The Cyprus Investment Story Competing in the New World Philip Ammerman | Navigator Consulting Group KENDRIS Conference | 18 October 2019
CONTACT DETAILS Philip is an investment advisor and serial entrepreneur who has advised investment banks, funds and asset owners on investment-led growth since 1994. He is founder of Navigator Consulting, Numenor Capital and the Centre for Innovation & Entrepreneurship. Philip supported the first wave of "real economy" investments, primarily in industry and manufacturing, that took place in Greece, Central & Eastern Europe, Russia and Ukraine. He has advised on over 120 investment transactions with a total investment value exceeding â‚Ź 6 billion. He has multi-sectoral experience in due diligence, business planning and financial modelling, in sectors including digital/tech start-ups and scale-ups, agri-food, manufacturing and hospitality. In 2010, he founded the Navigator Entrepreneurship Charter, an initiative to support growth in Europe by investing in 10 new start-ups and spin-offs between 2010 and 2020. pga@navigator-consulting.com LinkedIn: philipammerman Navigator Consulting Group www.navigator-consulting.com
Philip acts as regional portfolio manager for Brookstreet Equity Partners, a London-based private equity firm active in tech and innovation investments. Brookstreet recently announced its first investment in Greece, in the nanotechnology firm Nanophos. He is a non-executive director of Redfin Capital, an asset management firm, and is an evaluator for the European Union's Horizon 2020 SME Instrument. Philip studied at Princeton University and Cornell University's School of Industrial and Labour Relations. He is also a graduate of YCombinator's Startup School and the Oxford Fintech Programme. Originally from Athens, Greece, Philip is a resident in Cyprus since 2016, and travels over 250 days per year. He has implemented project work in over 40 countries, and has lived and worked in Greece, Cyprus, Germany, France and the United States. This presentation was prepared by Philip Ammerman of Navigator Consulting and delivered at a conference organised by KENDRIS in Larnaka, Cyprus on 18 October 2019. All information presented is based on information in the public domain. Sources have been provided where relevant. No part of this presentation should be construed as a recommendation to invest in Cyprus or in any of the companies or sectors mentioned. The opinions presented herein are the personal opinions of the author. Š Philip Ammerman, 2019
INTRODUCTION The government of Cyprus, in association with the private sector, has been implementing a multi-spectrum, investment-led development policy based on attracting foreign capital inflows. Whether this relates to incoming tourists, hydrocarbon exploration, citizenship by investment, or investments funds registering in Cyprus, the strategy depends on foreign capital. But that strategy faces significant challenges in a world where capital access and ultimate beneficial ownership is closely monitored and controlled. The strategy of investment attraction has not been met by equivalent investments in quality of life, governance or workforce. As a result, investors in Cyprus need to make very specific plans for how this jurisdiction fits into their wider strategy. Investors also need reliable partners in Cyprus and internationally.
THE NATIONAL INVESTMENT STR ATEGY 3 KEY PILLARS
Foreign direct investment into key sectors
Domestic investment & policy-led reforms
Solving bad debt / NPL and public sector regulation
Shipping
Education
Cooperative Bank
Property
Energy & Transport
NPL Restructuring
Finance
Healthcare
Public Debt Mgmt
Energy
ICT / Productivity
Tech
Casino & Tourism
Improving AML / KYC Compliance
INCENTIVES
Expatriate/HNWI Incentives | Investor Citizenship Programme | Investor Residency
INSTITUTIONS
CySEC | CIPA | CIFA | Cyprus Shipping Council | CCCI | OEV | Others
REGULATIONS
OECD CRS | EU 5th AML | MiFID / AIFM / UCITS | AML / KYC / CFT | US Treasury
SHIPPING & FINANCE SHIPPING
FINANCE
Incentives & Regulation
Incentives & Regulation
Tax on net tonnage
Alternative Investment Funds Law in July 2014 / July 2018 and Registered Alternative Investment Fund
Ship management Shipping and flag Full compliance with EU & IMO regulations
Property
Active international promotion
Shipping
Compliance with UCITS, AIFM and MiFID
Property Access to wide tax and foreign investment incentives
StrongFinance public-private sector cooperation (CSC-Department of Shipping)
ActiveFinance international promotion
Tech Results
Tech Results
Over 1,500 ships registered; Cyprus is the third largest EU flag (CSC) Employs 5,000 people ashore; 55,000 people afloat (CSC) Ship mgmt revenue rose to € 528 mln in 2018: key markets include Germany, Greece, Malta, Norway, Russia, Switzerland (CBC)
Cyprus has doubled assets under management, from €2.1 billion in 2012 to €4.8 billion in March 2018 (CIFA)
Energy
Strong public-private sector cooperation (CIFA-CySEC)
Energy
410 regulated entities + 35 under approval; 80 listed companies Bilateral MoU with 19 Regulatory Authorities & 47 Supervisory Authorities for enhanced supervision and exchange of information
PROPERT Y Registered Property Transactions
The Cyprus skyline is changing with the additional of residential highrise towers and commercial property investments.
Several main drivers: • The Investor Citizenship Programme and the Investor Residency Programme • Bank exchanges of debt-forproperty are also a factor • Demand for student housing • Seasonal labour housing • Buy-to-rent / tourism market rentals. Many investors have also been investing as property returns are higher than bank deposits and offer a relatively safe haven.
10000 9000
8734
8598
8000 7063
7018
7000
6269
6000 5000
4527
4952
3767
4000
Tech
3000 2000 1000 0 2010
2011
2012
2013
2014
2015
2016
Source: PriceWaterhouseCoopers, quoting Department of Lands and Surveys https://www.pwc.com.cy/en/industries/assets/real-estate-march2018.pdf
2017
LONGER-TERM SECTORS: ENERGY Cyprus has made a determined, strategic effort to develop hydrocarbon potential. Future development will depend on geopolitical and economic constraints, and regional threats. 2007: First licensing round for eleven offshore blocks. 2011: Aphrodite Field discovered by Noble Energy in Block 12; contingent reserves estimated at 5-8 tcf 2012: Second licensing round consisting of 12 offshore blocks. 2016: Third licensing round consisting of 3 offshore blocks. 2018: Exploration well by ENI Block 6 discovers the Calypso field 2019: Exxon Mobile discovers 5 - 8 tcf potential in the Glaucus-1 field in Block 10
Turkey currently exploring in CY offshore blocks
ENERGY MARKET HEALTHCARE MARKET ICT INITIATIVES CASINO
LONGER-TERM SECTORS: EDUCATION Upon EU Accession, Cyprus adapted the spirit and letter of EU policy. Quality has improved, while the number of foreign students studying in Cyprus has increased.
• In 2016/2017: 49 public and private higher education institutions, total enrolment of 45,263 students (up from 40.347 in 2015/2016) (MOE) • Cypriot students enrolled in Cyprus were 22,507 in 2016/2017
ENERGY MARKET HEALTHCARE MARKET ICT INITIATIVES CASINO
• Foreign students enrolled in Cyprus were 22,756 in 2016/2017 (including distance learning) • Innovative curriculum development, e.g. University of Nicosia, Blockchain programme https://www.timeshighereducation.com/news/best-universities-new-europe-ranking-2018#survey-answer
REAL QUARTERLY (YOY ) GDP GROW TH
6.0
3.3 2.0
2.0
Q2
Q3
4.0
4.4
4.8
4.8
4.8
4.7 3.7
4.0
4.0
3.8
3.8
Q1
Q2
Q3
Q4
0.4 Q1
Q2
Q3
Q4
Q1
2013
-0.6 Q2
-1.0 Q3
2014
-0.9 Q4
Q1
2015
Q4
Q1
Q2
Q3
2016
Q4
Q1
Q2
Q3
2017
Q4
2018
-2.7 -4.4 -5.1 -7.0
-6.7
CyStat: GDP Growth Rate at Constant Prices https://www.mof.gov.cy/mof/cystat/statistics.nsf/All/EB2B4ACD559F9047C2257D480027D4CC/$file/Growth_Rates_CP-Q418-EN-080319.xls?OpenElement
GENER AL GOVNT REVENUE & EXPENDITURE € mln
Revenue
Expenditure
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2009 General Govnt Revenue Expenditure Result
2010 2009 6,848 7,862 -1,015
2011 2010 7,203 8,115 -912
Eurostat: Annual Government Finance Statistics
2012 2011 7,233 8,355 -1,122
2013 2012 7,085 8,167 -1,082
2014 2013 6,664 7,595 -931
2015 2014 7,014 8,592 -1,577
2016 2015 6,976 7,213 -236
2016 7,086 7,027 59
2017 2017 7,688 7,344 344
2018 2018 8,278 9,268 -990
https://ec.europa.eu/eurostat/data/database
PUBLIC SECTOR EMPLOYMENT Headcount in the public sector has been growing significantly since 2015.
51,253
5,162
3,332
1,280
SemiGovernmental Orgnisations 9,156
2010
51,941
5,666
3,397
1,280
9,246
71,530
2011
52,198
5,831
3,516
1,280
8,728
71,552
2012
51,153
5,830
3,714
1,140
8,432
70,269
2013
49,475
5,765
3,502
1,140
8,008
67,890
2014
48,308
5,650
3,219
1,140
7,278
65,595
2015
48,014
5,612
3,127
1,140
6,047
63,940
2016
48,630
5,662
3,144
1,120
5,993
64,549
2017
50,740
5,631
3,112
1,120
5,911
66,513
2018
51,747
5,806
3,090
1,120
5,915
67,678
Year 2009
General Government
Government NPOs
Local Authorities
Other Local Authorities
Total 70,183
CyStat: Employment in the Broad Public Sector https://www.mof.gov.cy/mof/cystat/statistics.nsf/All/877CC2978876B4C2C22577AC0040F37C/$file/LAB-PUBLIC_SECTOR-Q109_0418-EN-140319.xls?OpenElement
CREDIT & NPLs 31/12/2014 Loans and advances Total General governments Other financial corporations Non-financial corporations Of which: SMEs Households
31/12/2018 Loans and advances Total General governments Other financial corporations Non-financial corporations Of which: SMEs Households
Total facilities Non-performing (Gross) exposures €'000 €'000 NPL Share 57,224,070 27,328,292 48% 1,170,149 62,304 5% 8,602,699 1,019,230 12% 23,570,597 13,667,339 58% 13,827,845 8,809,200 64% 23,880,625 12,579,419 53% Total facilities Non-performing (Gross) exposures €'000 €'000 NPL Share 33,892,413 10,278,431 30% 196,255 349 0% 5,617,632 329,172 6% 14,354,286 4,777,154 33% 10,469,355 4,084,291 39% 13,724,240 5,171,756 38%
NPLs have theoretically fallen from 48% total credit in 2014 to 30% total credit in 2018. A large share of the decrease is also due to debt restructuring and assetfor-debt swaps. While the NPL share has declined, access to credit remains difficult given bank balance sheets.
Central Bank of Cyprus: Aggregate Banking Sector Data https://www.centralbank.cy/en/licensingsupervision/banks/aggregate-cyprus-banking-sectordata
IMPACT: WEF R ANKING World Economic Forum Ranking: Improvement to 44th place in 2018, up from 64 in 2015
World Economic Forum
http://www3.weforum.org/docs/GCR2017-2018/03CountryProfiles/Standalone2-pagerprofiles/WEF_GCI_2017_2018_Profile_Cyprus.pdf
IMPACT: WB BUSINESS R ANKING World Bank Ease of Doing Business Survey: fall from 41 out of 190 economies in 2015 to 57 in 2018.
Trading Economics using World Bank Data
https://tradingeconomics.com/cyprus/ease-of-doing-business
IMPACT: FDI INTELLIGENCE R ANKING
FDI Intelligence
https://www.fdiintelligence.com/Locations/Singapore-tops-fDi-s-Smart-Locations-of-the-Future-2019-20-ranking
INVESTOR CITIZENSHIP PROGR AMME The Investor Citizenship Programme has attracted significant criticism from some EU countries as well as the OECD. A total of 3,255 passports have been granted between 2009-2017 (Philenews, 2018). Total revenue from the programme is estimated at â‚Ź 4.8 billion from 2014 to 2017. (Lakkotrypis, 2019). New direct ICP grants (not counting family members) are capped at 700 per year. Citizenship remains an exclusive issue of national sovereignty within the European Union.
2008 – 2010
55
investors only
2013
112
investors & family members
2014
400
investors & family members
2015
679
investors & family members
2016
904
investors & family members
2017
1013
investors & family members
Foreign demand for 600-700 passports per year is likely to remain strong given global GDP growth, population growth and the number of millionaires being created world-wide
CONCLUSIONS TO PART 1 1. The Cyprus economy remains dependent on foreign capital inflows as well as expertise in key sectors. 2. Successive Cypriot governments have a strong track record of (a) designing legal incentives and regulatory systems, and (b) attracting significant and tangible foreign investment. When done correctly, this brings strong results. 3. The reform of the wider public sector remains a critical issue. Quality and transparency of governance, strategic planning and move to an internet-based egovernment remains a challenge.
OBSERVATIONS 1. In many respects, Cyprus runs a “looser” regulatory regime that other jurisdictions. HNWI Incentive: 60 days residence vs. 180+ days in most other jurisdictions OECD Issue
Cyprus company registration: Nearly no requirements Jersey company registration: must be a resident and get a business license
2. Responsibility for compliance is shifting from government to the banking system as well as accounting firms with fiduciary responsibilities. This distorts normal economic activity. 3. There is little confidence that superficial policy amendments will solve any root cause problems. For example, contributing EUR 75,000 to the Public Housing Fund as a condition for citizenship is probably not going to result in affordable housing. Neither will government subsidies for “innovative companies” result in real innovation.
OBSERVATIONS (2) 4.
The Investor Citizenship Programme may be the latest example of “Dutch Disease�. High capital inflows for citizenship investments are making real business activity in Limassol, Nicosia and other areas increasingly unprofitable. The quality of services is also falling as a result.
5.
There are significant doubts whether real solutions to NPLs and real regulation of the financial sector is taking place. In many cases, bureaucratization has replaced regulation. Many institutions are also not aware of regulatory reach or limits.
6.
New EU regulations continue. 2020 will bring even higher compliance costs and issues for financial and non-financial firms alike.
KEY EXOGENOUS RISKS RISK Geopolitical Risk
DESCRIPTION
LIKELY IMPACT
CHANCE
Turkey: Relations deteriorate leading to limited armed conflict or clashes offshore (see ENI).
Confidence in Cyprus diminishes Capital & labour flight
SIGNIFICANT
Israel: A regional war between Israel and its neighbours or non-state actors
Disruption of flights, tourists and financial flows to Cyprus
Russia: Further embargos or issues lead to limiting the business relationship
In some scenarios: business opportunities
Regulatory Overshoot
International regulatory requirements continue to Higher compliance costs increase, making costs of compliance difficult. Confidence in Cyprus diminishes This is clearly seen today, driven by EU and Capital & labour flight OECD initiatives.
HIGH
US Treasury operations
Under the guise of AML and anti-terror financing, the US Treasury is placing severe pressure on Russian owners of bank accounts. A significant number have been closed.
HIGH
Deposit flight Investor flight Asset base and income of Cypriot banks falls still further Confidence in Cyprus diminishes
International financial crash
An emerging debt crisis or a real US-China trade war, and/or a further European debt crisis
Lower overall capital and trade flows; synchronized recession
HIGH
KEY ENDOGENOUS RISKS RISK
DESCRIPTION
LIKELY IMPACT
CHANCE
Regulatory Error or Capture
The key risk is whether Cypriot regulatory authorities have the resources necessary to implement their mission. For example: are Forex companies properly regulated in Cyprus?
Further damage to the business reputation of Cyprus Financial damage to investors in specific segments.
HIGH
Regulatory Overshoot
Cyprus regulators overstep their bounds. Rather Higher compliance costs than smart regulation, regulatory authorities rely Lower regulatory quality. on high bureaucratic procedures.
HIGH
Revisions to ICP or HNWI Incentives
Further revisions are made to bring Cyprus standards on substance, residency duration, or citizenship grants in line with OECD practice.
Cyprus incentives lose their attractiveness compared to other onshore or offshore jurisdictions.
HIGH
Labour & Input Price, Quality and Availability
Recruiting and retaining the qualified, highly skilled managers and staff needed is becoming more expensive and difficult. All costs are rising.
Labour imports or labour offshoring; rising costs for investors.
HIGH
Investors focus on jurisdictions with a better financial or fintech ecosystems.
HIGH
Lower Banking High costs of banking for foreign investors; low Effectiveness bank productivity; high bureaucracy and compliance; low capital availability
OTHER KEY ISSUES A further issue is the extent to which the Cypriot government can reform public sector operations and create a level playing field. •
Domestic investor have significant systemic advantages over foreign investors (IBU fees; asset valuation and access, capital access; Cooperative Bank liquidation);
•
The court system takes far too long to hear and decide cases;
•
Taxes and costs are increasing; quality and speed of operations is decreasing;
•
Key institutions, such as the Cyprus Registrar of Companies, have not adapted to the internet age; the process of registering and managing a company has become bureaucratic and costly due to domestic protectionism;
•
The government is expanding public sector recruitment; increasing public sector salaries; and delaying liberalisation in key sectors;
•
Key semi-governmental organisations have lapsed into heavy financial losses and are being maintained due to their regulatory backing and public sector payroll;
•
Other jurisdictions, such as Ireland, Malta, Estonia and Lithuania are reinforcing and enhancing their competitiveness across the spectrum of operations.
RISK MITIGATION: STR ATEGIC JURISDICTION
1. How does Cyprus fit into your wider business strategy given the increasing specialisation of other jurisdictions? For example: if you are a tech startup, and you seek a higher pre-money or post-money valuation, Dublin or Amsterdam have a deeper ecosystem and offer better valuations and exits. Lithuania has the best fintech regulatory licensing system. Ukraine has a deeper talent bench. 2. Compliance and regulation costs are going to increase in coming years in all EU jurisdictions. GDPR and the coming ePrivacy Regulation are good examples. What is your strategy for this?
BREAK-EVEN
1. Have you correctly calculated your break-even point? Are your Cyprus tax savings high enough to justify the added costs needed to achieve them?
RISK MITIGATION: DEFENSIVE / COSTS BANKING
Develop multiple banking relationships inside and outside the EU. Ensure access to funds and watch for deposit insurance levels. Remember what has happened with depositor insurance in “non-systemic banks�. Have at least one fintech provider such as Revolut or N26.
STAFF
Have a reliable Cypriot partner Ensure non-compete, retention and indemnity contracts with CY or fiduciary staff. Consider talent offshoring or onshoring in EU. Form alliances with universities or vocational training schools to access talent. Use HRDA, Erasmus, internships, and other tools to develop talent. Invest in training, productivity, IT.
PROPERTY
Current valuations of older property in Limassol favour buying rather than renting. (This refers to rental / purchase cost comparison, not future capital appreciation). Larnaka and Paphos remain significantly undervalued compared to Limassol or Nicosia.
RISK MITIGATION: AGGRESSIVE / INNOVATIVE SHARED ECONOMY
Do you need to bear all costs on your own? Can you form alliances or partnerships with other firms facing the same challenges?
DIGITAL / PRODUCTIVITY
What investments are you making to raise productivity, raise client relationships and raise market standing via digital transformation or wider productivity initiatives? Why is there no digital bank in Cyprus?
CONSOLIDATION
Cyprus is oversupplied with small, less-productive service providers across the value chain. A large part of this is also due to generational change. What is being done to consolidate these and gain economies of scale?
INNOVATION & DISRUPTION
Strategic investments in key segments such as high speed telecoms, co-working spaces, other Cyprus substance solutions, student housing, seasonal staff housing, small-footprint offices, digital banking, digital credit offer good return potential. Consolidating and upgrading traditional segments such as HORECA are a major opportunity.