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Issue 34 January 14 - February 13, 2014

6 EDITORIAL 8 UP FRONT 14 FIVE MINUTES WITH…

INVESTMENT

GUIDE 2014 WHERE

TO PUT YOUR MONEY

TO GAIN A CLEARER PICTURE OF WHAT 2014 HOLDS FOR INVESTORS FROM A CYPRUS-BASED STANDPOINT, WE INVITED FOUR FINANCIAL EXPERTS TO SHARE THEIR KNOWLEDGE AND ADVICE WITH US ON THE INVESTMENT POTENTIAL OF THE MAIN ASSET CLASSES (EQUITIES, BONDS, COMMODITIES, ALTERNATIVE INVESTMENTS AND CASH) AND MORE.

32 FEATURE

GOVERNANCE SHOULD TAKE CENTRE STAGE By Petros Florides 30 THE BITCOIN ADVENTURE By Dr. Constantinos Charalambous 35 NO EASY ROAD TO RECOVERY By George Theocharides 53 THE OUTLOOK FOR THE CYPRUS ECONOMY By Persella Ioannides 56 ALL ABOARD THE TITANIC By Savvas Savouri 64

President Centraleastern Europe of the Oracle Corporation.

54 | “ALL TOURISM IS GOOD TOURISM”

The European Parliament has issued a highly critical draft Enquiry Report on the role and operations of the Troika with regard to the euro area programme countries.

58 | WELCOME TO THE FLORIDA OF EUROPE

Marios Chiromerides, Managing Director of Connecor Investments, explains how the newly opened Nicosia-based office of this international transfer agency aspires to partner buyers and sellers alike, to mutually beneficial ends.

50 | SIMPLIFY, STANDARDIZE, AUTOMATE Oracle’s three-word key to success. Interview with Michel Clement, Vice-

32 | THE ACTION BEHIND THE TRANSACTION Serving the vast bankcard market from Cyprus, TSYS is a perfect example of a thriving international company whose strategically located operations here fuels its global success.

36 | THE FUTURE OF BANKING Chris Jones, Head of PwC’s Financial Services Practice in Europe, the Middle East and Africa, talks about the European banking sector, what happened in Cyprus and what Europe can learn from the emerging markets. 4 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

contents.indd 4

THE ROAD TOWARDS A BANKING UNION REMAINS BUMPY AND UNCERTAIN By Philippe Gudin de Vallerin 28

42 | EUROPEAN PARLIAMENT DRAFT REPORT SLAMS TROIKA

46 | CONNECTING THE DOTS

+ OPINION

S U R CY P

TUI’s Chief Executive, Peter Long, predicts more visitors to Cyprus in 2014

A new report entitled Crisis Investing in Cyprus promises to make us rich.

62 | A PROFESSIONAL JOB An article on the professional services sector as featured in the latest issue of fDi magazine.

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{money} {business} {economy} {tax&legal} {lifestyle}

08/01/2014 12:52

EDITORIAL

Investing in the Future

PUBLISHED BY IMH ISSN 1986 - 3543

lthough it is both tempting and easy to look back at 2013 and to blame all kinds of people in Cyprus and abroad for the problems that finally became too big to ignore or resolve without enormous sacrifices, you don’t need me to do that for you, especially two weeks into the New Year. Everyone knows what happened in March and we all have a strong suspicion that what lies ahead will be neither easy nor pleasant. However, while it may still be premature to believe that the only way is up, it is essential that we maintain a positive outlook in 2014 and believe in the country’s ability to emerge from the present difficult situation. As in previous years, we start the New Year with our annual Investment Guide (page 16) and the views of four financial experts on what those fortunate enough not to have lost their wealth and/or assets should be doing to see a good return on their investments. While most of their clients will be looking to foreign markets and studying the major share indexes, which rose impressively during 2013, some will doubtless be looking to Cyprus for a way of taking advantage of the island’s current predicament. The American authors of Crisis Investing in Cyprus (page 58) certainly believe that there is money to be made by investing in local companies and real estate at the present time. Others will take a less aggressive, longer-term view and see that Cyprus is now taking the necessary steps to restore confidence in those areas that have always proved lucrative and successful. Peter Long, the CEO of Europe’s biggest tour operator, TUI, believes that Cyprus will have more visitors this year than it did in 2013 (page 54), though he notes that various parts of the tourism sector need to consider their pricing policies. Similarly, the Cyprus Investment Promotion Agency (CIPA) has been taking its role seriously through a series of initiatives, including the funding of a broad-based Financial Times report on the country, one article of which we reproduce in this issue (page 62). Of course, trying to think positively and look to the future with optimism in no way precludes examining what went wrong and who was responsible for Cyprus’ present straitened circumstances. The European Parliament has already published a draft Enquiry Report on the role and operations of the Troika with regard to the euro area programme countries, including Cyprus, and it is highly critical (page 42). The two rapporteurs and other MEPs will be visiting the countries concerned to hear the views of officials and it is expected that a hard-hitting resolution will ultimately be passed by the Parliament. In Cyprus itself, things tend to move rather more slowly. Even when investigations are held and reports issued, they tend to be forgotten and ignored like the annual reports of the AuditorGeneral who, had she been listened to over the years, could have saved the state millions if not billions of euros. President Anastasiades has promised to act upon her recommendations. If he proves to be as committed to this as he appears to be regarding the implementation of the Memorandum of Understanding with the Troika, we shall certainly have some reason for optimism. 2014 is not going to be an easy year for anyone in Cyprus but it will be one during which progress is made on several important issues, including the first stages of the privatisation process regarding what are seen as the three most successful semi-government organisations (Cyta, the EAC and the Ports Authority). Moreover, developments in the energy sector and the lifting of banking restrictions are two issues that may be key to normalising the banking sector and the broader economy respectively. And while all the indications are that growth will not return until 2015, the public and private sectors need to have it as their goal for this year too. We are all investing in the future.

John Vickers, Chief Editor

john@imhbusiness.com

MANAGING DIRECTOR

George Michail GENERAL MANAGER

Daphne Roditou Tang MEDIA MANAGER

Elena Leontiou EDITOR-IN-CHIEF

John Vickers JOURNALISTS

Effy Pafitis, Chloe Panayides CONTRIBUTORS TO THIS ISSUE

Wendy Atkins, Rakis Christoforou, Dr. Constantinos Charalambous, Petros Florides, Philippe Gudin de Vallerin, Persella Ioannides, Dr. Savvas Savouri, George Theocharides ART DIRECTION

Anna Theodosiou SENIOR DESIGNER

Alexia Petrou PHOTOGRAPHY

Jo Michaelides MARKETING EXECUTIVE

Kevi Chishios SALES & BUSINESS DEVELOPMENT EXECUTIVE

Phivos Karayiannis ADVERTISING EXECUTIVES

Irene Georgiou, Christopher Constantinou OPERATIONS MANAGER

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Tax Facts & Figures 2014 - Cyprus

We in PwC are here to offer you the best of our knowledge and expertise. Our specialised tax solutions are adjusted to your own specific needs to support you in structuring your operations in an efficient way.

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up front

Louis Vuitton

Closes Cyprus Store

Double delivery takes Emirates A380 fleet to 44

mirates recently took delivery of its 43rd and 44th A380 aircraft with a double delivery from Airbus’ Finkenwerder facility in Hamburg, Germany. “Our customers love the A380 – from the quieter cabins and spacious layout on the main deck, to the on-board lounge and shower spas in our premium cabins. It is a beautiful aircraft which we have packed full of the best inflight comforts and products. From an operator

standpoint, the A380 is still one of the most fuel efficient aircraft per seat. It offers us some flexibility in range and also helps us to meet demand at slot-constrained airports,” said Tim Clark, President, Emirates Airline. Emirates operates the world’s largest fleet of A380s, flying one in three of these modern jets in the skies today. Emirates was the first airline to order the aircraft back in 2000, and it ordered another 50 more at the Dubai Air Show in November. In 2013, Emirates received 13

A380 aircraft and it expects to receive another 13 in 2014. The airline still has 96 more A380s worth USD 43 billion on order, of which 71 are expected to be delivered over the next five years, before the end of 2018. Emirates operates four scheduled flights weekly from Larnaca to Dubai: every Monday, Wednesday, Friday and Saturday. On these days in the morning, EK 107 arrives from Dubai while in the afternoon EK108 arrives from Malta on its flight back to Dubai.

uxury French brand Louis Vuitton’s Nicosia store closed its doors on December 31 2013, following a difficult year for sales of luxury goods in Cyprus. The dedicated boutique store, opened in 2007 on Stasicratous Street, was LV’s 372nd boutique worldwide. The move comes as Louis Vuitton, along with other major international brands, seeks to pull out of operations in countries with struggling economies to reduce the risk of a drop in turnover. LVMH (Moët Hennessy Louis Vuitton) recorded overall revenue of €13.7 billion in the first half of 2013, showing an increase of 6% compared to the same period in 2012; organic revenue growth was 8%. The Group continues to experience good momentum in the US and Asia, and continues to grow cautiously in Europe’s more difficult economic environment to visitors which draws them in.

Andreas Neocleous & Co LLC dominates

Best Lawyers’ 2014 listing

awyers from Andreas Neocleous & Co LLC dominate Best Lawyers’ 2014 listing of lawyers in Cyprus, announced on December 4, with fourteen lawyers from the firm ranked as leaders in their field, more than any other firm, holding leadership positions in all practice areas and

accounting for more than 10% of all the lawyers listed in Cyprus. Andreas Neocleous is the Best Lawyers’ 2014 Limassol Banking Law “Lawyer of the Year” and Elias Neocleous is Limassol Corporate Law “Lawyer of the Year.” Inclusion in Best Lawyers is based entirely on peer-review. The methodology is designed to

capture, as accurately as possible, the consensus opinion of leading lawyers about the professional abilities of their colleagues within the same geographical area and legal practice area, using a sophisticated, rigorous rational and transparent survey process. Best Lawyers has been carrying

out research on the legal profession for more than thirty years,. In 2006 Best Lawyers published its first international list (Best Lawyers in Canada) and since then has grown to provide lists in more than 65 countries worldwide. It has been covering the legal profession in Cyprus for five years.

The Marshall Islands The Marshall Islands TheCorporate Marshall Islands Registry Registry The Marshall Islands TheCorporate Marshall Islands Corporate Registry Corporate Corporate Registry Registry

Conferences

Planned By IMH t the annual IMH Christmas Breakfasts

iota Kythreotou-Theodorou, Managing Partner at Pamboridis LLC since February 2013, has been appointed a District Court Judge with effect as of December 2013. After completing her training with Watson, Farley & Williams in London (2001-2003), she worked for Efstathiou & Associates, specialising in commercial law and commercial litigation. She joined Pamboridis LLC in 2006 and was made a partner and Head of the Corporate/Commercial Department in 2008. A Member of the Law Society of England and Wales, the Cyprus Bar Association and the Nicosia Bar Association, KythreotouTheodorou obtained her BA (Hons) Jurisprudence from Oriel College, Oxford University (1996-1999) and her LLM in Private International Law from Oxford Brookes University (2000-2001). She speaks Greek, English and Spanish.

2014. He told the invited guests that the company which, among other things, publishes Gold magazine, has an extremely full schedule of activities for the coming year, including 60 conferences in Cyprus and several abroad. “Following the huge success of the recent Cyprus Economic and Investment Summit in Moscow, we shall be holding more such meetings in other key capitals in an effort to help attract foreign investment to Cyprus,” he said. In Nicosia Michail made special mention of IMH’s latest media outlet, the Gold News portal, which launched that day (13 December), and the Gold News Daily Newsletter, the first issue of which was distributed the same day. Michail concluded his address in both cities by proposing ways in which companies can promote their products and services through IMH’s conferences, exhibitions and business media which target what he called “the premium audience in Cyprus”. “It is my firm belief that no other organisation in Cyprus reaches and affects this audience better than IMH does”, Michail told the audience at both gatherings.

New App for Cyprus Basketball Fans

he Cyprus Basketball Federation (CBF), in collaboration with ZEBRA Consultants, has become the first Cypriot sports association to introduce its own mobile app. Fans of Cyprus basketball will now be able to access information regarding their favourite sport with a swipe of the finger on a smartphone

or tablet. The mobile app, which is available for free download at www.basketball.org.cy informs users on the latest Cyprus basketball news, CBF competitions, match schedules, live scoring and referee appointments. The app is available on Apple iOS and Google Android devices and works seamlessly on both mobile phones and tablets. Utilising ZEBRA Consultants’ web-based zecontent Content Management System, the mobile app is updated at the same time as the CBF website. ZEBRA Consultants specializes, amongst others, in developing applications for mobile devices, websites, online shops and other web based applications.

©Corbis ©Corbis ©Corbis ©Corbis ©Corbis

New Judge Appointed

in Nicosia and Limassol last month, Managing Director George Michail announced the company’s plans for

The The leading leading jurisdiction jurisdiction for for The leading jurisdiction for leading jurisdiction •The Management, The leading jurisdiction for for • Asset Asset Management, • Asset Management, Asset ••• Vessel Ownership Asset Management, VesselManagement, Ownership • Vessel Ownership Vessel Ownership ••• Real/Intellectual Vessel Ownership Real/Intellectual • Property Real/Intellectual Holdings Property Holdings •• Property Real/Intellectual Real/Intellectual Holdings Property Holdings •• Initial Offerings/ Property Holdings Initial Public Public Offerings/ • Publicly Initial Public Offerings/ Traded Companies Publicly Traded Companies •• Initial Offerings/ Initial Public Public Offerings/ Publicly Traded Companies Publicly Traded Publicly Traded Companies Companies

IRI Hellas Ltd. IRI Hellas Ltd. IRI Hellas Ltd. inIRI affiliation with the Marshall Hellas in affiliation with theLtd. Marshall Islands Islands IRI Hellas in affiliation theLtd. Marshall Islands Maritime & with Corporate Administrators Maritime & with Corporate Administrators in affiliation the Marshall Islands

Maritime & Corporate Administrators affiliation the Marshall Islands tel: 4294 404 piraeus@register-iri.com tel: +30 +30 210 210in 4294 404&||with piraeus@register-iri.com Maritime Corporate Administrators tel: +30 210 4294 404 | piraeus@register-iri.com Maritime & Corporate Administrators www.register-iri.com www.register-iri.com tel: tel: +30 +30 210 210 4294 4294 404 404 | | piraeus@register-iri.com piraeus@register-iri.com www.register-iri.com www.register-iri.com www.register-iri.com

UP FRONT

Shop Till You Drop! FXTM INTERNATIONAL BOXING CUP CYPRUS BEATS RUSSIA

ypriot boxers took the lead over their Russian opponents as they competed in last month’s FXTM International Boxing Cup “Cyprus Vs Russia” at the FXTM Apollon Indoor Arena in Limassol, proving that there is a lot of potential for further development in the Cyprus boxing scene. The boxing tournament, co-organised by forex broker ForexTime (FXTM) and the Limassol Municipality, took place

under the auspices of the FXTM Aravis Boxing Team. Hundreds of spectators enjoyed a thrilling adrenaline-filled tournament where athletes competed for international supremacy. Ten matches took place in the 57kg, 60kg, 64kg, 69kg, 75kg, 81kg, and 91kg categories. Cypriot winners were C. Antoniou, G. Danatsides, P. Tatidis, E. Kathopouli, F. Kazakov and G. Yakubu. Match winners from Russia were I. Kokshin, A. Esman, I. Shmelev, and A. Zaitsev. Andrey Dashin, founder

arios Clerides, former chairman of the Cyprus Securities and Exchange Commission (CySEC), has been appointed new CEO of the Cooperative Central Bank (CCB). The decision was taken at a board meeting on December 18, 2013 and announced a few days later. Clerides, 60, studied at the London School of Economics and Political Science,

and shareholder of ForexTime and himself a sporting enthusiast, congratulated the athletes saying “We at Forex Time are very proud to support youth and specifically to help athletes chase their dreams and succeed. Boxing is a very precise art form for me; it helps individuals develop the key skills of strategy, endurance and focus that can also be applied in everyday life and to the business world. Congratulations to all the athletes that have competed today and a special bravo to the winners”.

and was awarded a PhD in Labour Economics in 1982. First employed in November 1982 by Hellenic Bank (in charge of planning and economic research), Clerides later – from 2006 onward – served as Group Senior General Manager: Risk Management and Strategy. During a brief interlude of his time at the bank, Clerides joined CySEC as its chairman on a five-year contract, from 2001 until 2006. In April 2013 he was appointed, by the President of the Republic as a member of the National Council for the Economy. Following a €1.5 billion capital injection from the state, the Cooperative Credit Institutions have been 99% nationalised.

yprus and other countries of the eurozone may be suffering from austerity measures but some things never change. The 19th edition of the Dubai Shopping Festival (DSF) from 2 January to 2 February 2014 has once again made the emirate of Dubai a major attraction for visitors from around the world. The latest edition of the Dubai Shopping Festival, considered the region’s best entertainment and shopping extravaganza, promises to deliver an unforgettable experience to millions of visitors. Economy class return fares from Cyprus start from €430. Jaber Mohamed, Emirates Manager for Cyprus said: “The 19th edition of the Dubai Shopping Festival is not only about one of the best shopping experiences in the world. Tourists from Cyprus will enjoy a festive and entertainment extravaganza. The DSF caters for every visitor as in addition to shopping and prizes, there are hundreds of events and activities ranging from international concerts, musicals and shows to sports, outdoor, and fashion events.” Since it was launched in 1996, the DSF has grown from a mere shopping event to an international entertainment and shopping extravaganza that continues to draw millions of visitors to Dubai every year. Last year, the festival drew 4.3 million visitors.

Publicity from The Sun for

Haji-Ioannou Award

ritish entrepreneur James King has won an award giving him ₤50,000 to expand his business – despite being registered blind. King from Milton Keynes, won the award for his company Oliver James Garden Rooms, which creates glazed home extensions. The Sun newspaper ran an article about the winner and the

award last month. The Stelios Award for Disabled Entrepreneurs, funded by easyJet founder Sir Stelios Haji-loannou with the Leonard Cheshire Disability charity, recognises the achievements of disabled entrepreneurs. James King, 47, was a bricklayer until his early twenties, when he was diag-

nosed with the hereditary eye condition Retinitis Pigmentosa. “Because of my vision we have to overcome certain situations but because of this, we end up with a better standard,” he told The Sun. Sir Stelios said: “I have been really impressed by the growth of James’ business and the way he is meeting a genuine need in the market.”

10 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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08/01/2014 15:23

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up front

s The 10 Biggest US Companie

Run by Women

hen Mary Barra takes over ors Mot eral Gen at as CEO on January 15, she will join

Top 10 1. IBM CEO: Virginia “Ginni” Rometty

Company value: $192.7 billion Rometty took on the role of CEO of International Business Machines in January 2012, having joined the company in 1981 and held numerous leadership roles at the multinational technology and consulting giant, which has more than 430,000 employees.

the elite ranks of women at the top of the biggest companies in the USA. Before becoming the automaker’s first female CEO, Barra, 51, was executive vice president for Global

Mondelēz is a world leader in chocolate, biscuits, gum, candy, coffee and powdered beverages, with brands such as Cadbury, Oreo, Halls and Trident.

4. DuPont CEO: Ellen Kullman

Product Development and Global Purchasing and Supply Chain. She began her career at GM in 1980 as a co-op student at the Pontiac Motor Division. Women still make up less

that 5% of the CEOs of the country’s biggest corporations. Below is CNBC’s list of the women who run the 10 highest-valued US corporations, based on market capitalisation.

6. Lockheed Martin CEO: Marillyn A. Hewson

Company value: $44.5 billion CEO of the world’s largest defence company, Hewson has been the CEO and president of Lockheed Martin since Jan. 1, 2013. She has worked at Lockheed Martin for 30 years in several key corporate executive roles and leadership positions.

Company value: $56.9 billion Following a three-month stint as president of E.I. du Pont de Nemours, Kullman became CEO on the first day of 2009 and then chairwoman of the board on the CEO: Indra Nooyi last day of that year. She joined the CEO: Carol Meyrowitz Company value: $126.8 billion Company value: $44.1 billion company in 1988 as a marketing Nooyi became president and CEO Carol Meyrowitz joined TJX in manager. of Pepsico in 2006 and chairwom1983, and became president an the following year. The multinain 2005. She joined its board of tional corporation has a portfolio of directors the following year. TJX CEO: Margaret “Meg” Whitman operates more than 2,900 discount 22 brands, each generating more Company value: $52.4 billion than $1 billion in sales annually, inretail stores, including TJ Maxx, cluding Pepsi, Frito-Lay, Gatorade, Whitman spent 10 years as Marshalls and Home Goods. president and CEO of eBay before Quaker and Tropicana. moving on to lead HP, the hardware and software company that CEO: Phebe N. Novakovic provides products, technologies, Company value: $31.9 billion solutions and services to busiPresident and CEO of General CEO: Irene Rosenfeld nesses and consumers. Whitman, Dynamics from May 2012 to DeCompany value: $60.8 billion a Republican, made a bid for gov- cember 2012, Novakovic became Following a six-year stint as CEO of Kraft, Rosenfeld became chair- ernor of California in 2010, spend- chairwoman and CEO in Januing $178 million but losing to Jerry ary 2013. Before joining General woman and CEO of Mondelēz Brown. Dynamics, she served as special International in October 2012.

2. Pepsico

7. TJX

5. Hewlett-Packard

8. General Dynamics

3. Mondelēz

International

7 6 12 Gold the international investment, finance & professional services magazine of cyprus

4 3

assistant to the secretary and deputy secretary of Defense and formerly worked for the Central Intelligence Agency.

9. Archer Daniels Midland

CEO: Patricia Woertz Company value: $28 billion Woertz has been CEO and president of Archer Daniels Midland since 2006. A year later, she also became chairman of the board of ADM, the processor and producer of food ingredients, feed ingredients and biofuels.

10. Xerox CEO: Ursula Burns

Company value: $14.1 billion In 2009, Burns became the first African-American woman CEO of a Fortune 500 company. That was 29 years after she joined Xerox as an intern in mechanical engineering. The company employs more than 140,000 people and has clients in more than 160 countries. In 2010, President Barack Obama appointed Burns vice chairwoman of the President’s Export Council.

interview

five minutes with...

Rishi Somaiya Marketing Director, Ajman Free Zone Authority, United Arab Emirates

ere you satisfied with the response to last month’s first global investor summit held in Cyprus? Absolutely. As one of the business hubs for European markets, Cyprus is a very important market for us. It is one of our core international high priority regions for the future and we feel positive with the response we received. The event garnered more than 120 companies looking at Ajman as a potential business zone. What kind of people attended the two days of presentations? Our aim was to attract the business community, consultants and entrepreneurs as well those who want to take advantage of our excellent off-shore services. Among the attendees were the business elite of Cyprus, including top consultancy and accounting names such as KPMG & Deloitte. Even more crucial to us is that they were very positive after attending the summit and interacting with our top team. Today the UAE has over 36 free trade zones so they have obviously proved successful. But with no income or corporate tax payable, what is the gain for the UAE? Free zones are a catalyst in the development of the UAE as a top performing global business hub. AFZA has helped with the GDP and FDI primarily in the

Emirate of Ajman as well as the overall economy of the UAE. Free zones are a crucial part of the ecosystem that develops international business and encourages business community to come together. FDI not only brings in business investments. On a macro level, it leads to job creation, the development of retail and real estate, the utilization of our sea ports and airports, and increased trade resulting in overall economic development. With free zone growth, we will continue to see a marked growth in infrastructure, trading, talent and interest in the UAE. Ajman’s new offshore company setup services and facilities are described as being for international investors and consultants looking for lucrative and safe investment destinations for their clients. Doesn’t this put you in direct competition with Cyprus? Not really. What our offshore setup facilities aim to achieve is a mutually beneficial collaboration with our partner business countries and communities. What we offer is an excellent offshore investment channel, which works as brilliantly for a company with a base in Cyprus when combined with a Free Zone Company. We offer an alternative investment destination that facilitates entry into markets around us such as the GCC, the Middle East and the voracious market of the subcontinent with access to consumerism of over a billion people. Hence, we are not in direct competition but instead we promote complementary

14 Gold the international investment, finance & professional services magazine of cyprus

partnerships and open new avenues for investors by expanding their footprint. Why should foreign companies choose Ajman Free Zone rather than Cyprus? What makes it special? With the UAE now being a hub for global travellers and businesses, Ajman, being at the centre of the UAE, offers a strategic location advantage. In addition, investors will also enjoy a 100% tax free and liberal business environment with facilities and incentives like zero corporate tax, 100% foreign ownership, a 24-hour business and residence setup, easy access and robust banking system. Also, market access from the UAE is excellent due to the robust infrastructure of seaports and airports which today have the best connectivity regionally as well as internationally. Today’s business demands strong connectivity, faster turnaround times, low operational costs and access to emerging markets which is something the UAE offers. Also, operations in the UAE facilitate a wider business opportunity for Cypriot investors. Following this first global investor summit, are you planning to hold more in Cyprus in the future? Definitely. Cyprus is a huge market for us and our plan is to focus on building long-lasting partnerships and collaboration with its local business community. We aim to have similar events every year and keep the Cyprus community updated with our plans and new offerings.

COVER STORY

INVESTMENT

GUIDE 2014 WHERE

TO PUT YOUR MONEY By John Vickers

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o how was 2013? A quick look at the numbers suggests that for anyone buying shares on any of the world’s leading stock exchanges it could hardly have been better. In the United States, the Dow Jones Industrial Average ended the year up 22%, the S&P 500 gained 25% and the Nasdaq rose by 33%. In Europe, the FTSE was up by 10% and the Dax 22% higher. Even Greece rose 27%. And while we can doubtless consider Venezuela’s 452% gain a complete anomaly, Japan saw a 58% rise in the Nikkei. So if the major share indices are anything to go by, it would appear that we can finally draw a line under the global financial crisis: it started in 2008 and ended in 2013… Although the world is eager to say goodbye to five bad years, are things really that simple? Undoubtedly not. Although US stock markets have been buoyed by the smooth and steady launch of the Federal Reserve’s so-called ‘tapering’ of its Quantitative Easing programme and its commitment to continuing monetary easing “until the outlook for the labour market has improved substantially in a context of price stability,” the road to high employment, low inflation and financial stability is a long one and it may not be particularly smooth. For the countries of the eurozone, the picture is even less clear. Latvia has given the euro a vote of confidence by becoming the 18th member to adopt the common currency and Ireland has officially exited the Troika’s programme but here in Cyprus you will be hard pushed to find a great deal of optimism for the coming 12 months. This is not to say that investors will stay away. Elsewhere in this issue of Gold, you can read about what a new publication entitled Crisis Investing in Cyprus has to say about the opportunities for savvy investors. Moreover, positive stories continue to emerge – albeit sporadically – re-

garding investment in property and other companies on the island. It is also a fact that many of the investment firms based in Cyprus are paying little attention to what is happening here as they advise their wealthy clients to make the most of the wealth and assets. To gain a clearer picture of what 2014 holds for investors from a Cyprus-based standpoint, we invited four financial experts to share their knowledge and advice with us: Evgenios Antoniou, Head of Asset Management, CISCO; Loucas Marangos, CEO, TFI Markets; Demetris Taxitaris ACA, Managing Director, Symmetria F.S. Ltd and Nicolas Theocharides, CEO and Managing Director, UPM Ltd. were asked to express their views on the investment potential of the main asset classes (Equities, Bonds, Commodities, Alternative Investments and Cash). Regarding Equities and Bonds, they were requested to comment on them from a regional perspective too (US, eurozone, UK, Japan, emerging markets, etc.) Finally, we asked for a brief summary of how they viewed 2013 from the investor’s standpoint and for their forecasts as regards the coming year. Together with these ideas and views, we have selected some interesting ones from international commentators and companies to fill out the picture. To those who may feel that Cyprus in 2014 is neither the place nor the time to be discussing where wealthy individuals and firms will be putting their money, given the fact that austerity measures are likely to be felt even more strongly by most of the population, we would simply note what everyone directly involved in the economy, starting with the President, has been saying for the past nine months: investment is essential if Cyprus is to restore its standard of living, its reputation and its key professional services sector. Yes, we need inward investment for this but we also need to ensure that those using Cyprus for their own investment and tax planning purposes keep faith in the island’s institutions, and in its public and private sectors. The man in the street may have little cash to invest but now we are all investing in the country’s future.

ALTHOUGH THE WORLD IS EAGER TO SAY GOODBYE TO FIVE BAD YEARS, ARE THINGS REALLY THAT SIMPLE? UNDOUBTEDLY NOT.

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COVER STORY

2013 GOOD FOR THE

WORLD’S STOCK MARKETS

orld stock markets ended 2013 close to six-year peaks and benchmark bond yields were poised for their first annual rise since 2009 as investors celebrated a pick-up in

THERE IS ALMOST A COMPLACENCY ABOUT NEXT YEAR AND HOW WELL IT COULD GO

global growth with expectations of more to come. Thanks to ultra-easy monetary policies and an improving economic outlook, equities enjoyed a vintage year in 2013. Wall Street enjoyed its best year since 1997 with a 29% gain, while Japan’s Nikkei ended up 56.7% and European shares gained 16%. MSCI’s all-country world equity index was flat at 407.42 points on 31 December, 2013, having hit its highest since late 2007 at 407.65 on 30 December. The FTSEurofirst 300 index of top European shares was up 0.13% at 1,313.52 points, its best year since 2009. Assets favoured by investors in economic downturns took a beating in 2013, with top-rated US and German bond yields trading near the highest in around two years and gold limping towards its worst annual performance in three decades. With bets that the economic recovery will continue even as the US central bank steadily trims its bond-buying stimulus and that the eurozone will take more steps towards overcoming its debt crisis, investors look for more of the same in 2014. “There is almost a complacency about next year and how well it could go,” said Hans Peterson, head of asset allocation at SEB investment management. “There is still abundant liquidity even if the Fed started to taper and I think that is still the main theme ... Everything looks nice and easy right now.” Reuters polls show European stocks are expected to hit new highs in 2014, while Chinese, US and other major

stock markets are also seen posting solid gains. Gold is expected to remain depressed, while benchmark bond yields are seen rising only slightly, despite investors’ preference for riskier assets, the polls show. Analysts do not foresee a sharp bond sell-off because inflation in major economies is expected to remain stubbornly low, while the European Central Bank and the Federal Reserve have pledged to keep interest rates low for a prolonged period. While staying overweight in equities, Didier Duret, Chief Investment Officer at ABN AMRO private banking, said 2014 “will be a good opportunity to ... buy some good quality bonds as yields pick up above 3% in the US and above 2% in Germany.” The yield on the US 10-year Treasury note, which sets the standard for global borrowing costs, has risen to almost 3% from 1.75% at the start of the year, but it is seen rising to only 3.35% in 2014. Emerging markets have been a noted exception to the rally in equities. MSCI’s EM Index fell 5% in 2013 on worries that cuts in global monetary stimulus could expose economic imbalances and as funds return to the rich world.

EURO

he euro ended 2013 close to its highest level in two years against the dollar, but a Reuters poll shows it is expected to reverse its upward trend this year as the continued soft stance of the ECB contrasts with the Fed’s. On 31 December, the single currency was steady at $1.3790, up more than 4% for the year. The easing of the eurozone crisis and signs of a pick-up in economic activity even in the bloc’s weakest members have offered strong support to the euro and brought Italian and Spanish debt yields to just over half their crisis peaks. At the end of the year, a rise in money market rates due to thin yearend liquidity gave the single currency extra impetus, but there are some expectations the ECB may react with new long-term liquidity injections into the banking system if that continues in 2014. “Diminishing eurozone market liquidity, a steeper yield curve and a stronger euro will do little to resolve the ECB’s deflationary credit crunch dilemma,” said Lena Komileva, managing director at G+ Economics, in a note. “It would be too soon to expect that the ECB will respond with renewed liquidity easing at its January 2014 meeting, but it is clear that conditions warrant close monitoring and readiness for swift action.”

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NICOLAS THEOCHARIDES CEO and Managing Director, UPM Ltd.

2013

2013 was a good year for investment managers who recognized early that for specific regions of the global economy, such as the US, the recovery had started but also for investment managers who realized that the new Japanese government had the ability to end over two decades of deflation and stagnation and took the decision early to invest in these markets. In addition, 2013 was good for the clients of investment managers who had already liquidated any investments they had in gold, but also for the clients of investment managers who had been carefully assessing the situation with the Cyprus banks and took steps in good time to safeguard their clients’ money.

2014

2014 does offer good potential for investment returns as it will be a year during which the recovery in the global economy will spread to more regions of the world. However, when dealing with investments there are no “certainties” to speak about and downside risks always exist. These could emerge from areas such as nonagreement on the US debt ceiling, the European banks’ stress test results, from geopolitical eruptions or, perhaps, from the rift that is now apparent within the eurozone between the Central European countries and those of the Southern Periphery.

EQUITIES

Equities have had a good year in general, with the developed markets –especially Japan and the US – leading the way. As the global recovery gains traction and extends to other regions, 2014 is expected to be another very good year for equities. Japan is likely to be an outperformer for a second year while Europe is expected to deliver a good performance as, last year, it lagged a bit among the developed markets. The US is already at an all-timehigh and, although 2014 is expected to be a positive year, we don’t think that the performance will be in double digits. The Asian Markets, and especially China, have potential for 2014.

BONDS

Government Bonds are out of favour for 2014, while some good corporate names with a relatively good coupon and maturities up to 2-3 could feature in a balanced portfolio.

COMMODITIES

Gold is usually regarded as a hedge against inflation or as a holding to keep in times of uncertainty and risk aversion. 2014 is expected to be a year without any significant inflationary pressures while risk aversion is expected to decline. In

that regard, gold is expected to continue its declining course, and we could see it dip below the $1000 mark. WTI Oil is expected to trade in the range of $85 - $100 and we would only see it moving higher in the event of a possible supply disruption or political instability in the Middle East.

ALTERNATIVE INVESTMENTS

Good Hedge Fund names have come to be regarded as an important holding in any well-diversified asset allocation. As such, investors should consult the experts about the possibilities that exist in the Alternative Investments spectrum, who will always bear in mind the specific investor’s own investment profile. Some interesting and robust time-proven performance has been delivered through long – short strategies.

CASH

Interest rates are expected to remain low for the foreseeable future and, as such, cash is not expected to deliver any return to speak about. Nonetheless, cash is always an important element in any asset allocation. These days, after what we have seen happen with people’s cash in the banks, the importance of choosing which bank – both in Cyprus and abroad – in which to keep one’s cash, as well as how much to keep in each bank, cannot be overstated.

CYPRUS

In some languages, the word “crisis” is synonymous with “opportunity”. So if we subscribe to the view that 2014 will be the last year of the recession for Cyprus, it becomes apparent that somewhere within all the doom and gloom of the Cyprus economy there must definitely exist certain investment opportunities that the savvy investor will recognize and seize upon. In order to arrive at these investment opportunities, however, one needs to carry out a careful analysis of the present-day situation as well as the needs and prospects of specific companies and also of projects and, possibly, standalone assets such as halfcompleted buildings or other real estate.

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COVER STORY

TOP 10 BEST PERFORMING

STOCK MARKETS OF 2013 On the whole, the world’s stock markets delivered solid returns for investors in 2013, but the list of the best performers includes some surprising names...

nvestors brave enough to plough their cash into shares in Venezuela would have quintupled their money in 2013. The Caracas Stock Exchange, which lists just 15 Venezuelan shares, returned a whopping 452% in 2013, according to data firm Morningstar. The strong stock market returns came despite the anticapitalist policies of the former president, Hugo Chavez, who died in March. Chavez was not a fan of the private sector and, during his 14-year reign, he regularly seized company assets. This, in turn, discouraged foreign investors from putting their money into companies in the South American region. But investors should be cautious about history repeating itself in 2014. The main reason for the Venezuelan stock market’s strong performance was the fear that the country was on the verge of a currency crisis, rather than investors warming to President Nicolás Maduro. “Domestic investors are seeking to protect their bolivars from devaluation and inflation by buying the few stocks available on

the local exchange – pushing up prices,” said Barclays Wealth. Venezuela’s government devalued the bolivar by 32% in February 2013. There are other surprises among the Top 10 stock markets of 2013. A number of debt-ridden economies, such as Iceland and Greece, make the list, with rises of 38% and 35% respectively. Ireland, which suffered heavily during the financial crash but has been able to borrow on the open market again, also features, with its stock market returning 35%. Elsewhere, two frontier markets – Zambia and Nigeria – also make the list. Such markets have been touted as the next generation of emerging economies. Both nations have rapidly growing young populations and should, in theory, benefit from a rise in domestic consumption, which should lead to more foreign investors putting money into their stock markets. Less of a surprise is to see Japan’s Jasdaq index and America’s technology-heavy Nasdaq exchange in the top 10.

33.7%

USA/Nasdaq Index

34.5%

33.9%

10. 9. 8. 34.9% 7. 6. 35.2% 5. 4. 37.2% 3. 38.5% 2. 51.1% Argentina/Mercado de Valores

COUNTRY/STOCK

31.8% Pakistan/Karachi Stock Exchange

MARKET

RISE IN SHARE

PRICES 2013

Greece/Athens Stock Exchange

Nigeria/Nigerian Stock Exchange

Ireland/Irish Stock Exchange

1. 452%

Venezuela/Caracaa Stock Exchange

Zambia/Lusaka Stock Exchange

Iceland/OMXI All Share

Japan/Jasdaq Index

Source: Morningstar

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DEMETRIS TAXITARIS

ACA, Managing Director, Symmetria F.S. Ltd

2014

Leading economic indicators clearly point towards an improvement in global growth for 2014, albeit at a modest pace. A risk to our scenario for higher growth is disinflation or deflation stemming from the ‘jobless recovery’ we expect, although we think the probability for the latter is not high. We still prefer equities against bonds since we do not think the latter sufficiently compensate for the risk undertaken, while the former seem to maintain support by strong balance sheets and potential earnings upgrades. Equities also find support from the continued shift to this asset class from other asset classes including bonds.

EQUITIES

Despite the rise in recent years, we expect equities to continue ‘climbing a wall of worry’ and maintain an uptrend, although less intense than in 2013, driven increasingly by growth rather than ample liquidity as had been the case until recently. We think that risks, such as the degree of divergence between prices and fundamentals, are increasing as we progress further through this cycle and it would be vigilant in certain instances to take profits from the peaks, as appropriate, and potentially reposition at lower levels. This is also supported by the rise in volatility we expect to observe in 2014. Vigilance is also warranted as a lot depends on political decisions on a number of fronts, such as Central Bank policy, the US, the eurozone, China and Japan. Consequently, the potential for a sharp correction, which may present a buying opportunity, cannot be precluded. Regionally, we would overweight Europe, including Germany, on signs that the European crisis is fading, on the German consumer and on lower recent performance as well as apparent cheaper valuations. Specifically on the crisis front, despite initial positive signs, European leaders and Germany ‘doing what it takes’ is critical for the future of the eurozone. We expect Japan to make further fundamental progress and would maintain an overweight position,

avoiding exposure in local currency as we are concerned by a weakening Japanese yen. Emerging equities still carry risks owing to structural issues; hence, we remain cautious for now as we think the economic growth premium enjoyed by the emerging market economies over their developed counterparts will continue shrinking. Within equities, we continue to favour technology, financials and energy and would underweight consumer staples considering the state of the cycle and evolving themes.

BONDS

Government bonds still seem overvalued, offering low yields, and vulnerable to rising volatility in a year with an expected increased dependence on policy actions, which would take into account a number of factors including unemployment figures. We would thus be positioned at the shorter end of the yield curve, at low duration. On the other hand, corporate

bonds seem more attractive than government bonds, supported by stronger balance sheets despite tight credit spreads. We prefer to take some degree of credit risk rather than duration risk, on the back of the expectation of higher interest rates at some point. Selection is key for any positioning. We would overweight financials as we expect continued improvement in their fundamentals relative to industrials. Selected high-yield issues may be used as sources of outperformance in a portfolio. Weaker growth in the emerging market countries will probably lead to higher differentiation among emerging markets. We recommend being cautious and selective regarding corporate bonds in these markets.

CURRENCIES

We expect the dollar to strengthen against the euro, the Japanese yen, the British pound and other major currencies on the back of higher growth rates in the US economy. We expect the strengthening of the dollar against the euro to be gradual and moderate. We also expect the British pound to strengthen against the euro on outperformance of the British economy within Europe.

GOLD

Despite the large fall in the price of gold from its peak, we would avoid positioning for now, owing to macro improvements and growth as well as the expected strengthening of the dollar. However, we continuously monitor its movement and would treat any further weakness as a potential long term buying opportunity.

OIL

Concerns for dollar strengthening and for key commodity consumer economies, such as China and India, as well as growing supplies and the easing of geopolitical tensions, such as the recent agreement with Iran, filter concerns through for the price of oil. That is probably why oil prices have not responded to the recent improvement in global manufacturing confidence. Having said that, we would not be too negative as the improving overall macro environment and other factors are supportive.

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COVER STORY

LOUCAS MARANGOS CEO, TFI Markets

2013

have seen major players such as Facebook and Twitter listed and others (such as LinkedIn, Pinterest, etc.) are expected to follow suit. As international Internet penetration continues to expand, social media equities can remain in the spotlight for extended timeframes. We expect that, in general, Emerging Markets equities will continue to underperform developed ones, at least for the first half of the year as the combination of weaker-than-expected growth/earnings and, more recently, worries over the consequences of monetary policy tapering in the US will weigh. The potential impact on individual markets will vary. For example, countries with large current account deficits and a reliance on external funding, such as India, Brazil, South Africa and Turkey, have already experienced sharp equities and currency sell-offs. On the other hand, countries running healthier macroeconomics and current account surpluses, such as China, Korea, and Russia, were less affected and are expected to be more resistant to the effects of withdrawal of monetary stimulus in the developed economies but they are still vulnerable to contagion from problems in other Emerging Markets. In some cases substantial currency weakness is already helping some of the more fragile countries reduce their current account deficits and improve their competitive position. Investors in EM equities should act with extra caution in the next few months and only take strategic and selective positions.

The end of 2013 found equity markets hovering at all-time highs, supported by improving growth prospects and accommodative monetary policies. The Federal Reserve had taken the lead among Central Banks with its decision to start unwinding its expansive monetary policy but the withdrawal of stimulus will be a long process. 2013 was another year of recovery and it is our view that, slowly but steadily, we are moving away from the 2008-09 crisis era, even if most economies underperformed compared to expectations and growth forecasts were in most cases revised downwards through the year. 2013 was also a year of political uncertainty and instability. Middle East unrest in Syria, Egypt and Turkey undermined regional economic activity and sentiment. Political uncertainty in the US took the form of a partial government shutdown with the government flirting closely with default. In Europe we are still experiencing the aftermath of the European crisis with distinct differences in the growth prospects between North and South.

EQUITIES

2014 has the scope to be another positive year for global equities. G7 equity markets have already experienced a great 2013 with the S&P, Dow Jones, DAX, NIKKEI 225 and FTSE among others recording considerable gains and the rally should continue in 2014. We expect a positive macroeconomic performance, especially in the US where growth is on a particularly strong footing. The base scenario predicts that an improved unemployment outlook and still accommodative monetary policy will be positive factors that will continue to support G7 equity markets. An â&#x20AC;&#x2DC;alternativeâ&#x20AC;&#x2122; sector that has attracted great attention and may very well remain in focus is the social media sector. We

BONDS 2014 HAS THE SCOPE TO BE ANOTHER POSITIVE YEAR FOR GLOBAL EQUITIES.

We expect a mixed and complex picture to emerge in the G7 bond markets. On the one hand, we have the European Central Bank worrying about deflation and considering both quantitative easing (QE) and negative interest rates as possible tools. On the other hand, the Federal Reserve and the Bank of England seem to be going the other way. Additionally, we expect that investment decisions will be complicated by the behaviour of credit spreads which will be affected

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by improving economic fundamentals but also by the possible implementation of the Basel III EU directive which could have a spread widening effect. Bond investors will need to remain lively and active in 2014 to take advantage of opportunities. It is no longer the traditional market in which your long-term strategic views can provide stable returns. Investors will need to trade around their principal views and take advantage when uncertainty causes mispriced opportunities. Placements in Floating Rate Notes and short-dated fixed rate bonds should provide relatively high risk-reward ratio whenever they selloff. Emerging Market bond markets are expected to experience similar dynamics to equities as the pace and effects of US tapering will play a central role. Additionally, higher US interest rates will result in higher loan servicing costs and this could result in EM currency depreciation. International investors must also factor in currency risk before making placements in local currency denominated bonds. In addition, there is concern about the sustainability of Chinese growth rates and a subset of the Asian banking sector (India, Indonesia and Thailand), where banks are already suffering from deteriorating loan books and tight liquidity conditions. Again, caution is advised and careful selection is the order of the day when looking at corporate Asia.

COMMODITIES

Political instability in the Middle East and other oil-producing countries still casts fears of possible disruptions to the supply of oil. We expect an increased demand for energy as developed economies continue to grow. Consequently, we believe that energy prices will carry on their upward trends in 2014. Investors should be aware of developments in Libya and Iran which could be the wild card in terms of oil supply towards the end of 2014. Gold and other highly correlated precious metals are expected to continue their downward trend well into 2014, as uncertainty subsides in the US and other Western economies and rising risk appetite switches positions out of ‘safe haven’ assets. We believe that any long positions at this point are very risky as the market has not found a bottom just yet.

FOREX MARKET

Last year was all about Central Banks in the FX market. All the focus, by and large, was drawn to the Central Banks as they used their policy tools to help their economies get on the appropriate growth and stability path. At the moment we are witnessing a considerable

INVESTORS SHOULD EXHIBIT EXTREME CAUTION IN HOLDING POSITIONS IN LOCAL FINANCIAL INSTRUMENTS monetary policy divergence between the US and the UK on the one hand and the eurozone and Japan on the other. This divergence is expected to intensify in 2014 and become more and more evident. The Federal Reserve, having acted decisively, has provided a tremendous amount of stimulus in order to help the US economy recover and at the moment it seems that is has worked well and the US economy is indeed performing much better. The tapering of bond buying has begun and will continue in 2014. The Bank of England seems satisfied with the way things are working out for the British economy and does not consider any more easing, while the Bank of Japan (BoJ) end the European Central Bank (ECB) are very worried about deflation, poor growth and labour market conditions. As a result, the BoJ has already begun a massive expansion plan to provide sufficient liquidly in the markets to help the economy grow out of stagnation and may well provide more in the coming year if necessary, while the ECB is considering both quantitative easing (QE) and negative interest rates as possible tools. As a consequence it is likely that the USD and GBP will overperform other major currencies and in particular the EUR and the JPY. The CHF is expected to continue to trade close to the €1.20 ceiling, whereas high yielding currencies such as the AUD and the CAD will depreciate as long as growth rates of developing countries miss estimates and commodity prices and especially gold drop further. Overall there are great opportunities for long-term investors in the currency market that can generate more than sufficient gains

for the educated trader. Focusing on Central Banks and fundamental macroeconomic figures should be the main priority to identify trends and trade with success.

CYPRUS

Reality finally caught up with our little piece of heaven in 2013 and we have been called to pay for years of misguided policy decisions, loose regulatory oversight and bad banking. The cost of the unravelling is huge and its impact will be felt for a very long time. We share the general consensus that 2014 will be a very difficult year characterized by strict credit rationing practices by the banks, high unemployment levels, reduced consumption patterns and deflationary pressures. Of particular worry are the difficulties that the banking sector will continue to face in performing its traditional role of financial intermediation, the lack of an equilibrium in the real estate market, which is an indication that we have not reached a bottom, and the manner in which the banks will unwind their NPL portfolios, which can have a number of significant knock-on effects. Although there are significant headwinds, we should also note that the services sector has held up much better than expected in the past 9 months, the economy has shown remarkable resilience and the Government is clearly committed to fulfilling its obligations stemming from the Memorandum signed with the Troika. Additionally, exogenous factors such as the future exploitation of energy reserves and interest from foreigners in the real estate market can be positive factors in the years to come. As far as placements in the local market are concerned, we advise a ‘wait and see’ approach. Sovereign bond yields have dropped significantly to 8-9% levels, which reflect the risk that investors assume. Investors with healthy risk appetites could consider limited short-term placements in Hellenic Bank early next year in expectation of a bout of renewed interest in the CySEC in March-June next year as Bank of Cyprus shares are relisted. Having said that, investors should exhibit extreme caution in holding positions in local financial instruments, at least until there is improved visibility on the prospects of the economy. However, they can and should look for opportunities in investments in distressed assets as well as selected greenfield investments.

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COVER STORY

GOLDMAN SACHS’ TOP TEN MARKET THEMES FOR 2014. Goldman Sachs’ economic team published its Top Ten Market Themes for 2014. The 10 points “represent a broad list of macro themes from our economic outlook that we think will dominate markets in 2014.” They are as follows 1. SHOWTIME FOR THE US/DEVELOPED MARKET (DM) RECOVERY Our 2013 outlook was dominated by the notion that underlying private sector healing in the US was being masked by significant fiscal drag. As we move into 2014 and that drag eases, we expect the long-awaited shift towards above-trend growth in the US finally to occur, spurred by an acceleration in private consumption and business investment.

2. FORWARD GUIDANCE HARDER IN AN ABOVE-TREND WORLD Despite the improvement in growth, we expect G4 central banks (Bank of England, Bank of Japan, Federal Reserve, European Central Bank) to continue to signal that rates are set to remain on hold near the zero bound for a prolonged period, faced with low inflation and high unemployment. In the US, our forecast is still for no hikes until 2016 and we expect the commitment to low rates to be reinforced in the next few months.

3. EARN THE DM EQUITY RISK PREMIUM, HEDGE THE RISK Over the past few years, we have seen very large risk premium compression across a wide range of areas. While not at 2007 levels, credit spreads have narrowed to below longterm averages and asset market volatility has fallen. Even in a friendly growth and policy environment such as the one we anticipate, this is likely to make for lower return prospects (although more appealing in a volatility-adjusted sense). In equities, in particular, the key question we confront is whether a rally can continue given above-average multiples. We think it can.

4. GOOD CARRY, BAD CARRY Our 2014 forecast of improving but still slightly below-trend global growth and anchored inflation describes an environment in which overall volatility may justifiably be lower. Markets have already moved a long way in this direction, but equity volatility has certainly been lower in prior cycles and forward pricing of volatility is still firmly

higher than spot levels. In an environment of subdued macro volatility, the desire to earn carry is likely to remain strong, particularly if it remains hard to envisage significant upside to the growth picture.

5. THE RACE TO THE EXIT KICKS OFF 2013 has already seen some Emerging Market (EM) central banks move to policy tightening. As the US growth picture improves – and the pressure on global rates builds – the focus on who may tighten monetary policy is likely to increase. The market is pricing a relatively synchronised exit among the major developed markets, even though their recovery profiles look different. Given that the timing of the first hike has commonly been judged to be some way off, this lack of differentiation is not particularly unusual. But the separation of those who are likely to move early and those who may move later is likely to begin in earnest in 2014.

6. DECISION TIME FOR THE ‘HIGHFLYERS’ A number of smaller open economies have imported easy monetary policy from the US and Europe in recent years, in part to offset currency strength and in part to compensate for a weaker external environment. In a number of these places (Norway, Switzerland, Israel, Canada and, to a lesser extent, New Zealand and Sweden), house prices have appreciated and/or credit growth has picked up. Central banks have generally tolerated those signs of emerging pressure given the external growth risks and the desire to avoid currency strength through a tighter policy stance. As the developed market growth picture improves, some of these ‘high flyers’ may reassess the balance of risks on this front.

7. STILL NOT YOUR OLDER BROTHER’S EM... 2013 has proved to be a tough year for EM assets. 2014 is unlikely to see the same level of broad-based pressure. The combination of a sharp downgrade to expectations of

China growth and risk alongside the worries about a hawkish Federal Reserve during the summer ‘taper tantrum’ are unlikely to be repeated with the same level of intensity.

8. ...BUT EM DIFFERENTIATION TO CONTINUE 2013 saw countries with high current account deficits, high inflation, weak institutions and limited DM exposure punished much more heavily than the ‘DMs of EMs’, which had stronger current accounts and institutions, underheated economies and greater DM exposure. This is still likely to be the primary axis of differentiation in coming months, but in 2014 we would also expect to see greater differentiation within both these categories.

9. COMMODITY DOWNSIDE RISKS GROW Last year we pointed to the ongoing shift in our commodity views, ultimately towards downside price risk. The impact of supply responses to the period of extraordinary price pressure continues to flow through the system. And we are forecasting significant declines (15%+) through 2014 in gold, copper, iron ore and soybeans. Energy prices clearly matter most for the global outlook. Here our views are more stable, although downside risk is growing over time and production losses out of Libya/Iran and other geopolitical risk is now playing a large role in keeping prices high.

10. STABLE CHINA MAY BE GOOD ENOUGH Expectations of Chinese growth have been reset meaningfully lower as some of the medium-term problems around credit growth, shadow financing and local governance have been widely recognised over the past year. Some of these issues continue to linger: the risks from the credit overhang remain and policymakers are unlikely to be comfortable allowing growth to accelerate much. But the deep deceleration of mid-2013 has reversed and even our forecast of essentially flat growth (of about 7.5%) may be enough to comfort investors relative to their worst fears.

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EVGENIOS ANTONIOU

Head of Asset Management, CISCO

2013

For 2013, the winning asset class was equities, mainly driven by the quantitative easing followed by the major Central Banks. The MSCI All Country World Index rallied by 20.25%, with Japanese (Nikkei Index), US (S&P 500 Index) and European (MSCI Europe Index) equities rallying by 56.72%, 29.60% and 16.43% respectively. On the contrary, Emerging Market equities (MSCI Emerging Markets Index) plunged by 4.98% in 2013. Global bonds underperformed global equities, with the Barclays Global Aggregate Total Return Index posting a 2.6% loss for the year. Commodities also underperformed equities with gold surprisingly plunging and entering into the bear market zone and with the Thomson Reuters/ Jefferies commodity index posting a -5% loss for 2013.

EQUITIES

2014 is not expected to be as sensitive to macro developments as previous years – since a lot of positive macro expectations have already been discounted by the equity markets – and so the global equity upside potential for 2014 appears less compared to 2013. As long as the momentum for ‘risk on’ is maintained, equities could continue their rally. However, 2014 might appear a more volatile year, especially for US equities as market volatility may rise stemming from any positive US growth surprises which may leave the Yellen-led Federal Reserve behind the curve and hence increase the magnitude of tapering. It is worth mentioning that QE tapering in the US should impact a lot less on European stocks when compared with the potential impact on emerging and US equity markets. Consequently, the valuation gap between US and European equities might narrow within 2014. On a eurozone level, although the political risks have decreased and the leading macro indicators and sentiment improved, the eurozone crisis has not yet been resolved. Japanese equities might continue the rally, fuelled by so-called ‘Abenomics’. A further yen depreciation could result in a more competitive economy which will benefit Japanese exporting companies further. However, a Japanese equity rally this year

will be challenged by the Shinzo Abe government’s introduction of consumption tax hike in 2014. Emerging Market equities appear attractive on relative valuation grounds when compared with the developed equity markets. However, a further correction should not be precluded as long as Fed tapering and “China Financial Crisis” market worries persist. In 2013, due to the low yield environment investors turned to bond-like equity investments and hence high-dividendpaying stocks rallied. As a result, dividend growth stocks appear more attractive than dividend paying stocks on relative valuation grounds. The valuation gap between income and growth stocks might decrease in 2014.

BONDS

The US is generally ahead of the curve compared to the rest of the world, especially Europe, in terms of its Quantitative Easing (QE) programme, the recapitalisation of banks, etc. Hence, the US tapering will increase interest rate risk, especially for US bonds with long maturities. Emerging market local debt may further plunge in 2014. Eurozone bonds will mainly be affected by economic developments in the eurozone.

ALTERNATIVE INVESTMENTS

Alternative asset classes are expected to be interesting to global investors in 2014, due to the fact that developed market equities are currently trading at record highs and because of the low correlations between alternative investments and traditional asset classes. As far as commodities are concerned, oil downside risk could increase if the rate of growth in the emerging markets does not meet expectations and the increased US oil supply exceeds demand. Gold remains in a downtrend with immediate pressure towards the downside but it is supported by structural fundamental supply factors.

STRATEGIC POSITIONING FOR 2014 Q12014 OUTLOOK * Global Equities USA Europe-ex UK UK Japan Emerging Markets Global Bonds Government Corporate-Investment Grade Emerging Market Debt COMMODITIES Oil Gold

Equalweight Equalweight Equalweight Overweight Overweight Underweight Underweight Equalweight Overweight Underweight Underweight Equalweight

*The tabulated views express the 1st Quarter of 2014 strategic views with a one year horizon and are reviewed at least every quarter - with a one year rolling window- or within a quarter, if there are severe changes in market conditions, unprecedented events, changes in macro and fundamental factors etc.

In conclusion, it is important to stress that an investor should always target a well-diversified global portfolio across asset classes, geographical regions, sectors, style etc. and should always assess the potential return of an investment from a risk-adjusted point of view.

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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COVER STORY

WHAT DO I DO WITH MY MONEY? Moneywise reveals five stockmarket sectors ripe for investors in 2014.

Between July and September 2013, the UK economy grew by 0.8% – its biggest three-month gain since 2010 as exports and overall business activity improved. On the back of this, the UK stockmarket rose strongly. Long-term returns from UK Equity Income funds tend to be attractive, in part thanks to dividends. Gary Potter, co-head of multi-manager at F&C Investments, believes that there is more to come. He says: “The UK still looks very attractive and shares will once again surprise on the upside next year. I believe the FTSE 100 could surpass its previous high of 6,390 in 1999 and could push on to 7,500 in 2014.” An area that remains hugely popular with investors is equity income. These funds invest in dividend-paying firms – companies that share their profits with investors – and 2014 is set to be a bumper year for dividends, with UK-listed firms expected to shell out some £100 billion in investor payouts. While the numbers are inflated on the back of an anticipated £16.6 billion one-off special dividend from Vodafone, the total payout is still more than £30 billion above the pre-recession high, according to Capita Asset Services. Equity income funds are also considered to generally be a sensible way to play the UK stockmarket, given they typically invest in large firms with plenty of cash on their books. Justin Modray, founder of independent financial adviser Candid Financial Advice, says: “Long-term returns from UK equity income funds tend to be attractive, in part thanks to dividends, and their more defensive nature may prove useful if we experience another downturn.”

UK FUND RECOMMENDATIONS:

Modray recommends Cazenove UK Equity Income fund. It is investing in big and stable household names such as Vodafone and Tesco. It has returned 141% over the past five years and pays a historic yield of 3.9%. Patrick Connolly, a financial planner at Chase de Vere, and Jason Hollands, managing director at Bestinvest, both tip the Threadneedle UK Equity Income fund, which counts BT and ITV among its top holdings. The fund has returned 110%, and yields 3.5%. Hollands also likes Unicorn UK Income. He says: “It differs radically from most UK Equity Income funds by focusing on small-cap names, which have been faring well recently. It has achieved a considerable 256% return over the five-year term and has a yield of 3.2%.

The world’s largest economy appears to be exiting the doldrums thanks to ultra-low interest rates and vast injections of cash, via so-called quantitative easing (QE) from its central bank, the Federal Reserve. Like the UK, the US has seen its economy steadily rise and it rose by a better-than-expected 2.8% in the three months to the end of September. Most notably, 2013 witnessed US shares enjoy their best year for a decade, raising fears that the market is becoming expensive. The year proved to be a boon for corporate earnings, with many firms delivering results ahead of expectations. Russ Koesterich, chief investment strategist at BlackRock, says: “This strong trend in corporate earnings was been a key factor in supporting the rally in stocks in 2013. We believe this can continue into 2014.” However, experts warn that while the case for the US looks more promising over the long term, there is a risk the recovery could slow when the Federal Reserve starts scaling back its QE initiative, which is predicted to happen at some point in 2014. As such investors should expect some volatility.

US FUND RECOMMENDATIONS:

Modray likes the Fidelity Moneybuilder US Index, a passive fund that mirrors the performance of America’s S&P 500 index, which includes technology giants Apple and Google. Connolly rates the AXA Framlington American Growth fund, up 117% over five years, which also has investments in the likes of Apple and Google. Hollands favours GAM Star GAMCO US Equity, with holdings in American Express and Texas Instruments. It has delivered a 152% return (in US dollar terms) to its investors over five years.

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EMERGING MARKETS JAPAN

Once the world’s second-largest economy, Japan has been ousted from that position by China. But on the back of the implementation of some extraordinary economic measures, dubbed ‘Abenomics’ after its Prime Minister Shinzo Abe 2013, it has enjoyed a change in fortune. A devaluing of the currency hugely helped the country’s exporters, making their goods and services cheaper; while there has also been strong upgrades in corporate earnings. However, it is still troubled by debt. James de Bunsen, manager of the Henderson Multi-Manager Income & Growth fund, says: “Japan’s valuations relative to the rest of the world still look attractive. The government has strong political mandate to pursue reforms and achieve goals”

JAPAN FUND RECOMMENDATIONS: Hollands says: “While the easy money phase has now happened, the Japanese restructuring story has further legs in it, with the exchange rate considerably more favourable to Japan’s exporters.” His top pick is the GLG Japan Cora Alpha fund, while Connolly cites the Aberdeen Japan Growth fund, both of which are 65% better over the past five years.

The world’s emerging markets, typified by Brazil, Russia, India and China, the so-called BRIC nations, have endured a tougher time of late. But to put this in perspective, China – the powerhouse of emerging markets – saw its economy, which has slowed in recent years, still expand by 7.8% year-on-year in the three months to September 2013. The BRICs alone house some 40% of the world’s population, alongside a wealth of natural reserves. As they prosper, it is predicted their citizens will spend more money, driving markets higher. And while the BRICs may have suffered, they are trading at valuation levels near 2008 credit-crunch lows, offering a compelling buying opportunity but only for intrepid investors. Hollands says: “With valuations pretty

COMMERCIAL PROPERTY

Commercial property fell out of favour when the credit crunch hit back in 2008 but as the UK economic recovery gathers pace, it has come back on to the radar. Investors can spread their cash over a wide variety of properties, such as offices and retail parks, and the rents paid by tenants can provide a stable income above inflation for yield-hungry investors. There is also scope for capital growth over the coming years, too.

bombed out, some commentators are signalling this area as a great buying opportunity. So for long-term investors, building emerging market positions over the coming months may be a perfectly sensible move – just don’t pile in blindly.”

EMERGING MARKETS FUND RECOMMENDATIONS: Modray says: “While often volatile in the short term, the longer-term outlook for emerging markets remains very enticing.” He rates the JPM Emerging Markets Income fund, which launched in 2012 and has a high-yield bias. Hollands’ core pick is Lazard Emerging Markets, with investments in Hong Kong and Indonesia. It is up 105% over five years while Connolly recommends JPMorgan Emerging Markets, up 85%.

COMMERCIAL PROPERTY RECOMMENDATIONS:

Hollands says: “We favour funds with exposure to long leases, high-quality tenants and London and the South East.” His main pick is the 4.4% yielding Henderson UK Property Fund. Modray rates L&G UK Property, which has a yield of 2.8%, while Connolly is backing Ignis UK Property with 3.5% income yield, which has also risen by 21% over the past five years.

WHAT DO I DO WITH MY MONEY? BlackRock Investment Institute offers these tips

BIG PICTURE

Helicopter View: We generally prefer equities over bonds, particularly in our base case Low for Longer scenario. Risk in Safety: Equities and bonds are becoming more correlated. This is making “safe” portfolios a lot more risky. Alternative Menu: Infrastructure, real estate and other alternatives are real diversifiers— and offer attractive yields in a low-rate world. Volatility on Sale: It is better to buy an umbrella before the rain. Volatility is cheap and many assets are expensive.

EQUITIES

Equity Value: Equities are not cheap but they are not (yet) in bubble territory. We generally favour Europe and Japan on valuation. Yield Caution: US yield plays will wrestle with tighter liquidity. Dividend growers still offer potential, as do non-US dividend payers. Emerging Idea: Our contrarian idea is to overweight emerging stocks vs. developed. Be selective and favour indirect exposures (multinationals).

FIXED INCOME

Carry On: Many bonds still look expensive and risky (especially government debt). Go for carry (yield) in a barbell strategy. Curve Plays: Low rates support short maturities. Tapering fears have hammered many long-term bonds back to reasonable valuations. Beware Traffic Jams: Easy to get into, hard to get out of. Liquidity could dry up fast in some credit markets when you need it most.

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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OPINION

The road towards a Banking Union remains bumpy and uncertain By Philippe Gudin de Vallerin, Chief European Economist, Barclays Research

he Banking Union in the euro area will start this year, with the establishment of the Single Supervisory Mechanism and the actual transfer of bank supervision to the SSM in November. In the first ten months of the year, the ECB will complete its Comprehensive Assessment of banks falling under its direct supervision. The second leg of the Banking Union (the Single Resolution Mechanism) is still under discussion. The agreement reached by finance ministers in December is very different from the European Parliament’s negotiating position, and we think discussions during the ‘Trilogue’ will be complicated. We cannot rule out the possibility that no final agreement will be reached before the end of the legislative period. A delay in the implementation of the SRM is therefore very likely, which would reduce the chance of further reduction in financial fragmentation in 2014. However, we believe that no agreement before the deadline would certainly be better than a bad agreement, such as the one reached at the Council. The Banking Union will start in November 2014, with the creation of the Single Supervisory Mechanism, in light of the adoption of the regulation creating it by the ECOFIN on 15 October following the vote of the European Parliament in September. We consider this to be a very important step in the right

direction. The ECB will be in charge of the supervision of all euro area banks, and even though the smaller banks will be supervised indirectly through their national supervisors, the ECB will be in a position to take over direct supervision at any time. Although the council orientation was agreed upon at the December 2012 meeting, three months after the Commission unveiled its initial proposal, an agreement with the European Parliament ending the so-called ‘Trilogue’ was reached only during the summer, while the vote in the plenary session of the Parliament to ratify the deal did not happen until September, i.e. nine months after the Council’s agreement. In the run-up to the establishment of the SSM, the ECB will undertake a “Comprehensive Assessment” (CA) of all banks that will come under its direct supervision that consists of three sets of checks: 1) risk assessment, which should provide an overview of how banks operate, how they are funded, how they are managed and the type of liabilities they have; 2) asset quality review (AQR), which has been the main focus lately and will contain detailed information on the asset side of the balance sheet; and 3) stress tests, which will be carried out in cooperation with the EBA. At the November ECOFIN, finance ministers issued a statement on backstop arrangements for the CA, but uncertainty persists regarding the possible use of the ESM as a European backstop and bail-in rules. The

28 Gold the international investment, finance & professional services magazine of cyprus

statement recalls the prevailing rules in the established pecking order: should a capital shortfall be identified, the bank should start raising capital in the markets, retaining profits, or restructuring; it is only when these processes are insufficient that a public financial backstop would be mobilized, starting with national frameworks, and if they are deemed insufficient, European backstops could then be used, under the form of financial assistance to the banking sector with a loan from the ESM to the sovereign. The statement included a paragraph on the possible use of the direct recapitalisation instrument agreed upon last June, but it is still unclear under which conditions it could be used. Moreover, it is still unclear whether private creditors would be involved prior to recapitalisations by the public sector. Although the statement recalls that the Bank Recovery and Resolution Directive (BRRD) bail-in tool will not yet be applicable at the time of the CA, it indicates that “burden sharing will apply, in full respect of EU State Aid rules, ensuring a level playing field and with a view to safeguard financial stability”. In a public statement, Commissioner Michel Barnier, echoed by ECB President Mario Draghi, indicated that bail-in rules would be implemented on a case-by-case basis, suggesting that bail-in would apply only for banks failing to comply with regulatory requirements in the AQR, but not to those that would be asked to raise more capital following the stress tests.

The Council’s position on the Single Resolution Mechanism On 18 December, the Council agreed a general approach on a Single Resolution Mechanism (SRM), which is very far from the original proposal made by the Commission in July 2013. The compromise of the Council consists of a draft regulation on the SRM (to be negotiated with the European Parliament, see below), and a commitment to negotiate an intergovernmental agreement by March 2014 on the functioning of a Single Resolution Fund. We believe that the agreement is complex and might prove inefficient in overcoming financial fragmentation and breaking the link between sovereigns and banks in the first place. Mario Draghi warned at the monetary hearing at the European Parliament just a few days before the Council agreed its position that “we should not create a Single Resolution Mechanism that is single in name only”, and added that the “decision making may become overly complex and financing arrangements may not be adequate”.

The Resolution Authority The resolution power would finally be granted to a “Single Resolution Board” (SRB), consisting of an executive director, four full-time appointed members and the representatives of national resolution authorities of all member states participating in the Banking Union (i.e. euro area members plus those joining voluntarily). The SRB would be responsible for the resolution of banks directly supervised by the ECB (the large banks) as well as cross-border banks, whatever their size. By contrast, national resolution authorities would remain in charge of the resolution of all other banks, unless the resolution requires the involvement of the Single Resolution Fund (SRF), see below. When a bank is failing, the board would adopt a resolution, either on its own initiative, or following a notification by the ECB acting as the Single Supervisor. The draft resolution would be prepared in the executive format of the SRB, i.e. the five permanent members and the representatives of the national resolution authority of the country where the bank is located. However, any decision that would involve the SRF under certain conditions would require a two-thirds majority of the board members (in plenary session) representing at least 50% of contributions. Some additional constraints have been added to ensure that a member state is not obliged to provide public support without its prior approval under national budgetary procedures. We believe that this mechanism has several

shortcomings. First, it is very complex in its decision making process and involves lots of different stakeholders, making a swift and efficient overnight decision difficult. Second, it does not fully break the link between national authorities and their banks, given the role of the executive format of the board. Last, it does not cover all banks in the euro area and, in particular, small and medium sized banks do not come under the remit of the SRM, even though many problems that occurred over the last five years have involved medium sized banks.

The Resolution Fund

The functioning of the resolution fund would be based on an intergovernmental agreement, which member states are supposed to negotiate before March 2014. This fund would initially consist of segregated national compartments, which would be gradually mutualised over a 10-year transition period, and this gradual mutualisation would be determined by the intergovernmental agreement. During this period, bridge financing would be available from national sources (backed by levies on bank) or from the European Stability Mechanism (ESM) according to existing procedures (i.e. loans to national governments and only a very limited use of the direct recapitalizations facility). At the end of the transition period, the fund is expected to reach a total amount of €55 billion. The intergovernmental agreement would also comply with the bail-in rules included in the just-agreed BRRD, which will enter into force on 1 January 2016. The ratification by member states representing 80% of contributions to the fund is necessary before this agreement is actually enforced. There again, we think the Council’s proposal fails to address the main challenges. Because of the only-gradual mutualisation, the link between the sovereign risk and banks’ risk will not be removed in the near term. Moreover, we believe that the total amount of the fund in the medium term is probably not enough, especially given the restrictions surrounding the use of the ESM. Last, the intergovernmental approach will limit the efficiency of the functioning of the fund, in our view.

The European Parliament’s position The ’Trilogue’ between the Council, the European Parliament and the Commission starts under the new Greek presidency of the EU, with a view to adopting the SRM before the end of the legislative period. The regulation creating the SRM is based on article 114 of the Treaty and therefore requires a qualified majority of the Council and a vote by the European Parliament. For that to happen before the end of the legislative period (May 2014), an agreement at the Trilogue needs to be reached in less than three months, a very short period when compared with the time that has been necessary for an agreement on the SSM (nine months) and especially since the position of the EP is currently very far from the Council’s position adopted in December, and is closer to the initial Commission’s proposal. Therefore, we believe that is very likely that an agreement will not be reached in time. The EP’s position was endorsed by the Committee on Economic and Monetary Affairs on 17 December 2013. It states that “the Commission, acting as the resolution authority, should be empowered to decide” on a bank resolution. The EP’s approach is a lot more centralised and much simpler than the Council’s. Resolution would be triggered by the supervisor, while the resolution board would evaluate the proposal and suggest that the Commission initiate resolution. The Commission would take the decision, while the board would decide on the details of the execution. All banks established in the participating members of the SSM would fall under the scope of the SRM, including small and medium sized banks which are only indirectly supervised by the ECB. Moreover, the Parliament suggests strengthening the resolution mechanism’s accountability, following the same model as the SSM and the extended the role of national parliaments in the system. The resolution fund would be gradually funded over the next 10 years with bank contributions, representing 1% of covered deposits, but unlike in the Council’s proposal, it would be set up within the legislative framework of the EU Treaties.

No agreement before the deadline would certainly be better than a bad agreement, such as the one reached at the Council the international investment, finance & professional services magazine of cyprus

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opinion

Governance Should Take Centre Stage There are good arguments to be made on both sides of the privatisation debate

espite the fact that the Memorandum of Understanding between Cyprus and the Troika includes the privatisation of state utilities, there has been vociferous opposition to this, backed by threats of industrial action. Putting aside the requirement to raise much-needed funds, there are good arguments to be made on both sides of the privatisation debate. Each can learn something from the other if maturity prevails in an environment of appreciative inquiry. For its part, the Troika argues that, in the addition to the hoped-for sale proceeds of €1.4 billion, privatisation will usher in a new era of professionalism and competition that will ultimately benefit the customer. Most neutral observers would agree that the wider public sector is inefficient and largely self-serving. Decades of political meddling and pandering to specific interest groups have seen monopolistic profits squandered, with the long-suffering customer being of least concern. Unfortunately, the private sector has shown itself to be no better. Bank of Cyprus and Cyprus Popular Bank were commercial companies listed on the Cyprus Stock Exchange and operating in a highly competitive environment. Yet both collapsed after catastrophic failures of corporate governance and gross mismanagement, leaving customers to shoulder much of the burden. This should serve as evidence that private ownership and competition is no guarantee of good governance or proper management focused on the best interests of the customer. We could also learn from the experience of other countries. In the UK during the 1990s, there was great public anger over the way newly-privatised utilities were operating as monopolies and breeding “fat cat” directors. The result was the Greenbury Report (since integrated into the UK’s Corporate Governance Code), which aimed at curbing excessive salaries and bonus payments despite, in some cases, worsening services. Two decades on, the UK’s experience of privatising state utilities and other infrastructure (rail, etc.) is still one of mixed results. While the privatisation of telecommunications is largely considered a great success, ever-increasing energy bills and the real possibility of future electricity blackouts after years of under-investment have dominated recent political party conferences. Incidentally, the third choice of ‘mutualised ownership’ has also proven not to be a fail-safe option with the UK’s Co-operative Bank requiring urgent recapitalisation of £1.5 billion amidst allegations of political

Private ownership and competition is no guarantee of good governance or proper management

By Petros Florides

interference, hubris and incompetence. This sounds all too familiar. In the final analysis, the question of whether to privatise public utilities in Cyprus may be moot as economic imperatives force our hand, despite the protests. But, as we have seen, the Troika’s claim that privatisation will lead to greater efficiency and customer satisfaction is not necessarily true. So, what can be done to help achieve this laudable desired outcome? A golden opportunity presents itself to introduce a mandatory environment of exemplary governance for all systemically important public interest entities – including those marked for privatisation. This would demonstrate to our international lenders and the rest of the world that Cyprus is serious about leaving its past economic crimes and misdemeanours behind. The affected entities (whether under public or private ownership in the future) should be required to comply with a new Governance Charter based on ethics, values and principles, reinforced by new laws and regulations, including the personal liability of directors for any breach in letter or spirit. Much-needed updates to Cypriot law should be informed by international developments such as the onus placed on key executives courtesy of Sarbanes-Oxley in the US and the requirement that directors pay due regard to a range of stakeholders under the UK Companies Act 2006. Importantly, this new environment must be fearless in tackling Cyprus’ cultural idiosyncrasies that have thwarted previous attempts at good governance. Boards and senior managers should be required to demonstrate active promotion and support of, inter alia: meritocracy, integrity, sustainability, ethical leadership, responsibility, customer empowerment and fairness. In addition, this should be done within a demonstrable framework of transparency and accountability, underpinned by a culture of robust enterprise-wide risk management. Anything less should be considered a dereliction of duty with the appropriate penalties imposed on individuals concerned. The government must stop trying to placate the same vested interests that have largely contributed to our current misfortune. Instead, it should use the 2-3 years provided in the privatisation roadmap approved by the Eurogroup to develop a new governance environment such as that described above. This would be the most effective way of resolving all issues and concerns held in good faith, and finally give Cyprus a chance of moving forward for the greater good.

info: Petros Florides is Regional Governance Advisor for World Vision International, and Executive Officer of World Vision Cyprus. He is also on the board of the Institute of Directors (Cyprus), co-founder of the Cyprus National Advisory Council for the Chartered Institute for Securities & Investments, co-founder of the Institute of Risk Management Cyprus Regional Group, and a Chartered Management Accountant. The views in this article represent those of the author and not any other individual or organisation. 30 Gold the international investment, finance & professional services magazine of cyprus

Godfried van Loo, Founder & Creative Director, Yocter, Netherlands

PROFILE

THE ACTION

BEHIND THE TRANSACTION W

ith over 9,000 employees in 17 countries, processing more than 15 billion transactions a year, who would have guessed that the leading card management solutions company TSYS (Total System Service Inc.) has a major office in Nicosia? Serving the vast bankcard market from our small Mediterranean island, TSYS is a perfect example of a thriving international company whose strategically located operations in Cyprus fuels its global success. Gold spoke to TSYS Director of European Licensing, Michalis Michaelides, to find out more about TSYS and its presence in Cyprus. By Effy Pafitis | Photos By Jo Michaelides

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Gold: Can you give us a few basic facts and figures about TSYS? Michalis Michaelides: TSYS is a leading payment solutions provider, providing both licensed and outsourced payment processing solutions to financial institutions, businesses and governments around the globe. Today we have approximately 400 clients in more than 80 countries. We are an independentlytraded NYSE listed company that continues year-on-year to be a financially strong company – 2012 revenues were around $1.87 billion and 2013 has been a special year for us as we celebrated our 30th anniversary. We are a Fortune 1000 company and were named one of the World’s Most Ethical Companies by Ethisphere magazine in 2013. We employ more than 9,300 team members, of which approximately 250 are based in Nicosia and we’re known for our ‘people-centered payments’ brand. On average, we can say the people of TSYS and our proven solutions help process 41 million payment transactions a day...more than 15 billion enterprise-wide transactions a year! Gold: What services does TSYS provide to customers? Can you explain the processes in the financial transaction system where TSYS is involved and how precisely? M.M.: One of our taglines is ‘The action behind the transaction’ which is exactly what we do…for every payment transaction whether it be for a cup of coffee or for a vacation, our solutions are often behind the scenes making it happen. Basically, we provide solutions for financial institutions issuing all types of products such as credit, charge, debit, prepaid and loyalty cards to consumers or commercial cards catering to corporate customers. We also provide acquiring financial institutions solutions for managing their ATM networks, their physical merchants and e-commerce merchants. Our solutions connect the banks, card networks (such as Visa, MasterCard and Amex), merchants and card holders to direct the movement of money across these multiple parties. A payment transaction at a point of sale (POS) when you swipe or tap your card at a physical merchant or pay over the

Our Cyprus office plays a crucial role in the overall support of our licensing business Internet (via a payment gateway) can be supported by TSYS, as we help process the payment message for real-time authorization and later for clearing and settlement. Our solutions help deliver the services you receive, through support for loyalty/ points schemes and new card applications, through to the fraud and risk management systems such as realtime SMS alerts that are put in place to protect you. Gold: What are your current available products? M.M.: In the licensing space, we provide a comprehensive suite of products under the PRIME brand. Clients have the ability to create a tailor-made solution that fits their needs and requirements. We also provide a comprehensive outsourcing business model in which the solution resides within one of our state-of-the-art data centres around the world. The breadth and depth of our solutions span the entire payments value chain, from card and merchant management, through to authorization, clearing and settlement, risk and fraud management, to loyalty and ecommerce. Gold: How does PRIME work and what makes it more efficient than other similar products? M.M.: PRIME supports both card issuing and merchant acquiring on a single platform. It supports multiple currencies, multiple languages, multiple products (e.g. credit, debit, prepaid, virtual, loyalty, instalment cards), multichannel acquiring and multiple payment schemes all on one platform rather than fragmented platforms. Its architecture is

designed to allow it to scale up and its unique integration layer has created an interoperable basis for a rapidly growing number of value added services that benefit and help differentiate our clients’ products and services and, ultimately, you the consumer. TSYS’ innovation and R&D investment in PRIME has created an extremely rich functionality that draws from a global footprint of approximately 130 clients across more than 70 countries, and this helps define it as a leading platform for innovation. Gold: For which type of client is PRIME the best solution? M.M.: That’s the beauty of PRIME; it’s scalable from small-to-mid-to large scale financial institutions. Multinational clients use it to centralize their cards operations across multiple geographies. Even retailers can use the solution to offer their clients financial products. We are using industry best practices for product development and have developed a unique integration layer that enables the platform to be enriched with much lower resource and financial investment. This allows it to be more cost-effective for a wider range of banks in addition to those with multi-country expansion strategies for both developed and emerging markets. I think it is worth mentioning that our Cyprus office plays a crucial role in the overall support of our licensing business. Gold: Why was Cyprus chosen as one of the 6 European locations of TSYS? M.M.: Our Cyprus office was part of Card Tech Limited (CTL), a UK-based payments company, which back in the early nineties developed the 1st PCbased card management system in the world, the forerunner for PRIME. The office was established in 1989 and Cyprus proved to be a great strategic location to support its expanding client base across multiple continents and it grew to be the largest office for Card Tech in the world. Card Tech was acquired in July 2006 – in what was considered one of the largest foreign investments in Cyprus’ IT business at that time – and the island continues to be a valuable location in terms of servicing clients across multiple regions and also in terms of the high level of quality IT expertise that

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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PROFILE

EDITH KESSLERCHARALAMBOUS, SENIOR DIRECTOR, PRIME LICENSING CLIENT SUPPORT SERVICES “Our corporate values are integrity, relationships – valuing their worth and respect for every individual – excellence, innovation and growth. Together they have built an extremely strong company culture and an even stronger, quality of service.”

KENNETH CUSCHIERI, DIRECTOR HUMAN RESOURCES “Our Cyprus office continues to contribute to TSYS’ global growth strategy. The level of expertise and high percentage of university-educated graduates has continued to make Cyprus a good location for talent over the years.”

EVELYNE MOUSSA, SENIOR DIRECTOR APPLICATION SYSTEMS “The development for our flagship licensed PRIME product – which has expanded across 70 countries spanning Europe, the CIS, Asia, the Middle East and Africa – has largely been borne out of Cyprus. This is a great testament to the ability of the local team.”

can be found locally. We service clients as far away as Brazil, Japan, Norway and South Africa from Cyprus. In total, we provide services to more than 100 clients in more than 70 countries, and our Cyprus office is key to the servicing of this extensive client base. Gold: How does the European market compare to that of the US, particularly when it comes to innovation in payments? M.M.: I would say that there are some marked differences; the US is the largest market in the world and because of this it has given rise to some of the world’s largest financial institutions as well as some of the largest service providers, such as TSYS. Until recently, the US payments market was largely driven by volume, not innovation. However, the advent of new technologies such as mobile is changing this landscape very rapidly. There is a tremendous amount of investment taking place at the moment in payments and we expect this to radically transform the way we transact. The merging of payments into the mobile space and into social networks is happening at such a frantic pace that no-one can really say what the payment landscape will look like in 5 years time. What I can tell you, though, is that the world will need reliable payment service providers such as TSYS to ensure that the payment experience remains smooth, safe and secure. Gold: Do the 250 people in the Cyprus office have a particular focus or expertise as a team? M.M.: The team has a spread of disciplines, ranging from project management and programming though to relationship account management, business development and sales support and business system analysis. The focus tends to be on the programming and delivery side. I think it is worth mentioning that some of our key R&D work on PRIME is being done out of our Cyprus office. Gold: Do the employees of the Cyprus branch support or collaborate with their counterparts in other TSYS locations? M.M.: Most definitely. We are part of a global network of 23 offices across 15 countries which support our clients through multiple touch points. We make extensive use of the concept of

virtual teams, where team members from multiple locations collaborate to deliver a project. Gold: How valuable is the Cyprus office in the portfolio of TSYS locations? M.M.: TSYS fosters a strong peopleculture so team members are valued across the entire company and our Corporate Executives always cite TSYS team members as the ‘secret sauce’ that serves to differentiate us, along with our solutions, as a leading payments partner. I would also mention that the Cyprus office serves the growing portfolio of EUbased clients for TSYS very effectively. Gold: Has your business been affected at all by the events of March in Cyprus? M.M.: Overall no, as our services out of Cyprus are globally-focused. However, we do support some of the Cyprus banks which were affected. On the other hand, I’ve been impressed by our individual team members’ response to the Cyprus community. They ran one charity drive for families in need in March and are running another one now for this holiday season to support the Alkionides charity – all initiated by the team members themselves. Gold: Do you have any plans for further expansion or investment, either in Cyprus or internationally? M.M.: Yes, in Cyprus we’re investing in new modern facilities to support our large team. As a company, we also plan to grow through acquisitions and in July 2013 we completed the acquisition of NetSpend for approximately $1.4 billion. It is a reloadable prepaid debit card and related financial services company catering to under-banked consumers in the United States. Gold: What can we expect from TSYS Inc and TSYS (Cyprus) in the near future? M.M.: Good things. We’re heavily focused on being an innovator in the payment space and we definitely have the expertise and bright-minded people in our Cyprus-based team members and beyond to continue to develop our leading technologies. The world of payments is radically changing through the integration of mobile and TSYS will be at the forefront of all of these changes.

34 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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opinion

The Bitcoin Adventure A virtual currency is the way forward but it needs to be coordinated and controlled by central banks all over the world.

uring the last few weeks we have been bombarded with information regarding Bitcoin, the “new” virtual currency. There are those who believe that Bitcoin is the way forward, a currency impenetrable by external political factors and safer than conventional means of transacting. In fact, several Cypriot enterprises are taking steps to introduce Bitcoin to consumers by making the virtual currency an acceptable means of payment. At the same time, investors have been fascinated by the returns that Bitcoin promises to pay as a result of exchange rate fluctuations among conventional currencies. It would be unwise, however, to rush into the adoption of a virtual means of payment without knowing the plagued history of Bitcoin. Bitcoin was first introduced to the world in November of 2008 when the global recession was a fact. The founder used the alias Satoshi Nakamoto and seemed to be well-versed in mathematics and cryptography. He created a peer-to-peer network where block chains were transmitted through a decentralized system in order to verify transactions conducted by Bitcoins. The currency could be essentially “mined” by selling a user’s computer power to the established network. In 2010, Bitcoins started trading publicly and could be obtained from Mt.Gox, the first Bitcoin exchange established in Tokyo, Japan. Soon, a major vulnerability was discovered. In August 2010, the network failed to verify transactions before these were sent in blocks and as a result 184 billion Bitcoins were “illegally” created, leading to a crash of the market. Mt. Gox eventually reversed the unverified transactions but it was now clear that the system was vulnerable. Nakamoto, who never actually revealed his real name nor did he make any public appearances, disappeared just before the crash, making this event very suspicious in the eyes of the traders. In the meantime, Bitcoin trading took on a life of its own and survived despite the network vulnerability and the disappearance of its founder. Exploiting the global recession, the Bitcoin market was valued at $206 million in June 2011. At that time another weakness of the system was revealed when Mt. Gox

Bitcoin users were overjoyed to hear about the Troikaimposed measures in Cyprus

By Dr. Constantinos Charalambous

admitted that 60,000 usernames and passwords had been leaked. As a result, 600 users had their Bitcoin balances stolen overnight. Further, in 2013, the network failed again when computers running different versions of software could not verify a block, creating two different transaction logs every time a purchase was made. These two logs meant that a user could exploit the system and carry out two transactions with the same money.Yet despite these weaknesses, Bitcoin trading has persisted as people have lost confidence in conventional currencies. In fact, Bitcoin users were overjoyed to hear about the Troika-imposed measures in Cyprus. Declaring a bank holiday and confiscating money from deposits meant that more people worldwide would eventually turn to Bitcoin as a means of securing their money. Conventional currency deposits were no longer safe. This was a landmark in Bitcoin’s history and caused the value of a unit of the virtual currency to skyrocket from $100 on 1 April to $200 within a week. Bitcoin value bounced back twice in 2013 after the FBI arrested a narcotics dealer who accepted Bitcoins as a means of payment and later in the year when the People’s Bank of China did not allow banks to handle the virtual currency. It is safe to say that Bitcoin would not even exist if the economic circumstances were more favourable. It has been proven more than once that the decentralized network has weaknesses which could be exploited by a cryptographer to extract or even produce a large amount of Bitcoins. In either case, the market will crash leaving many investors disgruntled. In my view, a virtual currency IS the way forward, but it needs to be coordinated and controlled by central banks all over the world. Without the proper security measures in place, a virtual currency is destined to be susceptible to anyone with the knowledge to hack a computerp; more so, in a decentralized network. There is no doubt that some will be quick to ride the Bitcoin wagon, hoping to receive unusually high returns. A word to the wise: never forget that an investment which promises to pay a high return is a risky one ten times out of ten!

info: Dr. Constantinos Charalambous is a Professor of Economics and Head of the Department of Research and Development at PA College in Larnaca. He maintains a popular

economic blog at www.everyday-economist.com.

the international investment, finance & professional services

Gold 35

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the international investment, finance & professional services magazine of cyprus

Gold 37

interview

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he e is t n. He h e r whe regio iffice e EMEA 11. Prev o n o 0 h Lond ctice in t 2088 – 2 s Audit e s ’ C a w et r .H d in P ervices p ader from ital Mark22 years audit of e s a p e b S l r a L l s a o i C f s a ica/ b ones e Financi l Service king and partner r the glo of Amer dits of J s i r o Ch er of th inancia on Ban a PwC rtner f e Bank the au ationlead the UK F the Lond has been gning pa ner for th ialised in or multin treasury was , he led ears. He ement si ead part as spec s of maj f global ters ously p for 5 y e engag e EMEA l s Jones hoperation audits o and Reu terest Grou rrently th s also th dit. Chri reasury er on the e, Sony S. His in ion of is cu plc. He i group au global t ent partn rid, Roch nder IFR Associat hairs the ICAP ill Lynch advice to ngagem ational G edging u nt in the e also c C, and Merr provides een the e Merck, N ence of h volveme sident. H within Pw Jones and e has b r Nokia, e experi active in as its pre bn fund rs. Chris of the als. Hations fo extensiv led to an g a year p a £1.5 veral yea Faculty memoper re he has reasury includin also set u ns for se Services d he is a whe rporate t asurers, ttee. He operatio inancial Wales an in co orate Tre y Commi cts of its of the F and and ip team. Corp Advisor key aspe ommittee s in Engl leadersh ACTs aged all visory C countant service man n the Ad tered Ac financial sits otute Char C global Insti f the Pw ber o the international investment, finance & professional services magazine of cyprus

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The Russian Federation has the largest share of the world’s natural gas reserves

THE

USGS estimates that Cyprus may have up to

Natural gas is affordable, reliable, efficient and available

Μι Ψωνι α Μη α φορα να βδοΜ Ή κα το αδα;θε

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$1.6 trillion

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The KPMG Academy is committed to assist you in overcoming the challenging times we are facing by scheduling new seminars which are relevant to today’s environment. The titles and the dates of these seminars will soon be announced.

Natural gas is primarily used for electricity generation, industrial, residential, and commercial sectors

Natural gas emits up to 60% less CO2 than coal when used for electricity generation

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Cyprus’ block 12 first LNG export: Q3/2019

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Worldwide consumption of natural gas

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european parliament

European Parliament

Draft Report Slams Troika

n Cyprus, rapporteurs Othmar Karas (Austria) and, Liem Hoang Ngoc (France) note that “at the beginning of the EU-IMF assistance programme in 2013, speculations about the systemic instability in the Cypriot economy had been ongoing for a long time, owing inter alia to the exposure of Cypriot banks to overleveraged local property companies, the Greek debt crisis, the downgrading of Cypriot government bonds by international rating agencies, the inability to refund public expenditure from the international markets, and the initial reluctance of the

government to restructure the troubled financial sector.” The draft report also notes “the initial request for financial assistance was made by Cyprus on 25 June 2012, but differences of positions as regards the conditionality, as well as the rejection of an initial draft programme by the Cypriot Parliament, delayed the final agreement on the EU-IMF assistance programme until 24 April (EU) and 15 May 2013 (IMF), respectively, and on 30 April 2013 the Cypriot House of Representatives finally endorsed the ‘new’ agreement.” The European Parliament “deplores the

42 Gold the international investment, finance & professional services magazine of cyprus

The European Parliament has issued a highly critical draft Enquiry Report on the role and operations of the Troika with regard to the euro area programme countries.

unpreparedness of the EU and international institutions, including the IMF, for a sovereign debt crisis of a large magnitude inside a monetary union; regrets the lack of transparency in the MoU negotiations; notes the necessity to evaluate whether formal documents were clearly communicated in due time to the national parliaments and the European Parliament; further notes the possible negative impact of such practices on citizens’ rights and the political situation within the countries concerned.” The rapporteurs also points to the “unacceptable level of youth unemployment in the four Member States under assistance

programmes”, noting especially to the sharp increase in youth unemployment in Greece, Cyprus and Portugal, and instructs the President of the European Parliament to forward the draft resolution to the Council and the Commission, and to the European Central Bank. They emphasise that the draft report is a basis for subsequent political discussions, delegations to relevant Member States and hearings of various stakeholders in the beginning of 2014. “It records the history and state of play, but it does not attempt to draw final conclusions or recommendations which are to be drawn following substantial work in the coming months.” In relation to the report, the two rapporteurs, supported by Jürgen Klute (Germany) and Nils Torvalds (Finland), will be visiting Cyprus on 9-10 January and meeting, among others, House Speaker Yiannakis Omirou, Members of the House of Representatives, Finance Minister Harris Georgiades, representatives of the Central Bank of Cyprus, depositors in Laiki bank and Bank of Cyprus, former Finance Ministers and the members of the Committee of Enquiry that looked into the causes of the financial crisis in Cyprus. In the report, a proposed Motion for a European Parliament Resolution on the role and operations of the Troika (ECB, Commission and IMF) with regard to the euro area programme countries, states that the European Parliament: 1 Considers that the precise triggers for the crises differed in all four Member States; 2 Notes that, prior to the beginning of the EU-IMF assistance programme initiated in the spring of 2010, there was a dual fear associated with the ‘insolvency’ and ‘non-sustainability’ of the public finances of Greece as a result of the constantly declining competitiveness of the Greek economy and decades of imprudent fiscal policy, with the government deficit reaching 15.7% of GDP in 2009, and the debtto-GDP ratio continuing on an upward trend since 2003 when it stood at 97.4%, reaching 1297% in 2009 and 156.9% in 2012; 3 Notes that Greece entered recession in Q4 2008; notes that the country ex-

perienced six quarters of negative GDP growth rate in the seven leading to the assistance programme being activated; notes that there is a close correlation between the increase in public debt and the cyclical downturn, with public debt increasing from EUR 254.7 billion at the end of Q3 2008 to EUR 314.1 billion at the end of Q2 2010;

“The European Parliament deplores the unpreparedness of the EU and international institutions, including the IMF, for a sovereign debt crisis of a large magnitude inside a monetary union” 4 Notes that, at the beginning of the EUIMF assistance programme, the Portuguese economy had suffered from low GDP and productivity growth for a number of years, and that this lack of growth, combined with the impact of the global financial crisis, had resulted in a large fiscal deficit and a high debt level, driving up Portugal’s refinancing costs in capital markets to unsustainable levels; notes in this context that in 2007 Portugal’s growth rate reached 2.4%, its fiscal deficit 3.1%, its debt level 62.7% and its current account deficit 10.2% of GDP, with the unemployment rate standing at 8.1%; 5 Notes that, at the beginning of the EU-IMF assistance programme, the Irish economy had just suffered a banking crisis of unprecedented dimensions, causing Irish GDP to fall by 6.3% in 2009 (1.1% in 2010) from a positive growth level of 5% of GDP in 2007, unemployment to increase from 4.7% in 2007 to 13.7% in 2010 and - its most detrimental impact - the government balance of payments to experience a deficit in 2010 of 30.6%,

down from a surplus in 2007 (0.2%); further notes in the decade prior to the assistance programme that the Irish economy experienced a prolonged period of negative real interest rates; 6 Notes that, at the beginning of the EUIMF assistance programme in 2013, speculations about the systemic instability in the Cypriot economy had been ongoing for a long time, owing inter alia to the exposure of Cypriot banks to overleveraged local property companies, the Greek debt crisis, the downgrading of Cypriot government bonds by international rating agencies, the inability to refund public expenditure from the international markets, and the initial reluctance of the government to restructure the troubled financial sector;

EU-IMF financial assistance, content of the MoUs and policies implemented 7 Notes that the initial agreement between the Greek authorities on the one side and the EU and IMF on the other was adopted on 2 May 2010 in the relevant MoUs containing , the policy conditionality for EU-IMF financial assistance; further notes that, following five reviews and the insufficient success of the first programme, a second programme had to be adopted in March 2012, which has been reviewed three times since; 8 Notes that the initial agreement between the Portuguese authorities on the one side and the EU and IMF on the other was adopted on 17 May 2011 in the relevant MoUs containing the policy conditionality for EU-IMF financial assistance; further notes that the Portuguese programme has since been reviewed regularly, leading to the combined eighth and ninth quarterly reviews of Portugal’s economic adjustment programme; 9 Notes that the initial agreement between the Irish authorities and the EU and IMF was adopted on 7 December 2010 in the relevant MoUs containing the policy conditionality for EU-IMF assistance; further notes that the Irish programme has since been reviewed regularly, leading to a twelfth and final review on 9 December 2013 marking the imminent completion of the Irish programme; 10 Notes that the initial request for finan-

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european parliament Othmar Karas ΜΕP (Austria)

cial assistance was made by Cyprus on 25 June 2012, but that differences of positions as regards the conditionality, as well as the rejection of an initial draft programme by the Cypriot Parliament, delayed the final agreement on the EU-IMF assistance programme until 24 April (EU) and 15 May 2013 (IMF), respectively, and on 30 April 2013 the Cypriot House of Representatives finally endorsed the ‘new’ agreement; 11 Notes that the IMF is the global institution tasked with providing states experiencing balance of payment problems with conditional financial assistance; points to the fact that all Member States are members of the IMF and have therefore the right to request its assistance; 12 Deplores the unpreparedness of the EU and international institutions, including the IMF, for a sovereign debt crisis of a large magnitude inside a monetary union; 13 Acknowledges, however, that the immense challenge the Troika faced leading to the crisis was unique as a result of the poor state of regulation of financial services, large macroeconomic imbalances, and the fact that a number of instruments such as external devaluation were not available due to the constraints of monetary union; notes, moreover, that time was running out, legal obstacles had to be cleared, fear of a melt-down of the euro area was palpable, political agreements had to be reached, the world economy was in a downturn, and a number of countries which were intended to contribute financial support had seen their own public and private debt increase in alarming ways; 14 Regrets the lack of transparency in the MoU negotiations; notes the necessity to evaluate whether formal documents were clearly communicated in due time to the national parliaments and the European Parliament; further notes the possible negative impact of such practices on citizens’ rights and the political situation within the countries concerned; 15 Deplores that recommendations contained in MoUs mark a departure from the thinking initiated by the Lisbon strategy and the Europe 2020 strategies); points out however that this can be partly explained, even if not fully justified, by the fact that

“The European Parliament regrets the lack of transparency in the MoU negotiations”

programmes had to be implemented under considerable time pressure in a difficult political environment; 16 Regrets that the programmes for Greece, Ireland and Portugal comprise a number of detailed prescriptions for health systems reform and expenditure cuts; regrets that the programmes are not bound by the Charter of Fundamental Rights of the European Union and the Treaties, including Art. 168(7) TFEU;

The current economic and social situation 17 Deplores that since 2008 the income distribution inequality has grown above average in the four countries and that cuts in social benefits and rising unemployment are raising poverty levels; 18 Points to the unacceptable level of youth unemployment in the four Member States under assistance programmes; points especially to the sharp increase in youth unemployment in Greece, Cyprus and Portugal; 19 Welcomes the end of the programme for Ireland and the expected end of the programme for Portugal; regrets the lack of progress in Greece despite unprecedented reforms having been undertaken;

Troika – economic dimension – theoretical basis and impact of decisions 20 Underlines that adequate economic models are necessary in order to produce credible and efficient adjustment programmes; deplores that adequate statistics and information were not always available; points out that in Greece largescale fraud was happening in this respect in the years preceding the setting up of the programme; 21 Notes that financial assistance achieved in the short run the avoidance of a disorderly default on sovereign debt that would have had extremely severe economic and social consequences, as well as spill-over effects for other countries of an incalculable magnitude, and possibly the forced exit of countries from the euro area; further notes that there is no guarantee this will be avoided in the long run; also notes that the financial assistance and adjustment pro-

44 Gold the international investment, finance & professional services magazine of cyprus

gramme in Greece have not prevented an orderly default nor contagion of the crisis to other Member States; deplores the economic and social downturn which became evident when the fiscal and macroeconomic corrections were put into place; 22 Notes that from the onset the Troika published comprehensive documents on the diagnosis, the strategy to overcome the problems, a set of policy measures elaborated together with the national government concerned, and economic forecasts, all of which are updated on a regular basis; 23 Deplores however the sometimes over-optimistic assumptions made by the Troika, especially as far as growth is concerned, but also the insufficient recognition of political resistance to change in some Member States; deplores the fact that this also affected the Troika’s analysis of the interplay between fiscal consolidation and growth; notes that as a result fiscal targets could not be fulfilled; 24 Regrets that the reduction of structural deficits in all programme countries since the start of their respective assistance programmes has not yet led to a reduction in the ratios of public debt to GDP; underlines that the ratio of public debt to GDP has instead sharply increased in all programme countries; 25 Considers that fiscal multipliers are difficult to assess with certainty; recalls in this respect that the IMF admitted to underestimating the fiscal multiplier in its growth forecasts prior to October 2012 but that the Commission stated in November 2012 that forecast errors were not due to the underestimation of fiscal multipliers; points out that this expression of public disagreement between the Commission and the IMF was not followed up; 26 Points out that while the IMF’s stated objective in its assistance operations within the frame of the Troika is internal devaluation, the Commission has never clearly endorsed this objective; notes that the objective emphasised by the Commission in all four programme countries under enquiry has rather been fiscal consolidation;

Liem Hoang Ngoc ΜΕP (France)

“The European Parliament points especially to the sharp increase in youth unemployment in Greece, Cyprus and Portugal”

27 Considers that too little attention has been given to alleviating the negative impact of adjustment strategies in the programme countries; 28 Stresses that national-level ownership is important, and that failure to implement agreed measures has consequences in terms of the expected results;

Troika –the institutional dimension and democratic legitimacy 29 Notes that the Troika’s mandate has been perceived as being unclear and lacking transparency; 30 Points out that due to its ad hoc nature there was no appropriate legal basis for setting up the Troika on the basis of Union primary law; 31 Notes the admission by the President of the Eurogroup before the European Parliament that the Eurogroup endorsed the recommendations of the Troika without considering their specific policy implications; 32 Takes note of the dual role of the Commission in the Troika as both an agent of Member States and an EU institution; warns that conflicts of interests may therefore exist within the Commission between its role in the Troika and its responsibility as a guardian of the Treaties, especially in policies such as competition and state aid; 33 Points equally to a possible conflict of interest between the current role of the ECB in the Troika as ‘technical advisor’ and its position as creditor of the four Member States as well as its mandate under the Treaty; 34 Notes that the ECB’s role is not sufficiently defined, as it is stated in the ESM Treaty that the Commission should work ‘in liaison with the ECB’, thus reducing the ECB’s role to that of a provider of expertise; further notes that the ECB mandate is limited by the TFEU to monetary policy and that the involvement of the ECB in any matter related to budgetary, fiscal and structural policies is therefore on uncertain legal ground; 35 Points to the generally weak democratic accountability of the Troika in programme countries at national level; notes however that this democratic accountability varies

between countries, depending on the will of national executives; 36 Notes that formal decisions are made by both the Eurogroup and the IMF, with a crucial role now given to the ESM as it is the organisation responsible for deciding on financial assistance, thus putting governments, including those of the Member States directly concerned, at the centre of any decisions taken; 37 Points to the fact that the ESM is intergovernmental by nature, is bound by the unanimity rule, and is subject to political influence exerted by finance ministers, heads of state and government as well as national parliaments;

Proposals and Recommendations 38 Reiterates its call for all decisions related to the strengthening of the EMU to be taken on the basis of the Treaty on European Union; takes the view that any departure from the Community method and increased use of intergovernmental agreements would divide and weaken the Union, including the euro area; 39 Stresses that the ESM should evolve towards Community-method management as provided for in the ESM Treaty and demands that the ESM be made accountable to the European Parliament including with respect to decisions to grant financial assistance, in order to exert democratic accountability over the ESM; 40 Urges that in the short run consideration should be given to amending the ESM Treaty in order to allow standard decisions to be taken by a qualified majority rather than by unanimity, and to allow for precautionary assistance to be given; 41 Calls for the involvement of social partners in the design and implementation of adjustment programmes, current and future; 42 Demands that the Troika take stock of the current debate on fiscal multipliers and consider the revision of MoUs on the basis of the latest empirical results; 43 Is concerned, in particular, to improve the accountability of the Commission when it acts in its capacity as a member of the Troika; requests that the Commission representative(s) in the Troika should be

heard in the European Parliament before taking up their duties and should be subject to regular reporting to the European Parliament; 44 Calls for a reassessment of the decision-making process of the Eurogroup, amending MoUs with the Member States receiving EU-IMF financial assistance to include appropriate democratic accountability at both national and European levels; calls for European guidelines to be established in order to ensure appropriate democratic control on the implementation of measures at national level; 45 Is of the opinion that the option of a Treaty change allowing for the extension of the scope of the present Art. 143 TFEU to all Member States, instead of being restricted to non-euro Member States, should be explored ; similarly, takes the view that the option of a Treaty change to create a European Monetary Fund within the Community framework as an alternative to the IMF should also be explored; further considers that other issues to be evaluated include the current institutional framework of the Troika, the involvement of the ECB in the review of the programmes and the mandatory involvement of the IMF in euro area financial assistance programmes as enshrined in the ESM treaty; 46 Instructs its President to forward this resolution to the Council and the Commission, and to the European Central Bank.

“The European Parliament calls for the involvement of social partners in the design and implementation of adjustment programmes, current and future”

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46 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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INTERVIEW

CONNECTING

THE Falling on difficult times, feeling jaded, lacking succession planning: these are all good reasons to feel disillusioned with one’s business. But hope is at hand. Marios Chiromerides, Managing Director of Connecor Investments, explains how the newly opened Nicosia-based office of this international transfer agency aspires to partner buyers and sellers alike, to mutually beneficial ends. With Connecor connecting all the dots, the process of exiting a business is entering a new era. By Chloe Panayides Photos By Jo Michaelides

Gold: What are Connecor Investments’ main practices and what do you offer clients? Marios Chiromerides: Connecor is a business transfer agency. We act as intermediaries between owners and future owners of small and medium-sized businesses (SMEs), tangible and intangible assets located in Europe, Latin America, Southeast Asia and the Middle East, and we assist them during the process of transfer of ownership. We help current business owners successfully plan and execute a transfer of, or exit from, their business or business assets by finding new owners (successors, MBI/MBO, buyers or investors), while they can keep on doing what they do best: i.e. staying focused on running their business and making sure it continues to operate smoothly. An exit strategy is a comprehensive road map that enables business owners to successfully exit a privately held business. It asks and answers all the critical questions that business owners and their advisors must consider when the time has come for them to part with a business. We are in a position to estimate the value of a business and to look for interested buyers. Moreover, we can handle initial potential buyer interviews, discussions and negotiations with prospective buyers, facilitate the progress of due diligence, and generally assist with the business sale and transfer processes. Together with financial and legal experts, we will develop a tailor-made solution to ensure the transaction is carried out in the most tax-efficient manner. We will draw up the necessary contracts and protect all

parties involved against unforeseen events, future claims and contingencies. Finally, we help interested investors in finding the appropriate company, business or assets for them to acquire. Gold: What is Connecor’s core mission? How do you ensure – in both daily execution and wider planning – that it is fulfilled? M.C.: Our mission is to connect buyers and sellers of businesses. Selling a business is a process. The more complicated a business is, the more complex issues will arise during the

A BUYER WILL NEVER PAY FOR A BUSINESS ON ITS POTENTIAL BUT RATHER ON WHAT HAS BEEN ACHIEVED SO FAR

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transaction and, of course, the more time is required to successfully complete this process. In addition, each owner of a business has different circumstances underlying his or her decision to exit the business, so the timeframe for completion of each transaction can vary from one week to several years. Therefore, methodology is very important. We take a step-by-step approach to selling a business by understanding business value drivers and providing an opinion of value; by performing market research to identify potential buyers; by preparing promotional material; by making preliminary approaches and short-listing interested buyers; by conducting negotiations and deal structuring, and, finally, by coordinating all the professionals involved to close the deal. To fulfil our mission, Connecor has designed a full package of business transfer services covering legal, accounting, tax, commercial and other issues in mid-market transactions. Our most important asset is our network, with our own offices in Barcelona, Amsterdam, London, Singapore, Shanghai and Hong Kong as well as 40 associated offices in over 30 countries worldwide through Amicorp, our major shareholder. We have the ability to structure complex, international transactions and close deals that are beneficial to all parties involved, because we can offer a total package including tax-friendly solutions, legal structuring and commercially viable operations. Finally, confidentiality is key to our success. Gold: Clear strategy and careful planning seem to be of paramount importance to Connecor. Will you be leading by example in the Cypriot market? M.C.: A very well-thought strategy is the basis for commencing a business and it is perhaps the most important ingredient in making the business successful. A clear strategy, however, must also be accompanied by a touch of flexibility, so as to adjust planned actions and meet targets. Whereas Business Brokerage is a very widespread and organised service in the USA – and also moderately active in Europe – it remains to date a fairly under-represented service in Cyprus. Competition for transactions in the SME market is quite mixed and can be sometimes confusing as a number of parties attempt to offer this service, but only a few specialise in the way Connecor does. Connecor has a methodology of doing things:

we offer a niche service by focusing on serving SMEs and assets in that category, which is a difficult market to serve, especially for bigger transactional offices. We have our own methodology of approaching clients, of promoting businesses and closing deals. A new way of doing things can prove successful if communicated correctly and if the client is willing to be educated on the most beneficial way of selling a business. We are here to stay and we’ll invest time in educating our clients on how they can focus on the business while we focus on the deal!

DUE TO THE CRISIS, BUSINESSES ARE ACTUALLY SELLING AT A DISCOUNT Gold: Speaking of the deal, how big a challenge is it to partner a buyer and a seller? What does the process involve? M.C.: The search for serious buyers or sellers of businesses is a complicated and timeconsuming process, which makes partnering them an even more interesting challenge! Most business owners don’t really know where to find a successor or buyer of their business. What most business owners need to understand is that planning how they exit their business is even more important than how they started it! Preparation is key to selling a business. The most common mistake business owners make is that they spend their life and savings building a business, which might not be ready to be sold when the time comes for them to exit. They end up not knowing when to exit the business; most of the time, they don’t even know the real value of their company and so they end up becoming reactive rather than proactive. In the case of a buyer, acquisitions can satisfy a number

of goals if approached and executed as part of a long-term strategy. Some of the typical reasons executives pursue acquisitions can be: to accelerate revenue growth or capture market share; to enter an adjacent market; to expand into a new geography; to access new customers or technology; to strengthen their talent pool; reduce their costs, or perhaps to outwit a competitor. A buyer will never pay for a business on its potential but rather on what has been achieved so far. They want to buy the future but only pay for the history! Our company is in a position to identify buyers and sellers better than any other organisation. To “buddy” a business successfully with a future owner, you firstly need to prepare the business, present its selling points appropriately and ensure that the future owner is convinced that he or she is buying something worth paying for. If the business owner is open to listening to advice, then he or she has a good chance of selling the business. Gold: How have clients responded to Connecor so far? What feedback have you received? M.C.: Despite our minimal marketing efforts over the past three months, I have been approached by a good number of clients from a number of different industries who are in need of our services. Some businesses lack succession planning, some need to sell because of owner fatigue, and others are facing financial problems due to the crisis. In addition, there are many interesting projects in the pipeline that need funding to be completed. All these are potential clients for Connecor. On the one hand, the current economic environment is not favourable for merger and acquisition (M&A) activity, due to serious financing constraints and GDP corrections. On the other hand, M&A can be favoured if the right sellable business with inherent value is identified, is selling at a reasonable price, and is matched with the right investor. Our job is to work as transaction brokers, for the deal to be completed. The toughest question that every business owner must address is whether they are building a business worth buying. They need to look at their business from a buy-

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INTERVIEW

er’s perspective, without much sentiment. Furthermore, during a transaction, the owner needs to be your partner in the whole selling process. Gold: With Cyprus having suffered a notoriously difficult year, why the decision to open an office in Cyprus? How far is Cyprus an attractive base? M.C.: Connecor already has six offices worldwide, with Cyprus being our seventh. The market has enough interest in terms of businesses and assets for sale that will attract international investors but, most importantly, we are here to close deals originating from the Middle East, Russia, and possibly Greece. The geographical advantage of Cyprus to the Middle East and Europe is important, as well as the strong relationships of Cyprus with Russia and countries in the Middle East. These markets are already familiar with the favourable tax regime in Cyprus and the widely-used DTTs for structuring. Thus it made perfect sense to open the office in Cyprus, especially at this point in time in view of the prospects of oil and gas findings. Gold: Having most recently held the position of general manager of The Mall of Cyprus for over six years, why the transition to Connecor? What present and future opportunities do you perceive in the Cypriot market for Connecor? M.C.: Working for the Shacolas group and setting up and managing The Mall of Cyprus from the beginning was a great experience for me. This special project will always be in my heart. It remains, to date, the first and most successful shopping mall in Cyprus, and I am definitely very proud to be a part of its history. However, after six plus years in one position, no matter how important this position can be, there is a limit to how much value one can add and a limit to how much one can learn. The time had come for me to move on, to do something new and equally exciting! Connecor gave me the opportunity to move on from managing and growing a business, into another dimension: interviewing, advising, promoting, selling, and finally transferring a business. One of my personal goals in the next five years is to actually be able to sell at

CONFIDENTIALITY IS KEY

TO OUR SUCCESS

least one shopping mall in the region! Even more importantly, though, my new job allows me to have international exposure and interaction. Gold: With the Cyprus office of Connecor focused on local transactions, as well as those in Russia and the Middle East, what energy is being felt between Russia and Cyprus, and the Middle East and Cyprus, for future business growth? Is Connecor supplying for the demand, or actually driving the growth? M.C.: Cyprus has always been a good business centre for investment to and from Russia, and now increasingly for the Middle East. Our highly-educated workforce, strategic location, favourable tax regime, large number of double taxation treaties, excellent professional services, infrastructure and many other advantages mean that Cyprus is a place for doing business. Current sentiment is not as great as one would wish in view of the Eurogroup aftermath, and growth will take some time to return. Due to the crisis, businesses are actually selling at a discount. SMEs are still beautiful and are becoming even more interesting due to the potential of technology transfer. For a good business, there is always a good price and a good time to sell, but in order to get maximum value from selling a business you must get an expert to do it. Connecor will be a connecting bridge between investors and business sellers and will hopefully be able to contribute to growth in the years to come. Gold: What are your thoughts on the idea of a concerted Cyprus, with all members of the business community working to collectively promote Cyprus as a trusted, reliable business environment? How might this be achieved? M.C.: That would be ideal and it’s partly taking place already. When you take away

politics from business, it’s easier to have one voice. We are all international business ambassadors and we should definitely all work in union to promote Cyprus, especially because Cyprus has a business environment worth promoting. To name a few, the efforts of associations like the Cyprus Chamber of Commerce and Industry (CCCI), the Cyprus Investment Promotion Agency (CIPA), the Cyprus International Business Association (CIBA), the Cyprus-Russian Business Association (CYRUBA), and other bilateral Cyprus-country associations are contributing towards this goal. The effort needs to be collective and orchestrated towards that direction. The Government also seems to be making a major step in the right direction with visits from the President and other government officials to countries that can prove good investors for Cyprus. Constant and updated dissemination of information to all business parties allows the concept of a concerted Cyprus to flourish. Gold: Finally, what are Connecor’s goals for 2014? What do you hope to achieve? M.C.: The Cyprus office is creating a quality portfolio of SMEs and Asset client listings that we will be engaging, promoting and hopefully eventually selling in Cyprus, the Middle East, Russia and Greece. Furthermore, our regional focus will allow us to extend our lists of interested buyers and will enable us to create specific business search engagements for them. We will build branding and we aim to position Connecor as one of the leading intermediaries for SME transactions, by utilising our international network of offices and associates. Our global presence will allow us to identify opportunities in a variety of markets. Hopefully we will contribute in our own way in restarting the economy and ensuring that Cyprus maintains a strong position on the business map.

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technology

Simplify, Standardize, Automate Oracleâ&#x20AC;&#x2122;s three-word key to success

50 Gold the international investment, finance & professional services magazine of cyprus

For more than three and a half decades, Oracle has been the leader in database software. And as it has further developed technologies and acquired best-in-class companies over the years, that leadership has expanded to the entire technology stack, from servers and storage, to database and middleware, through applications and into the cloud. As Oracle Cyprus celebrates its 10th anniversary, Gold spoke to Michel Clement, Vice-President Centraleastern Europe of the Oracle Corporation. By John Vickers Gold: It is astonishing that the concept of simplifying IT was at the heart of the company’s vision almost from the very beginning. Today, the flow of data is enormous so how easy is to simplify an organisation’s IT infrastructure? Michel Clement: Traditionally, our customers built their IT environments as silos of information with separate systems dedicated to specific applications such as customer relationship management (CRM), enterprise resource planning (ERP), or supply chain management. They were typically satisfied with the functionality of the individual systems, but not well served by the system as a whole. They couldn’t fully share the core infrastructure, computing power, business processes, data, and other resources. Big Data – a term used to describe unstructured content from sources such as e-mail, blogs, and social media feeds – presents additional challenges. With applications now able to capture big data, greater strain is placed on the data warehouse and can negatively impact servicelevel agreements between lines of business and IT. So to achieve greater efficiency, economy, and service, almost all of our customers have moved to more standardized and consolidated environments with

global single instances of each application. Still, our customers struggled with the limitations of a dedicated, rigid, physical structure for each application. Computing power often sat idle for some applications, even as they purchased additional

Oracle

has a history of providing

products where they

are needed servers for other applications experiencing temporary spikes in demand. They had to reconfigure many different systems and deploy the same services and patches over and over. But the IT world continued to

evolve rapidly, and customers soon began to take advantage of grid or virtualized environments with shared services, dynamic provisioning, and standardized configurations or appliances. Gold: How have things changed even more in recent times? M.C.: Today, many customers are continuing the quest to eliminate even more complexity by moving to an optimized stack with a complete and integrated set of technologies that includes applications, middleware, databases, servers, and storage systems. But when customers purchase these technologies from different vendors, they’re still finding that they have to put a tremendous amount of work into building the optimized systems – and the systems need to be retuned or redesigned with every new business requirement that comes along. And even with the optimized systems, the pace of business is throwing new challenges at customers much faster than their IT departments can respond. To achieve the responsiveness, flexibility, and agility they need, customers are now taking the next step to cloud-computing environments. With the cloud, they’re getting the single common and standardized infrastructure they want at the foundation layer. Customers now have platform as a service (PaaS) capability for designing or developing their own applications. And they’re able to deliver applications to their users from public or private clouds. In a cloud environment, many customers’ IT departments have become much more dynamic and effective at enabling the business to drive their own agendas, seek out new opportunities, and meet competitive threats faster and with greater innovation. Gold: The idea of compatibility and portability is similarly an extremely modern concept and yet it seems to have been at the heart of Oracle from the start. Can you give us an overview of the key principles in Oracle’s strategy?

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technology

M.C.: Larry Ellison said in his keynote 2013 conference speech that the present era was not a PC era, nor an Internet era, but an Information Era. Let’s take for example Big Data. In this area, we have the most comprehensive package of hardware, software, and service products on the market. It is very important, because on the one hand huge quantities of archive data have been accumulated by the business sector, e.g. the telecommunications or power industry, and on the other hand, consumers themselves are generating data through the social media. Thanks to the latter, new ideas are born and new businesses are established, engaged in new areas of operations. Gold: The acquisition of Sun Microsystems in 2010 was seen as a major step, not only for Oracle but for the whole of the IT industry. Have the results lived up to your expectations? M.C.: Oracle acquired Sun in 2010, and since that time Oracle’s hardware and software engineers have worked side-by-side to build fully integrated systems and optimized solutions designed to achieve performance levels that are unmatched in the industry. Early examples include the Oracle Exadata Database Machine X28, and the first Oracle Exalogic Elastic Cloud, both introduced in late 2010. During 2011, Oracle introduced the SPARC SuperCluster T4-4, a generalpurpose, engineered system with Oracle Solaris that delivered record-breaking performance on a series of enterprise benchmarks. In 2013 we released the SPARC T5 server. Oracle’s SPARC-based systems are some of the most scalable, reliable, and secure products available today. Sun’s prized software portfolio has continued to develop as well, with new releases of Oracle Solaris, MySQL, and the recent introduction of Java 7. Oracle invests in innovation by designing hardware and

software systems that are engineered to work together. Gold: Given the company’s present leading position, how difficult is it to plan for even further innovation and progress in the future? M.C.: Oracle has always been ahead of the curve in developing new products. We spent 6 years completely redeveloping our software in order to make it cloud-ready. We can claim to be the only company that runs exactly the same software in

We can claim to be the only company that

runs exactly

the same software in

the cloud and

on-premise the cloud and on-premise. We knew, six years ago, that one could not take a piecemeal approach to developing apps for the cloud, and we have been proved correct. We recently announced at Oracle Openworld an in-memory option for our 12c database. This means that, at the flick of a switch, you can have an in-memory database if you want one. This, again, is unlike our competitors who have developed stand-alone systems that have this functionality. Similarly, we are now developing machine to machine capabilities in our new products. We are also looking at specialised systems such as ingestible sen-

52 Gold the international investment, finance & professional services magazine of cyprus

sors. These sensors can be swallowed by patients, and their drug consumption and their body’s reactions to it monitored by the sensor. It represents a breakthrough in this area of medicine. We are constantly receiving feedback and input from our customers, and we use that experience from our hundreds of thousands of customers to enhance our existing products and deliver new ones. Gold: What was the incentive for a huge company like Oracle to open a branch in a small country like Cyprus ten years ago? M.C.: Oracle has a history of providing products where they are needed. Oracle was present in Cyprus a long time before the opening of the local subsidiary, through a representative company and partners. Once we established a presence and it was clear that a further investment was needed because our customers and partners in the region had and still have the need for our products and services, we opened and successfully grew our local office, our partner network and our customer base. In other countries where there have been difficulties we have maintained a similar standing: our customers place their confidence in our support, and we work extremely hard to live up to that expectation. We stay with our customers through the good and the bad. Gold: Has Oracle Cyprus lived up to your high expectations? M.C.: The local office has grown in people and numbers in the past 10 years and maintains successful and long-lasting relationships with its customers who have put their trust in our solutions, services and executives. Also, the expertise and professionalism of the local office has led many of the local executives to undertake responsibilities at a more regional level and support projects not just for Cyprus but also for the broader European region.

opinion

No Easy Road to Recovery The economic outlook for Cyprus in 2014 is pessimistic.

he events of last March have created many problems for the Cyprus economy, as we are all painfully aware. The austerity measures imposed by the Memorandum of Understanding (MoU) and the prolonged loss of confidence in the banking sector have led to a huge deterioration of macroeconomic and other economic indicators. Unemployment has skyrocketed, surpassing 17% in October 2013. Compare that with a rate of 3.7% in 2008, and the magnitude of the problem is clear. Real GDP growth is projected to be negative and, in another recession year, to contract by almost 8%. Recent estimates show that it contracted by 5.7% during the third quarter of 2013 over the corresponding quarter of 2012. The public debt was 98.3% of GDP by the third quarter of 2013, continuing its rising trend since 2008 (when it was 48.9% of GDP), while the budget deficit is projected to be close to 6%. All of the above present – unfortunately – a very pessimistic outlook for the economy in 2014 but there is no easy route to recovery. The economy needs to go through a harsh but necessary adjustment before we see better days. Thus, we need to continue implementing all the reform measures outlined in the MoU, i.e. to restructure the banking sector, to correct fiscal imbalances and to implement long-standing structural measures. And we certainly need to keep our public debt under control and within sustainable levels or it will be extremely dangerous for the future prospects of the economy. At the same time, we need to put measures in place to compensate for the negative effects of the MoU and to promote growth following specific intermediate plans. What might some of those measures be? For a start, there must be more emphasis on innovation and entrepreneurship (we can learn a lot in this area from our neighbour, Israel). We should also cut bureaucracy that deters the inflow of foreign investment. We should diversify into other areas of employment (can we finally have that technological park?!). Obviously, we are relying a lot on the prospects for energy sources such as natural gas and oil but we should also move fast with the establishment of casinos that will provide

There must be more emphasis on innovation and entrepreneurship

By George Theocharides

substantial and much-needed revenues to the economy. The services sector – especially banking – needs to regain its lost confidence and credibility with investors/depositors. The commercial banks – and even the Central Bank of Cyprus (CBC) – need to improve their corporate governance practices and there must be greater CBC supervision. Improved confidence in the system would improve the liquidity problem and attract foreign investment. The latest figures show that withdrawals fell to €47.31 billion in October (compared to €47.47 billion in September). The second major problem facing the banks concerns their non-performing loans (NPLs) which have a serious negative effect on their liquidity and capital adequacy (recent statistics show the NPLs for Bank of Cyprus, Hellenic Bank, and Cooperative Central Bank as 48%, 43.6%, and 40%, respectively!). One way of tackling this issue is to create a special unit within the bank that has the necessary expertise in project financing and can distinguish between viable and non-viable projects. Those deemed to be viable should be restructured, either through an extension of loan repayments or even a gradual reduction of the interest rate. As for non-viable ones, the banks should take all the available measures to recover what they are entitled to, while protecting the first place of residence. The biggest obstacle to recovery is finding the necessary funding. We need to develop alternative forms of funding, such as specialized funds (UCITS, Venture Capital Funds, etc.) for which we can offer administration and even management services. We should also make better use of EU structural funds, especially in support of SMEs (a recent loan agreement between the Government and the European Investment Bank is a step in the right direction but more is required). I expect 2014 to be another difficult year in which unemployment will continue rising to almost 20% and real GDP growth will remain negative at just below 5%. However, if we implement all of the above measures and suggestions, receive further upgrades from the credit rating agencies and attract foreign investment, then by 2015 we may be able to return to low, but positive growth and unemployment will finally start to fall.

info: George Theocharides is Associate Professor of Finance and Director of MSc in Finance & Banking at the Cyprus International Institute of Management (CIIM).

the international investment, finance & professional services

Gold 53

“All Tourism

is Good Tourism” TUI’s Chief Executive predicts more visitors in 2014.

TUI Travel, Europe’s biggest tour operator and one of the world’s leading leisure travel companies, with over 240 brands in 180 countries and more than 30 million customers, is a key partner in the Cyprus tourism sector, bringing visitors to the island from not only the UK, but from Ireland, Sweden, Norway, Denmark, Finland, Germany, Netherlands, Belgium, Austria, Switzerland, Poland and France. In May 2013, the company signed contracts to purchase 60 narrow-body Boeing 737 MAX aircraft as part of its fleet renewal strategy. TUI CEO Peter Long spoke to Gold about the company’s relations with Cyprus and what the island can do – public and private sectors – to ensure that they continue to thrive. By John Vickers

tourism

Gold: Tourism to Greece was severely affected by the social unrest that accompanied the bailouts and austerity measures. Fortunately, Cyprus did not experience such a reaction to the Troika’s decisions. Have you noticed any effect on tourism numbers to the island in 2013 and in those predicted for 2014? Peter Long: In 2013, passenger numbers to Cyprus slightly decreased compared to 2012. We believe that this was largely due to the financial crisis earlier this year. However, Cyprus remains one of our key destinations – we had over 400,000 customers holiday on the Island in 2013 and expect that to increase next year. Gold: Opinion in Cyprus has always been divided between those who believe that the island should be aiming to attract high-end visitors and those who want to increase visitor numbers at any price. What’s your view? P.L.: All tourism is good tourism. The point is to be able to offer all customer types what they want and Cyprus has the ability to do that. With its sandy beaches, clear seas and great people, we believe that Cyprus has a lot to offer any traveller. If you're a couple in search of culture and fine cuisine, or a family looking for relaxation and safe beaches there is plenty to keep the little ones happy. There is something for everyone. It is our strong belief to continue to offer a wide-range of holidays for every need throughout our portfolio of brands. Gold: The UK was once the key source of visitors to Cyprus but numbers have been falling for many years. What does TUI see as the reasons for this? P.L.: The travel industry is becoming

In Cyprus there is something for everyone

more and more competitive. Countries worldwide are recognising the importance of travel and tourism to their economies. We bring visitors to Cyprus from not only the UK, but Ireland, Sweden, Norway, Denmark, Finland, Germany, Netherlands, Belgium, Austria, Switzerland, Poland and France as well. As long as the value proposition is good, in terms of price vs quality, then people will always want to go to Cyprus. We believe that, in general, that is the case on the island. However, prices do tend to be higher so the industry needs to be mindful that it doesn’t price itself out of the market. Gold: Given the intensely competitive tourism sector, what would be your advice to Cyprus and those responsible for the industry if it is to survive and ultimately thrive? P.L.: Tourism plays, and will continue to play, a vital role in the economic recovery of Cyprus. Because of this, the Government of Cyprus should invest in the country’s main gateway infrastructure, such as airports and ports, as well as improving road networks. This will ensure that tourism remains a key economic driver. For us to take advantage of the opportunities, we will need the full support and assistance of various stakeholders such as the authorities for tourism, our partners and, of course, the Government. This will enable us to continue developing and investing in our offering in Cyprus as we work with the Government for mutual benefit. We would also like to highlight that we have great support from the CTO and this will help to facilitate further growth. We would ask that airports show the support to committed long-term partners like our airlines by creating a level playing field, ensuring that all airlines are treated the same way and have the same rates. Hoteliers should continue to work with us continue to invest in hotels and improving the customer experience through innovation and differentiation. They also need to be mindful of the competition to ensure that they continue to provide value. TUI Travel already offers a wide range of differentiated product in Cyprus across its major source markets. Further growth will come from new differentiated product.

As long as the value proposition is good, people will always want to go to Cyprus Gold: In all the markets you service, which destination would you point to as a model for those that are trying to provide what today’s travellers want? P.L.: I would say Rhodes and Kos. They both have an extensive range of hard differentiated products allowing us to appeal to all customer segments across all source markets.

Peter Long

Peter Long joined the Board of TUI Travel PLC on 28 June 2007 as Chief Executive. In November 1996 he was appointed Group Managing Director of First Choice Holidays PLC and became Chief Executive in September 1999. Prior to joining First Choice, he was Chief Executive of Sunworld Holidays. From February 2001 to June 2005, he was a non-executive director of RAC plc, and from April 2006 to July 2009 he was a nonexecutive director of Debenhams plc. He was appointed as a non-executive director of Rentokil Initial Plc in 2005 and is currently the Senior Independent Non-Executive Director. In October 2013, Peter Long was appointed President of the Family Holiday Association, a UK-based charity which provides short breaks away from home for more than 2,000 disadvantaged families.

the international investment, finance & professional services magazine of cyprus

Gold 55

OPINION

The

Outlook for the Cyprus Economy Slow recovery predicted during 2014

By Persella Ioannides

he March 2013 EU bailout terms for Cyprus were a reminder of the need for businesses to geographically diversify revenue streams and exposure tied to their local economic environment. With this in mind, MeritKapital applied to operate a branch in the Latvian capital, Riga,under the single passport directive and CySEC recently approved its application. Latvia went through its own banking crisis in 2008, when it received a €7.5 billion bailout from the IMF and the EU. It has since recovered economically, much aided by the growth of the regional economy as well as by its adherence to the imposed austerity measures. With a GDP of €22.3 billion, it will adopt the euro on 1January 2014 and it is being forecast to have the fastest GDP growth in the eurozone of 4.1% for 2014. The outlook of the Cyprus economy

could also be deemed to be for slow recovery. First, S&P recently upgraded it by a notch to B- from CCC+. Its sovereign debt yields have substantially come down with the issues maturing in 2014 and 2020 currently at 9.8% and 8.27% respectively, from 24.5% and 13.8% in mid-July. Second, although its economy has been very much tied to Greece’s, due to its banking sector’s Greek loan book and Greek sovereign debt exposure, it is now less linked as that exposure has been fully divested. However, cultural and other economic similarities still make current macro figures from Greece a relevant case study to forecast the future trends in Cyprus: • an upgrade of the government debt by S&P from B- to B with a stable outlook • a drop in sovereign yields (10Y dropped from a high of 30% in June 2012 to 8.6% at time of writing), • expectations that the primary budget surplus will bemaintained this year,

56 Gold the international investment, finance & professional services magazine of cyprus

• debt to GDP levels that are forecast to decrease to 156.9% in 2014 vs. 170.3% in 2013 • and GDP growth that is expected to turn positive to 1.8% in 2015 vs. -0.4% in 2014 The small Cypriot economy should prove quite versatile and should reverse sooner following the imposed austerity measures that proved effective in Greece. Third, the financial services sector of Cyprus, excluding the banks with imposed capital controls, contributes decently towards total GDP. This pool is predominantly comprised of some banks which operate without capital controls (solely for nonresident UBOs), professional services firms, investment firms and FX companies. Additionally, tourism revenues are significant, with CTO figures estimating a 13% input to total GDP for 2012, excluding multiplier effects in other sectors of the economy. For the above-mentioned banks, key figures to note are that their financial results for 2013 appear promising, especially as they are in an advantageous position visà-vis their peers. On the professional services front, which deals with international clients, we performed an independent survey on a selected group of the larger market players and although they noted a slowdown in sales for 2013 of around 10-20%, they stated that the core of their client portfolio remains steady. This is largely due to Cyprus maintaining its status as an optimal tax jurisdiction in the EU and also due to the strong client vs. service provider relationship which is not easily transferable. Moreover, the general consensus is that it is unlikely that another round of such ‘bail-in’ measures will be undertaken unless the situation with Bank of Cyprus deteriorates substantially. Regarding the FX and investment firm industries, the sector continues to prosper having a solely international client base and having felt immaterial impact from the March banking bailout terms. Some of the top ten global FX companies are based in Cyprus as well as the top ten Russian investment firms, as measured by total sales. The latest statistics from the tourism industry noted a slight decrease in tourist arrivals for the period January to November 2013 of 2.5% while total revenue recorded a growth of 8% from the beginning of the year. The revenue increase from British and Russian visitors has compensated for a

Regarding the FX and investment firm industries, the sector continues to prosper reduction in that of Greeks, Germans and Belgians. Fourth, there is an expectation of an increase of FDI into Cyprus driven by international investors seeking opportunities in the real estate sector and other viable businesses that are strapped for cash in the credit crunch that followed the bail-in. Fifth, there have been other OTC transactions that have spurred some liquidity into the market. MeritKapital was the first broker on the island to sell a Bank of Cyprus’ bailed in’ deposit to a large US hedge fund. Also, there has been some M&A activity in the hotel industry, whereby ‘bailed in’ deposits were partially or wholly swapped for outstanding debts, within the same bank, of the targeted investment. MeritKapital is in advanced discussions for numerous other ‘deposit’ deals. An increase in all such OTC transactions and further innovative solutions should ease the ensuing credit crunch. Last, the natural gas reserves off Cyprus’s southern shore are a significant factor to consider in the island’s economic recovery. The Aphrodite gas field, which was discovered in 2011, is estimated to contain around 4 trillion cubic feet (tcf) of gas, the majority of which could be exported to satisfy the energy needs of

Asia and Europe. However, the construction of an offshore LNG plant and added transportation costs would only make economic sense at 5 tcf. If some agreement is reached for this LNG plant to liquefy the excess gas of neighbouring Israeli fields, then the pricing will start to make financial sense. A latest positive finding is the recent statement by US-based Noble Energy, which disclosed recently that the same gas field may – based on exploratory drilling – also hold between 1.2-1.4 billion barrels of oil. This is very encouraging as the time and cost to drill and extract oil is much less than that for natural gas which transpires into a more viable project. Nevertheless serious challenges remain. Despite improving operating income ratios, the viability of BOC continues to be uncertain. Non-performing loans (NPLs) have increased to 47% in Q3 from 38% in Q2. As a comparison, the Greek-based banks have average NPLs of 30-35%, and provisions per NPL reduced to 37% in Q3 from 42% in Q2. This demonstrates that Greek banks have already restructured their loans, repossessed assets and are subsequently managing them. The NPL figures for BOC still considerably lag behind these parameters. Second, the credit controls that continue to exist are sapping credit liquidity in the local economy and jeopardizing the viability of previously healthy companies. Third, although the international clientele has largely remained intact from the portfolios of service providers, it is questionable whether this period has served as a study timeframe for clients to measure their options for ulterior solutions that may be affected in time. Fourth, the lack of foreclosure laws prevents a correction in real estate prices to ignite activity in the industry. Although the Troika encourages imminent legislative amendments the problem remains outstanding.

Last, Iceland underwent a similar banking crisis in 2008, whereby an oversized banking sector and excessive risk taking led to the collapse of the island’s three main banks. As in Cyprus, the Icelandic banks lured foreign deposits with attractive yields and then lent flexibly to foreign borrowers. With the collapse of Lehman and a freeze in the credit markets, the noted banks collapsed. Iceland then imposed capital controls which prevent the exchange of the local currency; their respective lifting date remains undetermined. Its economy has just turned to growth of 3% this year and could borrow from the open markets only in 2011. Moreover, its businesses are suffering as FDI is discouraged by the capital controls. Professor Benoit Mandelbrot advised to “diversify as broadly as you can – far more than the experts tell you to”. There have been some encouraging developments that draw a stable economic outlook for Cyprus. However, the apportion of capital and efforts across other geographical markets, such as Latvia, forms a stepping stone towards a prudent risk management.

MeritKapital was the first broker on the island to sell a Bank of Cyprus ‘bailed in’ deposit to a large US hedge fund

info: Persella Ioannides is Executive Director and Head of Investment Advice at MeritKapital. the international investment, finance & professional services magazine of cyprus

Gold 57

s u r p y c

A new report entitled Crisis Investing in Cyprus promises to make us rich. By John Vickers

brand-new guidebook has recently been published in the wake of the Cyprus financial crisis. In it, Doug Casey, the highly respected author, publisher and professional investor, and Nick Giambruno, Senior Editor of Casey’s InternationalMan.com, take a first-hand look at the speculative opportunities for investment in the island, which they interestingly describe as “The Florida of Europe” when discussing opportunities to buy beachfront properties. Giambruno notes how “Doug Casey and I were recently in the crisis-stricken country of Cyprus. While we were there, we found some pretty remarkable bargains on the Cyprus Stock Exchange. Companies that are still producing earnings, paying dividends,

have plenty of cash (in most cases outside of the country), little to no debt, and trading for literally pennies on the dollar.” Another well-known US investor, Jim Rogers, responds to this by saying, “It’s also obvious, after what happened in Cyprus, that it’s a place where one should investigate. Whether it is right to buy now or not, you are certainly right to look into it. If you stay with it and you know what you are doing, you do your homework, you are probably going to find some astonishing opportunities in Cyprus.” In a lengthy advertising piece for Crisis Investing in Cyprus, Giambruno promises to “show why Cyprus is by far the crisis-investing opportunity with the biggest upside in the world right now, and how you can get in by buying assets at fire-sale prices.” And he goes on: “Who the hell would in-

vest in Cyprus? Good question. Most people couldn’t find Cyprus – a small island nation in the eastern Mediterranean – on a map. And most likely they’d never even have heard of it if it weren’t for that pesky EU-ordered “bail-in.” He then gives a brief summary of what happened in these words: “The two larg-

Big-time investors are poised to move in and take advantage of the opportunities available

investment

est Cypriot banks – Bank of Cyprus and Laiki Bank – gorged on Greek government bonds. Then Greece’s sovereign debt crisis crushed the bonds. The Cypriot banks lost their capital. The Cyprus government couldn’t afford to bail them out. And the EU wouldn’t, probably because so much of the cash was owed to non-EU Russians who used the banks as their offshore haven for years. Eventually, as a condition of the €10-billion bailout, the Cypriot government agreed to a haircut of bank deposits exceeding €100,000. In addition, the government imposed capital controls to keep money from leaving the country.” However, what really grabbed Doug Casey’s attention, says Giambruno, “was the Cyprus stock market, which bottomed out at 98% below its high… To Doug, the crash sounded like “a bell ringing at the bottom of the market.” He quotes Casey as saying, “I suspect that there are some very viable businesses available – companies selling for a tiny fraction of book value. I think fortunes could be made…” The types of company that Casey and Giambruno are talking about are what they call “the survivors of train wrecks: fundamentally sound companies beaten down by shell-shocked markets. These are the screaming bargains we’re looking for. They’re not rare, but you don’t see them every day either. And the rewards can be gigantic.” To make their point, they suggest: “Consider this: a return to the previous Cyprus stock market peak of 5,519 would multiply your investment 58 times. That means an investment of just $10,000 would turn into $580,000… and an investment of $100,000 would make you $5.8 million.” Fortunately they are not so naïve as to ignore the fact that the country’s stock market peak occurred before EU membership and is now viewed as a bubble – not to say scandal – by most observers. And they admit that “Cyprus doesn’t have to return to ‘normal’ to make tremendous profits. Any progress made – by streamlining the government, eliminating the capital controls, and/or recharging the business environment – will mean enormous gains if you invest in the right companies.” To make the point that Casey is not sim-

The fallout from the banking crisis isn’t enough to destroy the value of solid companies listed on the exchange ply sitting in his office in the US and using his theories in a ‘one size fits all’ manner to talk about Cyprus, the man came here and saw for himself. As Giambruno describes him, “Doug is perfect as the spearhead for this mission. His unique talent is an ability to look beyond the macro environment and to find the people who can help him exploit opportunities no one else even recognizes. Nondas Metaxas, the CEO and director of the Cyprus Stock Exchange, is one of those people.” Metaxas is described as “tall, authoritative and optimistic for a guy who’s overseeing a bear market that may have no rival in the history of the world. But looking at the larger picture, Metaxas sees good reason to be bullish.” One of those reasons is “the 2011 discovery of a massive gas field about 100 miles south of Cyprus. The resource is worth billions of dollars – enough to turn the cash-poor island into an energy exporter. That gives Cypriots a lot to look forward to. Even Metaxas admits the short-term picture is not quite as rosy. In July, unemployment ran more than 15%, headed higher. Tourism is down 5% from the same period in 2012. Capital controls remain in effect. But these controls do not apply to new money brought into Cyprus. The inflow of money isn’t restricted, and neither is income or returns you make off money you invest…” Giambruno continues his upbeat assessment, stating that “The fallout from the banking crisis isn’t enough to destroy the value of solid companies listed on the exchange. They’ll continue to do business in Cyprus, generate earnings, and even pay dividends.” One of the reasons for his optimism is his view of what is now happening in Greece:

“When the financial crisis there began, investors fled the Athens Stock Exchange. But over the 12 months starting in October 2012, the Index shot up 35.62%. And now US hedge funds are investing in Greek banks. Remember John Paulson, who earned billions betting against subprime mortgages? He’s leading the charge, apparently encouraged by rising exports and rebounding tourism. Similarly, the crisis in Cyprus has opened up the potential for you to earn extraordinary profits.” All of this, of course, is part of the publicity for Crisis Investing in Cyprus, which the authors describe as “an action-packed, 39page report that gives you everything you need to make tremendous gains from the biggest upside crisis opportunity available today”, which contains “the specific opportunities and the gains possible, the process to follow, the people to contact – in our exclusive, first-ever report on making money from a country in turmoil…” One of the main points that Casey and Giambruno repeat again and again is that “In crisis situations, stock prices bottom out for all companies, good and bad alike. But sound, productive, well-run businesses don’t lose their inherent value – even though you can suddenly buy them at giveaway prices. In Crisis Investing in Cyprus, they identify eight companies “whose values will skyrocket when the market recovers. Every one of these companies currently costs less than $1 a share.” And even in the advertising copy, Giambruno gives details of three of the companies they are backing. See if you can identify them:

Crisis Investing in Cyprus Pick #1:

This rock-solid company has been around since the late 1950s, which means it’s actually older than the Republic of Cyprus itself. And it’s seen much worse than the current fiscal crisis, having survived the Turkish invasion of Cyprus in 1974. Cypriot financial experts we asked about the company’s financial health have nothing but praise for it. While it’s currently not paying its annual dividends due to the crisis, they are confident that business as usual will start again soon. We believe it: This pick has €19 million in cash and no debt – a great foundation to get back on its feet and give you a 259% gain if it returns to even half its previous high. And

the international investment, finance & professional services magazine of cyprus

Gold 59

investment

Nick Giambruno

Cyprus is one of the few countries that will grant full citizenship to those who make certain investments in the country

Doug Casey

if the stock eventually reaches its previous all-time high, your gain would double to 518%.

Crisis Investing in Cyprus Pick #2:

If you’re looking for a company that does a significant portion of its business outside of Cyprus, you’ll like this well-run firm with a presence on three continents. The stock sells for a fraction of its all-time high – roughly a third of book value. And it can even pay a dividend. The business has enough cash on hand for about a year of operating expenses, which should let it weather the current crisis. If the price increases to half its all-time high, your gain would be 429% – and if it actually hits the high, your gain would be 858%.

Crisis Investing in Cyprus Pick #3:

Want to buy super-cheap and position yourself for four-digit gains? This is the buy for you. Here’s a business around for almost 50 years that now sells at 3% of its all-time high. The company has been turning a profit for years. With low leverage, it has a good chance of survival. And an increase to half of its previous high would produce a whopping gain of 1,575% on your capital.” If your appetite is not already fully-whetted to order the book, Giambruno offers even more goodies to potential investors in Cyprus, starting with real estate: “You can now buy retirement or vacation property in Cyprus at bargain-basement prices. And what’s not to like? The ‘Florida of Europe’ offers an idyllic lifestyle, with sun-drenched beaches, lavish resorts, cosmopolitan cities, and a healthy cuisine that melds European and Middle Eastern influences. “Two former oil-industry workers who each chose Cyprus as their retirement home tell us they’re here thanks to the blissful weather and exceptional quality of life. But we’re betting they wish they’d put off buying until now…

“The banking crisis and lack of financing have severely depressed real estate prices. For example, flats that once sold for €2,200 per square metre now sell for €1,000 per square metre. “Banks will be auctioning off some of the nonperforming real estate loans. That may lead to foreclosures, pushing property prices even lower – and kicking off bargain season. The key to finding bargains now is to get access to the auctions already scheduled. “Owning a second home on an island as picturesque as Cyprus will always be desirable. That’s especially true when some properties are selling for 50% less than they did just a year ago.” He goes on to note that owning property in Cyprus is also the key to another littleknown perk: “Governments eager for money often reward foreigners who buy real estate at a high enough price with economic residency

You can now buy retirement or vacation property in Cyprus at bargainbasement prices

or, in select cases, citizenship. Cyprus is one of the few countries that will grant full citizenship to those who make certain investments in the country. “Residency gives you access to Cyprus only. But citizenship – meaning a Cypriot passport – would give you the right to live and work in all 28 EU countries. Owning a second home on a balmy, beautiful Mediterranean island would be one of the most appealing ways possible to gain that access.” Quite why anyone investing in distressed

60 Gold the international investment, finance & professional services magazine of cyprus

Cyprus companies would be interested in working in the 28 countries of the EU is another matter. On the issue of the imperative of seizing the moment, the authors quote Dr. Theodore Panayotou, Professor of Economics at Harvard University and Director of the Cyprus International Institute of Management, as saying: “This is the best time to invest in Cyprus for investors who want to avoid regretting in a couple of years time not acting when Cyprus was still affordable and full of emerging opportunities.” Giambruno reminds readers “of the gains you could have realized from the US financial crisis – over 1,000% on 11 stocks in just two years; over 3,000% on several others in a little more time. The same could happen in Cyprus as other investors recognize the 10X, 20X, and even 30X+ gains possible from buying stock at today’s bargain prices.” The authors note that, since the banking crisis, Cyprus has seen a lot of positive changes. “The government and banking sectors are being cut down to size. A pro-business government is in power. Skilled labour costs have dropped. And the private sector is primed to revive the country’s economy. When the capital controls are lifted, the Bank of Cyprus is relisted, and the offshore gas begins to be developed, Cyprus will rise from the ashes of its economic collapse. And just like in Greece, big-time investors are poised to move in and take advantage of the opportunities available.” So, are you hooked? The authors say that they plan to charge $200 for Crisis Investing in Cyprus. Indeed, they say that they “could easily charge much more, given the gains we think you’ll make from these investments.” However, you can download a copy for $99 from www.caseyresearch.com/cm/crisisinvestment-opportunity It’s probably reasonable to ask why Casey isn’t keeping all this to himself and reaping all the benefit of his wisdom. But then again, he is a multi-millionaire and probably doesn’t need the hassle. You decide…and let us know if we should have invested $99 on the report.

4η

πληροφορικής τεχνολογίας τηλεπικοινωνιών ΕΡΓΑΛΕΙΑ ΚΕΡ∆ΟΦΟΡΙΑΣ ΓΙΑ ΑΝΑΠΤΥΞΗ ΤΩΝ ΚΥΠΡΙΑΚΩΝ ΕΠΙΧΕΙΡΗΣΕΩΝ

professional services

A Professional

Job

62 Gold the international investment, finance & professional services magazine of cyprus

The following article on the professional services sector is one of eight published in the latest issue of fDi magazine entitled “Cyprus: Now in recovery mode, the country gets back to business”. The special supplement on Cyprus was funded by the Cyprus Investment Promotion Agency (CIPA) while the reporting and editing were carried out by fDi Magazine, which is published by the Financial Times.

yprus remains rightly proud of the global reputation of its professional services as it continues to be one of the leading jurisdictions for structuring investments into Europe and emerging markets at a competitive cost, says Wendy Atkins Although the Cypriot financial sector took a bashing during the crisis, this did not extend to the professional services market, which proved more than able to weather the storm. The sector’s resilience means Cyprus remains rightly proud of its reputation for accounting and legal services. “The events in March had an adverse impact on the credibility of Cyprus,” says Evgenios Evgeniou, Chief Executive of PwC Cyprus. “But companies that use Cyprus as a base are still intact and the fact that we’ve had two positive reviews from the Troika [the EU, the European Central Bank and the International Monetary Fund, which are supervising the country’s adjustment programme] is helping confidence to gradually return. Professional services firms did a good job of keeping clients abreast of developments as the events were unfolding.” As the backbone supporting foreign investors in Cyprus, the country’s professional services firms report frustration at the scale of the inaccurate and negative reports that have surfaced in the international media over the past year. “We’ve been accused of money laundering or facilitating it. In my opinion, this is a joke,” says Christos Mavrellis, senior partner and head of the company and commercial department at law firm Chrysses Demetriades. “Despite the fact that all the investigations by EU institutions have demonstrated the opposite, nothing has been published to counter this negative publicity.”

Common law connection

According to the Cyprus Investment Promotion Agency, the island continues to be one of the leading jurisdictions used by blue-chip companies and corporate planners for structuring investments into Europe and the world’s leading emerging markets. “One of the main contributors to our success story is that Cyprus is a common law country,” says Mr Mavrellis. “Our Company Law is almost a copy of the [UK’s] 1948 Companies Act, so it is easily understood in many other parts of the world. Some international organisations investing in former [Soviet] countries structure their investment via Cyprus because they can get better securitisation structures. They know where they stand and they’re entering a legislative regime that is understood by Western lawyers.” The Cypriot legal sector now has more than 2,500 registered advocates and 160 limited liability law firms. Most of its practising lawyers studied or qualified in the UK. Accountancy on the island also enjoys a good global reputation, with more than 120 limited accounting firms and 40 partnerships, plus more than 3,500 active English-speaking registered accountants. It also follows International Financial Reporting Standards. What is more, Cyprus is the first country

in the world to be selected by the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Management Accountants to train UK chartered and certified management accountants outside the UK, as well as to organise the training of UK-certified accountants. “In terms of quality and value for money, we have an advantage over other European jurisdictions,” says Mr Evgeniou. “Our cost base and pricing are still competitive compared to other EU countries.”

Cost considerations

Cyprus’s professional services sector looks likely to benefit from activities in both the film industry, where the island’s sun, scenery and local talent could prove big attractions, as well as the energy sector. As Mr Mavrellis says: “The energy sector is attracting people to Cyprus. As time goes by there will be more companies establishing here needing professional services.” Mr Evgeniou is also upbeat: “My advice is to come to Cyprus to see for themselves. After what happened in March, it is essential that investors gain an understanding of the situation on the ground.” Mr Mavrellis adds: “Cyprus has managed to retain its clientele. Clients have done their investigations and they say the best place after the Cyprus of today is the Cyprus of yesterday. They realise they get better services at lower prices and they have learned they can trust our people.”

Clients say the best place after the Cyprus of today is the Cyprus of yesterday the international investment, finance & professional services magazine of cyprus

Gold 63

OPINION

All Aboard the Titanic For the eurozone to have any hope of a viable economic future, its currency needs to hurtle towards parity with the dollar.

he has been re-elected when all others of her political classes of 2000 (when she became leader of her party) and 2005 (when she was elected Chancellor) have long been sent packing. She has stamped her authority, not only on her own people, but on an entire continent, doing so in a way few, if any, have ever done without recourse to military might. And her career will end just as theirs did: in failure. She is Angela Merkel and she has gone way beyond her limits to consign the eurozone to a future resembling Japan’s lost decades. At some point, historians will reflect on the economic management of the early decades of the 21st century. When they do, their challenge will be to decide where it was performed at its worst; in Washington, Tokyo or Frankfurt? In the case of the first two capitals, responsibility – or rather irresponsibility – will be seen as collective. In the case of the third it will be very much identified by one person and that person is Frau Merkel. And yet, despite her negligent hand being on the tiller, there is a queue to join not only the EU but the eurozone too. This month, Latvia has become the eurozone’s eighteenth member, joining three years after its near neighbour Estonia. And as was the thinking in Tallinn, the authorities in Riga believe their economy is safer in the eurozone than outside it. Let me make my view perfectly clear: joining the ‘safe’ eurozone is much like boarding the ‘unsinkable’ Titanic, for its population of over one-third of a billion is sinking into deflation, depopulation and de-industrialisation, each feeding the other two. Quite frankly, in a global context, the eurozone will be ever more de-emphasised. I am convinced that what we have recently seen in the eurozone’s labour data is a recovery headfake. After all, recovery was only going to be made possible if it could export its way to it. And in the year since Greece faced up to a political crisis that threatened its very existence within the eurozone, the single currency moved uncompetitively higher in all dimensions. True, the rate cut by the ECB reversed matters. Do not, however, imagine that

Joining the ‘safe’ eurozone is much like boarding the ‘unsinkable’ Titanic

By Savvas Savouri

the euro is a one-way sell from here against the dollar or yen. Don’t get me wrong, I still have enormous confidence in China and the general emerging market story, in which India only deserves a footnote. I just don’t believe the eurozone is fit for modern global purpose unless and until the euro falls sharply against the dollar and yen. And, quite frankly, I cannot see this happening. Once again, don’t get me wrong, I do not see the euro’s strength as an endorsement of eurozone recovery. Rather, the cause of it failing to rebound and indeed falling back into recession. Exchange rates are, after all, about relativities, often not so much beauty as ugly contests. And Washington and Tokyo continue to do their best at making their currencies particularly unattractive. It is somewhat ironic that, by insisting on fiscal austerity across the eurozone, the German Chancellor has undermined domestic demand, whilst putting upward pressure on the euro and so hitting external demand. To repeat, my outlook for the eurozone sinking into deflation and de-industrialisation is based on the assumption that the euro continues to move higher against the dollar and the yen. I am aware, of course, that the ECB has halved its refinancing rate – to 0.25% – and this has weakened the euro. However, the reversal has been relatively modest, only partially retracing its recent competitivenesssapping appreciation. The reason is that Tokyo and Washington are doing enough with their own economies to make their currencies uglier than the euro. For the eurozone to have any hope of a viable economic future, its currency needs to hurtle towards parity with the dollar. Instead it has moved upwards and will continue to do so unless something totally exceptional happens. And, whilst Germany’s competitiveness pain threshold may be around 1.5 against the dollar, that of France has already been breached. Let me end by repeating this grade-assessment for the eurozone: Deflation, depopulation and de-industrialisation means ‘D’s all round.

info: Dr. Savvas Savouri is a Partner and Chief Economist of Toscafund. 64 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

opinion_savouri.indd 64

08/01/2014 15:03

{January 14 – February 13, 2014}

ISSUE

My Autobiography

By Sheryl Sandberg

{tax&legal}

By Aleka Mandaraka-Sheppard

76 Increase to Standard and Reduced VAT Rates 77 More Accolades 19% 18% to 19% € for Harneys Cyprus 18% to

€

to 9

19% to 18%

to 8%

€

77 81

{lifestyle}

78 The Winner Takes It All Investing in sports memorabilia. 82 A Day In The Life Michael Virardi

€ € €

% to 9% 8% € 8% to 9

€

19% to 18% 19% 18% to

9 to

9% to 1 18%

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to 9

€

€ € €€ 8%

€

TAX & LEGAL: Modern Maritime Law

By Alex Ferguson

€

70 Cyprus Business Forecast Report Published 71 Baker Tilly in Romania Celebrates 10th Anniversary 72 First Names Group acquires Citadel 73 Under Pressure Companies need to be more sophisticated when it comes to pricing

BUSINESS: Lean In: Women, Work, and the Will to Lead

€

{business}

By Brad Stone

74 IMF Completes Second Cyprus Review 75 Choosing the Right Option In the latest in its Mediterranean Paper series, the GMF (German Marshall Fund of the United States) deals with Natural Gas in Cyprus.

€

MONEY: The Everything Store: Jeff Bezos and the Age of Amazon

{economy}

8% to 9%

66 Protecting Mutual Interests Proper debt restructuring is good for both debtors and lenders 67 Silver Prices Fall but Demand for Coins Grows 68 Eurozone Showed its Resilience in 2013 69 Impact of Cyprus banking crisis “minimal” for expats

8% to 9%

{money}

€

+ BOOK REVIEWS

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES OF CYPRUS

gold_plus.indd 65

Gold 65

08/01/2014 13:48

debt restructuring

{money}

Protecting

Mutual

Interests

Proper debt restructuring is good for both debtors and lenders By Rakis Christoforou

ebt restructuring is a process in which a debtor and lender choose to rework the terms and conditions that apply to a loan or other facility currently in force. Sometimes known as debt rescheduling or debt refinancing, this strategy is usually employed when the lender and debtor believe there are sound financial reasons for making changes to an existing loan or other facility contract. In general, it is a compromise where both parties receive some sort of benefit from debt restructuring. The current situation in Cyprus calls for such a compromise. Many companies and individuals are looking for ways to improve their cash flow through the use of debt restructuring techniques given the present unwillingness of financial institutions to lend them additional

money to cover their needs. Unfortunately we are yet to see proper debt restructuring in Cyprus on the part of Financial Institutions which, in most instances, proceed with refinancing of loans without real benefit to the debtor. The process of debt restructuring can be used in both individual/private and commercial settings. With business debt restructuring, the goal is more often to change the terms of repayment in order to allow the

The use of debt restructuring can be a powerful tool when financial reverses take place debtor to make better use of available resources needed to operate the business. Cyprus businesses today are open to the idea of a corporate debt restructure, especially if the action involves a long-time client and the restructure will preserve the working relationship. Businesses and individuals, however, should be ready to develop a strategy after understanding their financial position and their options in order to make

a sensible proposal to the Lender. Business debt restructuring can be helpful for small businesses as well as large corporations. As with any lending situation, the use of small business debt restructuring is usually aimed at rearranging existing debt so the small business can make the most efficient use of available resources. When the lender is open to altering the terms of payment or other factors in the loan agreement, the action also protects the lender’s interests, in that the restructure minimizes the chances of the debtor defaulting in the near future. For individuals, the use of debt restructuring can be a powerful tool when financial reverses take place – something we are often experiencing in Cyprus nowadays. For example, if the main source of income is lost and the debtor is unable to secure a new job at the same level, it may become difficult or even impossible to continue paying the loan according to the original terms. In order to prevent default and all the expenses associated with such an action, the lender should be ready to alter the amount of the monthly payments, or possibly alter the payment schedule itself in an effort to help the debtor regain a sound financial footing. Proper diagnosis of the current financial position (for both companies and individuals) and the development of a sound plan are essential tools that help achieve the best of results for a sustainable solution to financial difficulties. The assistance of experienced professionals in this field is also essential, not only in the development of a sound strategy but also at the negotiating table with financial institutions. At its core, any type of commercial or private debt restructuring has the goal of maintaining what is considered a desirable relationship between a lender and a debtor. This means protecting the financial interests of both parties, and allowing the repayment of the loan to continue in a manner that is beneficial to the lender as well as the debtor. While debt restructuring is not possible in all cases, financial institutions should consider this possibility as a viable alternative to placing loans in default and being unable to collect more than a small portion of the amount owed.

info: Rakis Christoforou BBA, CPA/ABV/CFF, MCSI, CGMA, ACFE is the founder and director of RC Business Valuation & Forensic Accounting Ltd, the first company in Cyprus specializing in the areas of Business/Debt Restructuring, Business Valuation and Financial Forensics. 66 Gold the international investment, finance & professional services magazine of cyprus

precious metals

Silver Prices Fall but Demand for Coins Grows

{money}

Investors see the metal as an alternative way of preserving wealth.

he sharp fall in the price of gold and silver in early 2013 caused a wave of pent-up demand for coins and bullion. Observers say that it was not surprising that silver sales hit records: not only did lower prices enticed consumers to buy more physical metal but, in India in particular, consumers have been substituting silver for gold because of strict import restrictions put in place in mid-2013 which focused primarily on gold. The banking crisis in Cyprus earlier in the year highlighted the fragility of the global banking system and many people ended up buying other assets to preserve their wealth. Partly due to its lower price compared to gold, silver has always been a popular alternative. Although the crisis has abated since March, there is still a strong distrust of the global banking system, which is why consumers and investors are buying silver and gold on price drops. If you hold a silver or gold coin, you are not a creditor to the banking system; you are holding real money. Of the top 3 global mints, the US Mint was first in volume, selling 42.4 million 1-oz American Eagle Silver coins in 2013. It hit a new record in mid-November when it reported sales of 40.1 million, surpassing the prior record set in 2011, when it sold 39.8 million coins. The US Mint saw average monthly sales of 3.5 million coins. The busiest month was January (7,498,000 sold) and the slowest was November (2.3 million). The Canadian Royal Mint came in 2nd for its silver coin sales, though the data does not include the last 3 months of the year. As of the end of September, the Canadian Mint had reported total sales of 19.7 million ounces of its Silver Maple Leaf coins in 2013. For the third quarter, the Canadian Mint reported silver sales of 6.7 million

ounces, an increase compared to Y2012’s Q-3 sales of 4.8 million ounces. It has predicted that it will pass 2011’s sales record of 23.1 million ounces. “Silver Maple Leaf coin demand continues to be very strong in key markets such as Canada, the US and Europe,” the Mint said in Q-3 financial report. “The Mint cannot predict the

Most analysts were wrong with their silver price projections in 2013 precious metals market, but performance of the bullion… business should remain robust.” The Perth Mint came in 3rd, selling 7,799,000 ounces of silver in 2013. Perth’s busiest month was in April when the Mint sold 1,113,000 ounces. April was also when silver prices fell 21% from a high of $27.965 an ounce on April 10 a low of $22 six days later. The Perth Mint is moving forward with its plans to break ground on a new Silver blank production facility, which is expected to be operational by 2015. But although 2013 was

a strong year for the silver market, executives at the Mint are cautious on the future. “If indeed there is a resurgence of confidence in the world economy and an expectation of steady and increasing economic growth in the world, then worse lies ahead for precious metals,” said Edward Harbuz, CEO in the Mint’s 2013 review. “Of course, the future is particularly uncertain at the moment. Perhaps the positive scenario described above is not to be. Perhaps the recovery in the USA will be less convincing than expected, perhaps the underlying problems in the eurozone, which have not really been addressed, will cause further crises in the future…” Despite the record sales of silver coins, analysts who focus on the silver market seem uninspired by the prospects for the white metal in 2014. UBS recently cut its targets for the price of silver in 2014 by $4.50 per ounce to $20.50, citing greater economic stability around the world that will lead investors out of perceived safe-haven investments like gold and silver. UBS also cut its 2015 silver-price projections from $24 to $21, showing its expectation that the sluggish performance in the market will persist well into the future. Demand from exchange-traded fund investors is a big variable that could cause big swings in the price of silver in 2014. Analysts at CIBC set a $19 price target on silver for year-end 2014 but warned that a change in ETF demand could send prices far lower in the interim. Yet not everyone is pessimistic about the prospects for silver prices. Citi predicts weakness in silver in 2014 but it expects a modest bounce in future years, with targets of $22.20 for 2015, $22.50 for 2016, and $23 for 2017. Merrill Lynch expects an average price of silver for 2014 of more than $23, with weakness early in the year followed by a climb to $25 by the second half of 2014. It is worth noting that most analysts were wrong with their silver price projections in 2013 and this year the price of silver is expected to produce even more surprises.

the international investment, finance & professional services magazine of cyprus

Gold 67

eurozone

Eurozone Showed its Resilience in 2013 {money}

n end-of-year article by Simon Nixon in The Wall Street Journal suggests that for the eurozone, the real story of 2013 was been what didn’t happen rather than what did. “Confronted by a series of shocks that in previous years might have reignited concerns over the survival of the currency bloc, the euro has proved remarkably resilient,” he author notes. He goes on: “The decision to force uninsured depositors in the two biggest banks in Cyprus to take losses didn’t lead to bank runs across the periphery as many had feared. Unemployment remained painfully high in much of Southern Europe, yet there was little evidence of the social unrest that the doomsayers had predicted. There were political crises in Italy, Greece and Portugal. But on each occasion, the outcome was a stable government committed to reforms designed to make the economy more productive and competitive. “Instead, as fear of an implosion receded, the economy recovered. The gross domestic product of the euro area is likely to have expanded by 0.5% in the second half of 2013; Portugal came out of recession in the second quarter, Spain in the third quarter; Italy stopped contracting in the fourth quarter and Greece is expected to return to growth in 2014 for the first time in seven years; Ireland defied most forecasts by growing 1.5% in the third quarter alone.

“Spain, Portugal and Greece eliminated vast current-account deficits, reducing their reliance on foreign borrowing – and not just by slashing imports; Iberian exports in particular have surged, aided by structural reforms that have boosted competitiveness. Budget deficits have been cut: Greece’s 19% fiscal adjustment is a remarkable achievement that should allow the country to deliver a primary surplus before interest costs in 2013. “Against this more benign economic backdrop, bond yields have fallen back to 2010 levels as foreign investors have returned to crisis-country debt markets. Ireland was able to exit its bailout program and Portugal hopes to do so next year. The European Central Bank’s balance sheet, which ballooned during the crisis as funding markets closed, has shrunk as banks have been able to repay emergency loans; financial fragmentation across the euro zone has eased as borrowing costs in the periphery have finally started to come down.” The Wall Street Journal notes that two of the eurozone’s largest economies – France and Italy – have made the least progress in terms of improving their competitiveness and productivity through the crisis, reflected in very weak growth outlooks. It is an open question, writes Simon Nixon, whether Paris or Rome has the will to undertake essential reforms or face down the inevitable resistance from vested interests. But while these risks are real, he says, one shouldn’t rule out the possibility of upside

68 Gold the international investment, finance & professional services magazine of cyprus

The decision to force uninsured depositors in the two biggest banks in Cyprus to take losses didn’t lead to bank runs across the periphery as many had feared

surprises too. After all, eurozone stock markets soared in 2013, which suggests that real money investors at least are anticipating a substantial recovery in corporate earnings over the next two years at odds with the gloomier macro forecasts. “What would transform the economic outlook – and help ease deflation fears – would be an upturn in business investment and German domestic demand. On both counts, there are reasons for optimism. Corporate investment has been exceptionally weak for five years, suggesting clear potential for a powerful snap back as confidence returns. At the same time, there are signs that ultra-low borrowing costs are finally tempting Germans to start spending: German domestic demand rose by a surprise 0.7% in the third quarter and was the biggest contributor to growth.” Much depends on the ability of the banking system to make credit available. Recent surveys suggest credit conditions may finally be easing, helped by a surge in interest from foreign investors in Southern European distressed bank assets. Efforts by banks and regulators to strengthen capital ratios before the ECB takes over responsibility for bank supervision at the end of 2014 should also help build confidence. The piece concludes on a positive note: “It is even possible 2014 will see a reversal of the vicious spiral of recent years with higher growth, falling unemployment and stabilizing house prices leading to increased demand for – and supply of – credit. After all, this is exactly what seems to have happened in the UK and Ireland in the second half of 2013 – and no one saw that coming either.”

banking

{money}

Impact of Cypr

as a pillar of the economy by the government.” In November the EC, ECB and IMF released a statement saying the economy is doing better than expected and that Cyprus is on course to meet the terms of its bailout. It said: “All fiscal targets have been met with considerable margins,… prudent budget execution, and a less severe deterioration of economic activity than originally projected.”

banking

crisis

“minimal” fo r expats

he headlines were full of the woes of the Cypriot economy in March this year, but much of the predicted hardship has bypassed expatriates living on the island. So says Expatriate Healthcare which recalls how customers of the two biggest banks in Cyprus saw millions of euros stripped from their savings and austerity measures put in place. The €10 billion (£8.4 billion) bailout by the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) was newsworthy, the expatriate website notes, but what of the expats on the ground? Those living in Cyprus did not flee when the news broke in March and many did not have their cash tied up in the system, it says. Carl McCann, an

expat on the island, told The Telegraph: “The talk is all about gloom and doom, but in my opinion Britons living here tend to keep their savings back in the UK or elsewhere.” Many believe that the situation has been overstated and services such as accountancy, shipping and legal work have fared well due to their basis in the international market. There are also a number of new developments that have been built with foreign buyers in mind, showing how the island is looking abroad for investment. April and May did see a dip in the property market, but this had recovered by July and the government has introduced a number of incentives to lure foreign buyers to the island. These include a cut from 18% VAT to 5% when someone from overseas purchases a property for their own use. Vasilis Hadjivassiliou, partner at PwC in Limassol, said: “The property market is seen

Britons living here tend to keep their savings back in the UK or elsewhere

The Everything Store: Jeff Bezos and the Age of Amazon By Brad Stone (Bantam Press, 2013)

R.R.P. £18.99 (£12.72 from amazon.com.uk) he winner of the 2013 Financial Times and Goldman Sachs Business Book of the Year Award is the definitive biography of the company that placed one of the first and largest bets on the Internet and forever changed the way we shop and read. Stone tells the story of Amazon’s development from its meagre beginnings to the present situation where it is growing irresistibly and he is quite open about the negative side of this development, both for the company’s employees and its competitors. Amazon started off delivering books through the mail but its visionary founder, Jeff Bezos, wasn’t content with being a bookseller. He wanted Amazon to sell everything and at disruptively low prices. To achieve that end, he developed a corporate culture of relentless ambition and secrecy. Compared to tech’s other elite innovators – Jobs, Gates, Zuckerberg – Bezos is a private man but he stands out for his restless pursuit of new markets, leading Amazon into ventures like the Kindle and cloud computing, while completely transforming the retail sector.

the international investment, finance & professional services magazine of cyprus

Gold 69

cyprus

{business}

Cyprus Business Forecast Report

Published Recently published research from Business Monitor International, “Cyprus Business Forecast Report Q1 2014”, is now available from Fast Market Research. Among its conclusions and predictions are the following:

he Cyprus government will remain firmly committed to the terms of its €10 billion bailout programme, which could result in a public backlash over the coming years. However, we believe that future negotiations with creditors could prove to be more confrontational in a bid to secure the best terms possible and limit a potential drop in popularity. We see a rapid adjustment in the fiscal dynamics, forecasting the nominal budget deficit to fall from 6.4% of GDP in 2012 to 4.3% in 2013 and continue narrowing to 3.2% in 2014. Further commitment to EU-prescribed austerity measures will be key to ensuring sustainable debt management given that we see the general government debt pile rising above 100% of GDP in 2013. Early indications of the severity of Cyprus’ economic adjustment following the country’s banking sector crisis in early 2013 reaffirm our view that the economy is heading towards a period of major structural adjustment. We continue to see several

years of negative real private consumption, government expenditure and fixed investment growth, which will keep the economy firmly in deep recession until 2016-2017.

Major Forecast Changes We have revised our 2013 real GDP growth forecast to -7.1% from -9.0% and see -3.6% real GDP growth in 2014, from our previous forecast of -3.4%. Bigger-than-expected spending cuts have significantly reduced the budget deficit and prompted us to revise our nominal fiscal balance forecast to -4.3% of GDP in 2013 and -3.2% in 2014, from -6.8% and -6.5% respectively. We see a sharper adjustment in the current account in 2013, now forecasting a deficit of 3.9% of GDP, from our previous forecast of -7.0%, as imports of goods fall at a faster rate than we had previously assumed.

Key Risks to Outlook The near-term outlook is somewhat uncertain as we believe that the Q2&3 GDP data may not accurately reflect the full impact of Cyprus’ banking sector crisis

70 Gold the international investment, finance & professional services magazine of cyprus

We believe that future negotiations with creditors could prove to be more confrontational and compliance with rigorous fiscal austerity and structural reform to qualify for financial aid. This means that the risks are likely to the downside, as leading indicators have continued to deteriorate into the third quarter of 2013. Deteriorating social conditions will test the Government’s resolve to adhere to prescribed fiscal consolidation programmes over the coming years. This could significantly derail ongoing efforts to rein in spending in the absence of meaningful nominal GDP growth.

accounting

Baker Tilly in Romania th Celebrates 10 Anniversary

aker Tilly in Romania (Baker Tilly Klitou) organised a special celebration at the Athenee Palace Hilton in Bucharest last month to mark its 10th anniversary (2003 – 2013), Clients of Baker Tilly Klitou, associates, collaborators and Baker Tilly people were present at numerous events organised throughout the day. The CEO and President of Baker Tilly International, Geoff Barnes, was one of the main speakers at the event. Adam Grainger, the EMEA Director of Baker Tilly International was also present on behalf of the Global Office. Marios Klitou, CEO of Baker Tilly Klitou and Mamas Koutsoyiannis, Managing Director of Baker Tilly in Romania and Moldova, talked about the history of the firm and guided the audience through the most important milestones of the history of Baker Tilly Klitou in Romania. Nicolaos Giannisis, CEO of PrimeCapital which was one of Baker Tilly’s first collaborators in Romania, shared his

The 10th anniversary is only one step on our long and winding road

Marios Klitou, CEO of Baker Tilly Klitou

{business}

Geoff Barnes Main speaker

experiences with the Baker Tilly firm. Almost 200 people attended the events including the Ambassador of Cyprus to Romania, Kaliopi Avraam, and her Greek counterpart, Ambassador Grigorios Vassiloconstandakis. Marios Klitou, thanked all clients and associates for their loyal support and noted that “The path to the 10th anniversary was not plain and simple at all. But it was full of interesting challenges. The 10th anniversary is only one step on our long and winding road, and I’m sure that Baker Tilly will move forward with our determination to achieve higher goals. Now, we are ranked No. 7 in Romania in terms of combined fees and number of employees, with service offerings in five different business units”. Affirming the commitment towards upholding the shared values of Baker Tilly International, Klitou touched upon the firm’s plans to expand across other major towns in Romania. Regarding Baker Tilly’s duties towards society, Klitou said that “we are very proud that our close collaboration with Hope and Hopes in Romania is continuing, as we are giving the chance to a better life to institutionalized children in Romania. We are also one of the founding members of the Romania – Cyprus Bilateral Chamber of Commerce and Industry as part of our efforts to strengthen the commercial relations between Romania and Cyprus”.

the international investment, finance & professional services magazine of cyprus

Gold 71

companies

{business}

First Names Group acquires Citadel

The company completes its third acquisition of 2013. Morgan Jubb

eading international trust, fund and corporate service provider First Names Group has completed a transaction to purchase Citadel Services PSF Sàrl in Luxembourg. The acquisition of Citadel is the Group’s third acquisition this year and will provide the Group with a much-sought-after presence in Luxembourg. Earlier this year the Group bought international fund business Moore and trust and corporate service provider Basel, providing it with a greater global presence and increased headcount to 460 ‘First Names’ across nine strategic locations. Established in 1984, Citadel is an administration organisation offering corporate services from consultancy to accounting and covering aspects of international tax planning, company and trust formation, and ongoing administration for all associated structures. Citadel and its team will begin operating under the new brand in the second

quarter of 2014. The Managing Director of Citadel, Simon Baker commented: “I am very impressed with First Names Group; it has a fantastic reputation and it has been a pleasure working with those involved on this transaction. It is a really exciting time for Citadel; the acquisition will integrate the business in to a much larger Group and present mutually beneficial opportunities for the future.” Morgan Jubb, Chief Executive Officer at First Names Group, further noted: “We have achieved a great deal in the last 12 months and our expansion into Luxembourg is a natural progression as we have been keen to gain a strategic presence there for some time. Citadel is a first step towards us gaining a significant presence in Luxembourg to enable us to provide trust, fund and corporate administration services out of this jurisdiction. The Citadel team are fantastic and I am very much looking forward to working with them.” The First Names Group story started in 1988 when it was established as a small trust company in the Isle of Man. Today, it is a global, independent provider of trust, corporate and fund administration services, with more than 450 employees and offices in the Isle of Man, Jersey, Cyprus, Switzerland, Ireland, UK, British Virgin Islands and Japan. A management buyout in July 2012, backed by AnaCap Financial Partners, gave First Names its independence and paved the way for growth. Early in 2013, just as it launched the new brand, it secured its first strategic acquisition – Moore Management, a well-established corporate service provider in the funds sector. Since then it has broadened its offering with the addition of the Basel Trust Group in both Jersey and Geneva. In 2011, 2012 and again in 2013, First Names was named one of Private Client Practitioner’s Top 25 Trust Companies.

Citadel is a first step towards us gaining a significant presence in Luxembourg 72 Gold the international investment, finance & professional services magazine of cyprus

pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing pricing

pricing

Under Pressure S

{business}

Companies need to be more sophisticated when it comes to pricing

haky consumer confidence, stiff competition and increased transparency offered by the Internet are forcing organisations to reappraise how they price their goods and services, says a new report from PwC, “The power of pricing”. The survey of over 500 companies worldwide highlights some significant and also surprising trends in how companies set prices. More than 40% of respondents consider pricing to be the most effective way of growing profitability. However, only 26% believe increased prices will drive profits over the next three years while a significant minority (17%) believe that profits will decline along with their prices. David Lancefield, Partner, PwC, says: “Pricing is one of the main levers you can pull to make an impact on your bottom line. It’s especially important to get it right in a world in which investors and customers are more demanding than ever. Yet only 5% of respondents feature in the top quartile of all aspects of pricing performance.” The results also show that as many as 60% of respondents adopt the most basic approaches to setting prices including matching competitors’ prices or applying a fixed mark up to costs. More sophisticated approaches such as pricing based on customer willingness to pay are less common. Nazanin Naini, Senior Consultant, PwC, says: “The greatest challenge for companies is to understand where they generate real value and to reflect this in their pricing. Many

The infrastructure to support smart pricing decisions is not fit for purpose

companies claim to be customer-centric, yet understanding what customers really value is one of the most commonly stated challenges, with only 13% of our survey respondents telling us they have deep insight into their customers’ willingness to pay. “Furthermore, we often see companies taking a scatter gun or uniform approach rather than, for example, setting prices in a way that rewards loyalty and customers generating high profitability, as opposed to those most costly to the business.” Companies often underestimate the importance of having the necessary people and systems to support an effective pricing strategy. Nearly half of the survey respondents don’t have a pricing team to make fully considered recommendations on pricing. As a result businesses often give their sales force discretion to discount from list prices, making profit targets less achievable. David Lancefield said: “Our research suggests that the infrastructure to support smart pricing decisions is not fit for purpose. Almost half the respondents struggle to develop an IT infrastructure that supports pricing, whilst 37% struggle with governance and decision-making. “A poor pricing strategy can result in a loss of customers and a backlash from important stakeholders. When it’s done well, it’s the most powerful and effective way to achieve profitable growth.”

Lean In: Women, Work, and the Will to Lead

By Sheryl Sandberg (WH Allen, 2013) R.R.P. £16.99 (£11.55 from amazon.com.uk) n this, the 5th best-selling title of 2013 on Amazon, the Facebook COO and one of Fortune magazine’s Most Powerful Women in Business draws on her experience of working in some of the world’s most successful businesses and looks at what women can do to help themselves, and make small changes in their lives that can effect change on a more universal scale. Learning to ‘lean in’ is about tackling the anxieties and preconceptions that stop women reaching the top, taking a place at the table and making themselves a part of the debate. Sandberg makes some interesting points about how men and women are judged differently (by people of both sexes) and how women should work with it rather than fight it. The book encourages women to climb corporate ladders, Sandberg’s point being that the more women there are at high levels, the more that all women in the workforce will benefit. She must surely be aware that, in 2014, only eighteen of the Fortune 500 CEOs are women.

the international investment, finance & professional services magazine of cyprus

Gold 73

imf

{economy}

IMF Completes Second Cyprus

Review he Executive Board of the International Monetary Fund (IMF) completed its second review of Cyprus’s performance under an economic program supported by a three-year, SDR 891 million (about €1 billion) Extended Fund Facility (EFF) arrangement. The completion of this review enabled the disbursement of about €83.5 million, which would bring total disbursements under the arrangement to about €250.4 million. The Executive Board also approved the authorities’ request for modification of performance criteria on end-December 2013 fiscal targets. The EFF arrangement, approved on May 15, 2013 is part of a combined financing package with the European Stability Mechanism (ESM) amounting to €10 billion. It is intended to stabilize the country’s financial system, achieve fiscal sustainability, and support the recovery of economic activity to preserve the welfare of the population. Following the Executive Board discussion, Christine Lagarde, Managing Director and Chair, said: “The Cypriot authorities have established a record of strong policy implementation, meeting fiscal targets with comfortable margins, making strides in restructuring and recapitalizing the financial system, and advancing structural fiscal reforms. While macroeconomic outcomes have been somewhat better than expected, the economic situation and outlook remain difficult and subject to significant risks. Full and timely implementation of the adjustment program, as well as broad public support,

is therefore crucial to restore confidence and growth. “Considerable progress has been made in stabilizing the financial sector. Cyprus’s largest bank put in place a restructuring plan, the second largest bank was fully recapitalized with private – including foreign – funds, and initial steps were taken to consolidate the cooperative credit sector. Building on these efforts, banks will need to implement their restructuring plans, and the recapitalization and consolidation of cooperative credit institutions should be completed rapidly. These will help pave the way for a further gradual relaxation of payment restrictions in line with the authorities’ roadmap, while safeguarding financial stability. “The resumption of credit flows and output growth will depend on progress in addressing banks’ problem loans. This requires an effective

Considerable progress has been made in stabilizing the financial sector framework for private sector debt restructuring with appropriate incentives. At the same time, efforts should continue to strengthen bank supervision and regulation and the implementation of the anti-money laundering framework. “The 2014 budget is appropriately conservative, given the uncertain outlook. Continued prudence in budget execution is necessary, complemented by structural reforms to ensure adequate protection of vulnerable groups, im-

74 Gold the international investment, finance & professional services magazine of cyprus

prove revenue administration, and strengthen public financial management. The authorities also need to accelerate efforts to jump-start the privatization process,” Lagarde said. Among the review’s main conclusions: The recession through September, though deep, has not been as large as expected. Private consumption has been relatively resilient, economic sentiment continues to improve, and exports, including tourism, have held up. Nevertheless, the situation remains difficult, with unemployment on the rise and disposable incomes falling. Banks are curtailing credit as asset quality continues to deteriorate, and private sector indebtedness remains very high. In this context, the growth forecast for 2013 has been revised upwards modestly, but a deeper contraction in 2014 is now envisaged, consistent with a more gradual private sector deleveraging process. The program is on track. Fiscal performance continued to exceed targets comfortably, and the 2014 budget is more ambitious than envisaged at program approval. All structural benchmarks were met, albeit with a modest delay in one case. Significant progress has been made in restructuring and recapitalizing the banking sector, including with foreign participation in the share capital of one domestic bank. Looking forward, efforts must concentrate on ensuring full implementation of banks’ restructuring plans to clean up balance sheets and pave the way for a return of credit to the private sector. Fiscal structural reforms are proceeding, but strong resolve is needed to kick-start the privatization process. The program remains subject to large uncertainty given lingering financial sector vulnerabilities and continued challenges to policy implementation.

energy

Choosing the

Right Option

n the latest in its Mediterranean Paper series, the GMF (German Marshall Fund of the United States) deals with Natural Gas in Cyprus. The conclusions of the paper by Anastasios Giamouridis are as follows: The discovery of the Aphrodite gas field and the potential for additional hydrocarbons discoveries in offshore Cyprus is very timely. It comes at a moment when the country faces multiple challenges, including recovery from the economic and financial crisis and reducing excessive dependence on banking and financial services. In this difficult environment, there has been a tendency to see hydrocarbons as a panacea for the island’s problems.

Contrary to frequent claims, it is not selfevident that pipeline exports to Turkey would be the most commercially viable monetization option The challenge for Cyprus (and its partners) is to develop its hydrocarbons potential as fast as possible, while at the same time ensuring that it maximizes economic benefits. Besides commercial issues, Cyprus faces a degree of political risk stemming from Turkey. Turkey contests the right of Cyprus to develop resources within its EEZ. It also seeks to link Cyprus’s right to develop its offshore resources to a settlement of the problem of the division of the island. The Cypriot government rejects such pressures, which have not discouraged important international energy companies from bidding for licenses to exploit Cyprus’s offshore blocks. Support from the EU should primarily aim at reducing political risk, allowing

commercial operations and decisionmaking to go ahead unimpeded by longstanding political disputes. The following conclusions challenge widely held views, which have not always been subject to sufficient scrutiny. Production and exports of Cypriot hydrocarbons in the early 2020s are possible but cannot be taken for granted. Achievement of this outcome depends on clarification of the size and quality of available hydrocarbon resources, production and export infrastructure development costs, and applicable prices affecting project economics for the Aphrodite field. Pre-selling rights to hydrocarbons as a means of frontloading revenue is unlikely to be a financially attractive option for Cyprus. If the Aphrodite field alone does not prove potentially profitable, Cyprus will have to seek wider economies of scale to reduce unit costs and support viability. Possible sources of such economies of scale include further discoveries in Block 12, new discoveries by Total and ENI-KOGAS in the five blocks recently awarded to these companies, and/or joint monetization under which Israel or others liquefy their gas in an LNG plant in Cyprus. Such complicated arrangements might well delay progress. The exploration program by ENI-KOGAS and Total in their respective license areas probably offers the best opportunity for minimization of such delays. Economies of scale in export infrastructure should be pursued to boost profitability. Contrary to frequent claims, it is not self-evident that pipeline exports to Turkey would be the most commercially viable monetization option, in the absence of political constraints. A number of market risks call into question the commercial viability of this hypothetical option. The choice of “multiple export options” – involving both LNG and pipelines – would undermine profitability. This

{economy}

might become a reasonable approach only when the planned LNG infrastructure has reached its natural saturation point and economies of scale have been achieved in full. This is unlikely to occur before the mid-2020s, at the earliest. At the current stage of exploration in Cyprus (i.e. on the basis of the 5-8 tcf discovered in Aphrodite), the combination of pipeline and LNG would not be commercially viable. Liquefaction and the export of LNG enjoy strong commercial advantages including investor interest, potentially higher netbacks from selling to premium markets (depending on LNG costs and contractual terms), better tools at managing longterm market risk (as LNG’s flexibility can facilitate market diversification), ability to maximize benefits from economies of scale and positive impact of onshore LNG infrastructure development on the national economy. LNG’s competitive advantages increase with larger volumes, though, like other options, it cannot be considered risk-free. The successful development of Cyprus’s gas resources has the potential to bring attractive returns to investors and provide the country with a high degree of energy security from the early 2020s onwards. It could also contribute to the EU’s energy security and the diversification of its energy supply. Indeed, providing there is sufficient commercial potential, and subject to wise political, regulatory, and commercial management, Cyprus’s new energy resources could offer substantial net benefits and positive multiplier economic effects to the country itself, investors, the region, and Europe as a whole.

info: Anastasios Giamouridis is a senior consultant at Poyry, a global energy consulting/engineering firm. His expertise includes gas monetization, LNG, and long-term supply contracts including price reviews and new contract negotiations. the international investment, finance & professional services magazine of cyprus

Gold 75

vat

Stock taking

All taxable persons who are affected by the change in the standard VAT rate are obliged to undertake a physical stock count of their inventories by the close of business on 12 January 2014. It should be noted that, if the company is using an electronic stock taking system, a physical stock take does not need to be carried out. The stock

€

taking should include both quantities and values. The final stock take report should be kept as part of the business records for a period of 6 years. As per the VAT Authorities, the purpose of performing a stock take is to prevent situations where invoices for the sales of goods taking place following the increase of the VAT rate are moved back to dates before the increase, thus applying the old rather than the new rate.

Credit Notes

Question: If credit notes issued after 13 January 2014 relate to the adjustment of invoices which were initially issued before 13 January 2014, which VAT rate should be applied to those credit notes? Answer: The rate to be applied is the VAT rate which was applicable at the time of supply of the goods or services. If a VAT invoice was issued before the supply of goods or services, the VAT rate that was applicable at the time of issuing the invoice should be applied. Therefore, the time when a credit note is issued does not always determine the applicable VAT rate; reference must also be made to the time of supply of the relevant goods and services.

Contracts / agreements

Where these agreements continue after the increase of the standard rate, only supplies of goods or services made after the effective date will be subject to the increased standard VAT rate of 19%.

76 Gold the international investment, finance & professional services magazine of cyprus

€

8% to 9%

€

8% to 9%

€

n issue 99 of its Indirect Tax Update, KPMG provides the following important clarifications to questions that may arise regarding the upcoming increases to VAT. As from 13 January 2014, the standard VAT rate will increase from 18% to 19% and the reduced VAT rate of 8% applicable on all services falling under Schedule 12 of the Cyprus VAT Legislation will increase to 9%. The main categories of services falling under Schedule 12 include: • restaurant and catering services • tourist accommodation • passenger transport services together with passengers’ accompanying baggage within the Republic with metropolitan, interstate and rural taxis • passenger transport services within the Republic with tourist, excursion and intercity buses Any goods or services falling within the reduced VAT rates of 5% and 0% (included in Schedules 5 and 6 of the Cyprus VAT Legislation respectively) will remain unaffected by the announced increases.

€

to 9%

€

9% o t 8% €

9% to 1 18%

€

€ to 9%

9% o1 t 18% 9% 18% to 1

9% to

€

€ Standard € and Reduced VAT Rates € € 8%

€

9% o1 t 18%

9% o t 8%

€

€ € €

9% 18% to 1

{tax&legal}

Increase to

9% 18% to 1

Where a payment is received after the increase of the standard rate and that payment is in connection to services or goods provided or supplied prior to the effective date, the applicable VAT rate is 18%. If the terms of contracts / agreements, which have been signed prior to the increase of the standard rate of VAT, expressly provide that the applicable VAT rate of 18% will remain the same in the case of any increase to the VAT rate, the building constructor bears the obligation to account for output VAT using the standard VAT rate of 19%. In every situation, you should be taking into consideration the relevant tax points in order to timely account for output VAT with regards to the supply of goods or services. The relevant tax points are summarized below:

a) With regard to goods, it is the earliest of: a. Date of delivery of the goods b. Date of issue of an invoice c. Date of receiving a payment

b) With regard to single supplies of services, it is the earliest of: a. Date of completion of the services b. Date of issue of an invoice c. Date of receiving a payment c) With regard to continuous supplies of services, it is the earliest of: a. Date of issue of an invoice b. Date of receiving a payment

law firms

More Accolades

for Harneys Cyprus

arneys Cyprus has ended its strongest year ever with more accolades, with three partners recommended in the Best Lawyers International guide. Harneys, which trades as Aristodemou Loizides Yiolitis in Cyprus, achieved its highest ever rankings this year in the legal directories Chambers, Legal 500 and IFLR1000. The firm has thrived in what was a turbulent year for the Cyprus economy, launching its Cyprus Banking Group in April to assist clients through the crisis. Harneys Cyprus increased its team of lawyers by nearly 30 per cent in 2013 as it expanded its litigation and investment funds practices. “As the only multi-jurisdictional firm operating in Cyprus, we were able to react immediately to guide clients through the Cyprus banking crisis,” says Cyprus managing partner Emily Yiolitis. “Through what has been a busy and important year for Cyprus, we have advised clients on issues related to the imposition of capital

Tax Lawyer of the Year in Limassol: Emily Yiolitis

controls, bank restructuring, financing and derivatives transactions, corporate structures, tax treaties and more recently, litigation. It is heartening to see the firm and our lawyers recognised by the legal and business communities.” Best Lawyers International named Emily Yiolitis as Tax Lawyer of the Year in Limassol in its recently released 2014 guide, selected partner Pavlos Aristodemou as Finance Lawyer of the Year in Limassol, and recommended partner Nancy Erotocritou in both banking law and finance law. This caps a year of accolades for the Harneys Cyprus team, with the aforementioned partners and Demetris Loizides recommended as leading lawyers by Chambers, Legal 500 and IFLR1000. Emily Yiolitis was also included in Citywealth’s IFC Power Women Top 100 list.

{tax&legal}

Aristodemou, Nancy Erotocritou and Demetris Loizides were recommended for their expertise in the Corporate and M&A sector. The directory described the Corporate & M&A team as “truly committed to its clients, very fast to grasp the essence of a deal and very concise in its responses.”

BOOK REVIEW Modern Maritime Law (Two Volumes) By Aleka Mandaraka-Sheppard (Informa Law

The firm has thrived in what was a turbulent year for the Cyprus economy IFLR1000 moved Harneys Cyprus upward into its tier two category and described the team as “the most responsive lawyers I’ve worked with in Cyprus.” Chambers Europe called Harneys “an office of the highest calibre from the top level to the trainees” in its corporate/ commercial rankings. The firm was newly listed in the directory’s tax category as an “increasingly strong market player.” Harneys Cyprus maintained its strong rating in the Legal 500 2013 directory, earning band two rankings in Banking & Finance and Corporate & M&A. Pavlos Aristodemou was newly named as a leading individual in Banking & Finance, one of only four lawyers to achieve this rating, and Nancy Erotocritou was also recommended. Legal 500 wrote that they both have “unshakeable dedication” and give “the highest standard of advice.” Pavlos

from Routledge, 2013)

R.R.P. £120.00 (Vol. 1) & £150.00 (Vol. 2) he third edition of this unique title has been fully revised and restructured into two self-contained volumes, the first covering jurisdictional issues and risks and the second exploring the diverse aspects of maritime law, risks and liabilities. The book continues to provide succinct analysis of the key principles and precedents of maritime law, a detailed account of important decisions, and incorporates developments in regulation, codes of good practice and international Conventions. The first volume tackles a wealth of complex jurisdictional aspects, ranging from the enforcement of maritime claims to a detailed analysis of the conditions of arrest of ships, including reconsideration of wrongful arrest, beneficial ownership, forum nonconvenience and limitations upon the jurisdiction of the English courts. The second volume tackles the substantive maritime law with a particular emphasis on risk and liabilities, and analyses issues of contract, tort and criminal law, causation and remoteness of damages. Together, the two volumes are an invaluable reference for lawyers working in the shipping sector, academics and shipping and risk management professionals worldwide.

the international investment, finance & professional services magazine of cyprus

Gold 77

{lifestyle}

investing in sports memorabilia

Sports: the pinnacle of inspiration and perspiration; proof that the human body can go above and beyond; an even playing field upon which all are equal. And so it is – with this zeal in tow – that the battle for prized items of sports memorabilia rages profitably on. By Chloe Panayides

Berlin, Germany, the 1936 Summer Olympics: a talented and tenacious man – at the time, overlooked and made to jump more figurative hurdles than many fellow athletes due to his African-American heritage – won four gold medals, becoming the most successful athlete of the year, all against the bitter backdrop of Adolph Hitler’s pro-Aryan Nazi rule. Jesse Owens’ feats have endured as being not only exemplary of sporting brilliance, but as testament to the possibility of overcoming the odds: his gold medals equating to embodiments of absolute triumph in the face of adversity. One individual certainly respected them as being so, parting with $1.4 million to acquire one – just one – of them. The sale – held on December 8, 2013, at SCP Auctions – represents the highest price ever

elieve it or not, in Cyprus there is a man intent on immortalising his name in the Guinness Book of World Records for owning the largest collection of Michel Platini memorabilia. Platini, former captain of France’s national football team and current president of

UEFA, has long been held in high esteem by 51-year old Philippos Stavrou-Platini (who, indeed, actually legally changed his name in honour of his favourite athlete). Stavrou-Platini has opened a museum in Mosfiloti, in which he stores his prized items. It has taken more than 20 years to acquire the numerous

paid for an item of Olympic memorabilia at auction, superseding the previous record held by the marathon winner’s cup from the first modern games of 1896, which commanded $861,130 in April 2012. Indeed, with sporting pursuits rousing such feverish passion – having been a stalwart mainstay of society since antiquity – and with recent estimates indicating that there are some 3.5 billion football fans worldwide, and that 3.6 billion people tuned in to watch the London 2012 Olympic Games (the highest audience in history), it was only a matter of time before investor attention began to sway toward the potential profitability of sports memorabilia. Touch Invest – a specialised platform aimed at sharing chronicles, perspectives and experiences supporting the collecting of, and investing in, alternative assets – suggests that the sports memorabilia market is worth some $5 billion, with $1 billion attributable to the US alone. Attesting to the growing trend, Graham Budd – of Graham Budd Auctions Ltd that holds regular sales at Sotheby’s London – exampled a recent 2013 auction, which was comprised of a respectable 993 sporting items to be sold over two days. Detailing key catalysts that have invigorated the sports memorabilia market, Budd refers to the flourishing of channels such as Sky Television in the 1990s, that funneled a great deal of money into the promotion of various sports, bringing the latter closer to the hearts and homes of fans worldwide: “The media really got a hold of sport and hyped it up, making it a dramatic and glamorous market.” Likewise – Budd maintains – as prominent

items, spanning pictures, posters, jerseys, and signed footballs. The current record – established five years ago – for the Largest Sporting Memorabilia Collection is held by Fernando Da Silva, with a compilation of 1,625 items related to Portuguese club, Benfica. Some news sites suggest that Stavrou-Platini’s col-

lection comprises over 21,000 items, which required him to part with €200,000 in total. No surprise then that the super-fan set the process in motion to enter into the Guinness Book of World Records, which commenced about one year ago. Fellow Cypriot and vice chairman of UEFA, Marios Lefka-

sports people progress through their careers and approach retirement, attention focuses on their past efforts and distinctions, coupled with the distinct realisation that said successes have suddenly become finite. Budd examples the retiring of Sir Alex Ferguson – prolific manager of Manchester United from 1986 until 2013, further credited with widening football’s fan base, especially in Asia – causing an influx

Look for a truly historic item, such as a shirt worn during a world cup final or memorable match of inquiries from Thailand and South Korea, with investors seeking to purchase Manchester United memorabilia. In keeping with the underlying principle of overcoming adversity, experts concur that the sports memorabilia market has, indeed, largely remained unharmed by the effects of the financial crisis, with the higher-end, in particular, remaining strong. Explaining, Budd says: “Wealthy people have still got money, and in this day and age where they are getting nothing in their bank, they are looking for alternative ways to channel it.” Bonhams’ sports specialist, Chris Hayes, agrees, relating that it is becoming increasingly popular for investors to purchase sporting

ritis, facilitated Stavrou-Platini’s dreams coming true in 2009, by informing Platini of his fan’s pursuits, inspiring the UEFA president to pay him a visit. Stavrou-Platini says of the occasion: “When Lefkaritis arrived, he got out of the car,

paused, and said, ‘Look who’s here’. And lo and behold, out comes Michel Platini. As soon as I saw him, I screamed ‘Michel!’ I think the entire village must have heard me!”

the international investment, finance & professional services magazine of cyprus

Gold 79

investing in sports memorabilia

Sports by Numbers

ports fans are dispersed far and wide, ardently committed to a variety of sporting pursuits, as well as acquiring items of importance from their chosen field: the following selection of some of the most prominent sales in ten different sporting arenas serves as full-proof testament to that.

Baseball

With largely an American following, key players in the history of baseball are shown a reverence in the US akin to that imparted to royalty. Babe Ruth, many will attest, has long reigned as king of the game, and therefore (somewhat) explains one fan paying an astonishing €4.4 million in 2012 for one of the earliest jersey worn by the baseball great: a circa 1920 New York Yankees road model donned during his first season following his departure from the Red Sox team.

Basketball

Perhaps there is no greater representation of Michael Jordan’s illustrious career than when he stepped onto the court on June 11, 1997, ill with a high fever. Despite his ailing physical state, Jordan nevertheless scored an impressive 38 points, seven rebounds, and five assists, to not only claim victory for his team, the Chicago Bulls, but also to establish one of the best games of his career. Following the match, Jordan signed his shoes, which were kept for 16 years before being put up for auction at Grey Flannel Auctions on December 11, 2013. They sold for $105,000. The ‘flu game’ shoes more than comfortably superseded the previous record for game-worn shoes, which stood at $31,000.

Boxing

Voted as being one of the top sportsmen of the century, Muhammad Ali endures as a symbol of power and force. His boxing gloves – used against opponent Floyd Patterson in 1965, in the heavyweight title fight of that year in Las Vegas, Nevada – sold for a commendable $1.1 million. Many believed that Ali (then Cassius Clay) prolonged the fight, only delivering the knockout punch in the 12th round, as retribution for taunts previously delivered by Patterson.

Cricket

William Gilbert (‘W. G.’) Grace, born in 1948, is esteemed by historians as being one of the most important cricketers in the sport’s history, lending to its development and later prominence. A bat used by Grace to knock up his first top-class century has been valued at £80,000. As property of the Lords Cricket Club, it is not expected that this prized antique will go under the hammer anytime soon.

Football

Football: played in the majority of countries worldwide, and considered to be one of the world’s most popular sports. The Sheffield Rules – a football code detailing the intricacies of the rules, and considered as being the earliest instruction on the sport – was originally hand-written in 1857 in the English city of Sheffield,

goods at auction for investment purposes, rather than take the current interest rates. Indicating, furthermore, to the changing face of sports memorabilia, Trevor VennettSmith, owner of Nottingham-based specialist sports auctioneer Vennett-Smith, relates: “Prices have gone up tremendously. People often comment that this is an old man’s game. Yet if this is true, a new generation

devised by Nathaniel Creswick and William Prest. Described as an important historical document, the pamphlet sold to an anonymous bidder at Sotheby’s in 2011 for a respectable $1.4 million.

Formula 1

The helmet worn by Sebastian Vettel, winner of the Formula 1 Championship for four consecutive years from 2010 until the present, sold at a Bonhams auction on December 9, 2013 for a record $118,000. The signed helmet was worn at this year’s Nurburgring Grand Prix, which also constituted German driver Vettel’s first home victory. Put up for auction with profits to benefit the Wings for Life charity, the sale represents the most expensive helmet ever sold.

Golf

Golf is a niche yet strong market, and fans have proven their zeal, with one paying $310,000 for golfing great Bobby Jones’ green jacket from the Augusta National Golf Club, which hosts the annual Masters tournament. Sold at Heritage Auctions in the US in 2011, the final price paid for the jacket, featuring Jones’ initials on the inside, was more than triple that of the pre-sale estimate of $100,000.

Ice Hockey

A jersey worn during the 1972 Summit Series games by Canada’s celebrated ice hockey player Paul Henderson, sold in 2010 for $1.275 million. Henderson is praised for having scored the winning goals in 3 out of the 8 games

is coming up as prices continue to soar.” Vennett-Smith credits the Internet with having helped to bridge the gap between sports memorabilia and the up-and-coming generations, with renewed interest in football, in particular, being related, seeing early caps, shirts, blazers, and medals jumping as much as four times in value over the past five years. Experts further detail that emerging markets

80 Gold the international investment, finance & professional services magazine of cyprus

played in the Soviet Union, leading the Canadian team to victory. Overall, Henderson has played over 1,000 games in Major League Hockey, scoring 758 points. Of all of his feats, the Summit Series endures as the highlight of his career.

Rugby

In spite of fervent rugby fans, rugby memorabilia has maintained a low profile over the years. Whilst items of value may be found – a 1906 blazer worn in the South African Springbok’s first tour of Britain reportedly amassed £8,000 – prices of key items are still modest in comparison to their counterparts under other sporting banners. Still, it is thought that with rugby returning to the Olympics in 2016 for the first time since 1928, the sport’s esteem will be elevated worldwide, introducing a whole new audience to the game.

Tennis

A week-long, online auction in February 2013, featuring a selection of items belonging to Arthur Ashe (1942-1993), resulted in Ashe’s 1971 Wimbledon gentlemen’s doubles medal reaping $21,013. Esteemed as being one of the greats in the history of tennis, the 1971 medal is representative of one of Ashe’s first Wimbledon successes. In 1975, the South-African born tennis player went on to win Wimbledon, being the first AfricanAmerican to have done so.

– such as Russia and the Middle East – represent key growth areas yet to be fully explored: individuals who are passionately invested in sports, with a lot of money, no less, to actually invest in sports memorabilia. So, what are the rules of the

In this day and age where they

are getting nothing alternative ways to channel it

in their bank, wealthy people are looking for sports memorabilia game, which must be heeded to ensure a triumphant investment? Touch Invest, with adamantine resolve, asserts that investing in sports memorabilia is requiring of the same research and depth of knowledge fostered for other markets, such as the stock market. And within sports memorabilia, the athlete is the stock. Thus, investors would do well to familiarise themselves with the athlete, ensuring that he or she has good fundamentals, good management, and, finally, good market value. For example, in 1991, a near-mint condition baseball card, featuring celebrated baseball player Honus Wagner – considered by critics as one of the greatest players in baseball’s history – sold for $451,000. The T206 Honus Wagner card (as it is official titled), sold again in 1995 for $500,000, 1996 for $640,000, 2000 for $1.265 million, 2007 for $2.35 million, and, finally, in 2008 for an incredible $2.8 million, reflective of a soaring 521% increase. Conversely, baseball player, Mark McGwire’s 1998 record-breaking homerun baseball – having sold in 1999 for $3 million – has suffered a terrible loss in value, following on from McGwire’s admittance in 2010 of having used performance-enhancing drugs during his seemingly stellar career. Experts now suppose that sellers would be hard-pressed to receive even six figures for the ball today. Bad stock, indeed. Besides such extenuating circumstances, investors would do well to centre their efforts on a team’s or player’s ‘golden period’, during which particular success was achieved, of even historic magnitude. Sports consultant, Bonhams, Dan Davies clarifies: “Don’t buy items made to cash in on an event, but look for a truly historic item, such as a shirt worn during a world cup final or memorable match.” Furthermore, Davies suggests that patience is prudent, as only after players have retired, establishing themselves as ‘greats of the game’ will prices truly see worthwhile rises: “Typically, items from sports players still alive or playing do not tend to sell for as much.” Unique items, with a personal connection to a team or player, are likewise far more fecund than signed replicas. Budd says of profitable items that they are the sort of thing you can pick up and touch, representative of what all the effort and achievement was about. A football shirt worn by Brazilian sportsman Edson Arantes do Nascimento – better known as Pele – during the 1970 World Cup

final, sold at London’s Christie’s in 2002 for £157,750. Meanwhile, a Yankees jersey worn by Lou Gehrig – who famously succumbed to a motor neurone disorder that robbed him of his dynamism on the pitch, claiming his life at the age of 36 in 1941 – sold in 1992 for $363,000. Today, the same jersey is thought to be worth almost double that figure. On the other hand, mass-produced merchandise, due to its sheer volume and lack of association with the athlete, is rarely considered investment grade. More pressingly, a criminal market has been allowed to bloom within sports memorabilia, with FBI statistics suggesting that over 50% (possibly as much as 90%) of all

The sports memorabilia market is worth some

Whatever avenue one may choose to follow, Budd cautions: “You still have to make judgment calls about what you’re buying and what would be a good investment.” Indeed, the core of investing in sports memorabilia as defined by Budd may be likened to the peak of the ‘Prime Sports Pyramid’ that identifies the key contributors to a sportsman’s successful performance: emotion, passion. Budd elaborates: “There’s a rail of football shirts in front of you, and you have to pick the players that people will still be remembering and talking about in ten, twenty and fifty years time, rather than the guys that are big today and forgotten tomorrow. “You can only do that if you are passionate about the sport.” And that, it seems, is how the winner truly takes it all.

$5 billion

signed memorabilia in, specifically, the American market are counterfeit. Vennett-Smith confirms the risks, professing of being fearful that up to 85% of items sold on auction websites could be fraudulent merchandise. He says: “I often get people coming in with football star’s signatures. I have to tell them it is a nice picture but someone has spoiled it with a scribble.” Regardless of country, Davies advises that those who tread with trepidation in the sports memorabilia market will fare well; never has the endeavour to ensure provenance and authenticity been so imperative. He says: “The market is awash with fakes. Only buy from a reputable dealer who can provide a certificate of authenticity and guarantee of a full refund if it is later discovered to be a forgery.” Indeed, such reputable dealers do exist plentifully, with entry and exit in the sports memorabilia market being facilitated with ease and high liquidity, thanks to the variety of venues, stores, shows, auctions, and private sales that occur on a regular basis. More than that, one firm is capitalising on the ever-dominating sports memorabilia market, offering short-term loans against select sports memorabilia. Borro.com aspires to offer customers – often comprised of entrepreneurs and small business owners – the opportunity to acquire a quick loan, devoid of a credit check, in exchange for the temporary release of their prized possession.

BOOK REVIEW My Autobiography By Alex Ferguson (Hodder & Stoughton, 2013)

R.R.P. £25.00 (£12.00 from amazon.com.uk) t the end of last season, Sir Alex Ferguson retired as manager of Manchester United after 27 years in the role. He went out in a blaze of glory, with United winning the Premier League for the 13th time, and he is widely considered to be the greatest manager in the history of British football. Sir Alex was with Manchester United as it changed from a conventional football club into a major global business enterprise, and he never failed to move with the times. His vision, energy and ability enabled him to build teams both on and off the pitch. He was a man-manager of phenomenal skill and, increasingly, he had to deal with global stars. His relationship with Cristiano Ronaldo was excellent and David Beckham has described him as a ‘father figure’. This is not his first autobiography but it may be his last as he sets out his recollections of his time in charge of England’s most famous football club. You don’t have to be fan to enjoy it.

the international investment, finance & professional services magazine of cyprus

Gold 81

A Day in the Life

Michael Virardi The motivational speaker and inspiration coach on the joys of fatherhood, how he manages to be so positive and his ambition to work a 4-hour day. “I have always been

an early riser, getting up around 5.30. I go swimming and running every day except Sunday – a 20-minute run followed by a 15-minute swim to start my day. My routine changed slightly 11 months ago when I became a father, but only in that that I now have to babysit until 7.15 when my wife wakes up – she has to stay up later than me so it’s only fair that she gets to lie in. I would say that Christine and I share baby duties 60%-40%. But I still do my exercise every day and once I’ve taken my shower, I have breakfast – a smoothie made from bananas, apricots, figs and other things – and then I’ll can start work around 8.30. I work from home and, if I am busy on a book, I will begin with that. All the energy and zest I get from the exercise allows me to think clearly. If I’m not writing, I will start work on my first priority. Every night I draw up a ‘to do’ list of 10 things and in the morning I apply the 80:20 principle to it, finding the 2 things that will give me 80% of the value, and I deal with them first. I don’t have a regular, repeated routine. If I am giving a seminar, I will be away all day and at present that happens maybe 35 days a year. On many days I visit existing and potential clients

– we all need to network! – and I may devote an entire day to that. I love this freedom to choose how I spend my time. I enjoyed working in the family business but, of course, I wasn’t as free as I am now. At 36 I decided that I wanted to pursue my dream and my father gave me his support and blessing. In return I agreed to a 30-month transition period so at 38 and a half I started my new career, while remaining a director and shareholder in Virardi Enterprises. My father, in particular, is a remarkably positive person so as far as my own positive outlook is concerned, I have always had a good role model. Another reason for being positive is that I don’t listen to hours of news and analysis throughout the day. I only watch one news bulletin a day. Some people might say that I am ignoring the ‘real world’ but why should I listen to all the negative stories? There are plenty of positive ones around that are much more valuable and I try to see the positive aspects of every situation. I love being able to travel, meet new people, see new places, be exposed to new ideas – all these stimuli provide inspiration and stories for my books and lectures. Coming

A great book about a great businessman

82 Gold the international investment, finance & professional services magazine of cyprus

My tasty, healthy Another smoothie: my favourite breakfast singer Julio smoothie Iglesias

back to my day, I am lucky that my mother-in-law Maria is a great cook so I eat at her house four days a week. Once I’ve finished for the day you won’t find me in front of the TV. Since I was a kid I haven’t been able to watch anything for more than 20 minutes so I read, mainly autobiographies and biog-

raphies. Life is too short for us to learn only from our own mistakes so I like to see what people who inspire me have done. The last one I read and loved was Walter Isaacson’s biography of Steve Jobs. The only person I can listen to while I’m reading is Julio Iglesias. He has been my favourite singer since I was at university. The latest I go to bed is 11pm; it’s usually 10.30pm. I don’t feel some kind of moral obligation to work for 8 hours. In fact I probably work for around 5 hours a day and I would like to reduce that to 4! I don’t work at weekends. I like football, although I never go to local matches. I support Leeds United. I studied in England and I admire it for its discipline and its organisation but I couldn’t work there. However, I spent a month in New Jersey and I loved it. I feel I could happily live in the United States. Every year I make my New Year’s Resolutions. This year’s list includes finishing my new book by the end of June, bringing my cholesterol levels down, spending more quality time with the family, giving more lectures at universities abroad… there are so many! I don’t have any unfulfilled ambitions unless we count things like wanting to have an international bestseller. I am very content with my life. I have a lovely wife and son and I wouldn’t change this for anything. I feel contented and very blessed”.

CMY

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