypriot tourism sector, which accounts for at least 12% of the country ’s GDP, has been muted. Angelos Loizou, Chairman of the Cyprus Tourism Organisation (CTO), says that while the numbers of Russian visitors have dropped, the shortfall has been covered by a sharp increase

in tourists from Western Europe, mainly from the UK and Germany.

In today ’s political climate, there are few countries which can claim to have such positive relations with both Russia and Germany, with Israel as well as the Arab states. That the people and politicians of Cyprus can maintain enduring friendships with all of them is a legacy of the country ’s unique history as a cultural and economic crossroads. As the island prepares to develop into a regional oil and gas power, this legacy stands it in good stead for the future. President Anastasiades says, “our vision is to turn Cyprus into an energy hub for the Eastern Mediterranean, in the process contributing to enhancing geopolitical stability and economic prosperity in the region.”

While stability and prosperity are rare commodities in today ’s Mediterranean, the President is also preparing to seize what he calls the ‘historic responsibility’

The reunification of the island will also have a decisively positive impact on the local economy.”

Nicos Anastasiades President of Cyprus

of reaching a peace deal with the Turkish Cypriot community and reuniting the island of Cyprus.

“A viable and durable solution to the Cyprus problem that will reunite the island, its people, economy and resources will resonate positively throughout the Eastern Mediterranean region,” President Anastasiades says.