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Central Bank Governor: Unpredictable new challenges

14/09/2022 07:45

In Cyprus, the consequences of the adverse geopolitical events to the economy and the banking sector are so far contained, but the second round effects have not yet materialised, said Governor of the Central Bank of Cyprus Constantinos Erodotou, in a speech at the London Business School Alumni Cyprus Club event on Monday.

He told attendees that the pandemic and the war in Ukraine have created significant macroeconomic uncertainty in the euro area, associated with a high degree of output growth and inflation volatility. He said GDP is growing at a much slower pace this year than previously expected. Growth is hampered by soaring energy and commodity costs, low confidence and supply chain disruptions. At the same time, inflation is approaching double digits, and a winter with possible energy shortages is on the horizon. Nevertheless, a recovering tourism industry, decreasing unemployment, and EU funding payments all help to boost activity and limit, to some extent, output loss.

Erodotou said that this situation, combined with pre-existing challenges, such as the climate change and the new protectionism trend, requires a new approach in Monetary Policy and constitutes a major test for policymakers in the euro area and around the world.

In Cyprus, the consequences of the adverse geopolitical events to the economy and the banking sector are so far contained, but the second round effects have not yet materialised and uncertainty in an environment with high inflation and weakened growth prospects might lead to unpredictable new challenges.

The Cyprus economy, he said, continued to record noteworthy GDP growth despite the outbreak of the Russian-Ukrainian war. Real GDP growth in Cyprus expanded by about 6 percent over first half of 2022, mainly driven by a faster than expected recovery in tourism-related activities and, to a lesser extent, by growth in information and communication activities and in professional services.

At the same time, weakness in the Cyprus GDP performance could be expected to become visible over the second half of 2022 and 2023, primarily owing to the anticipated worsening in the international environment outlook.

The labour market has been exhibiting continued resilience, the Governor of the Central Bank said. Over the first half of 2022, the unemployment rate reached 6.7 percent, well below the 7.5 percent rate recorded in 2021. The resilience of the Cyprus labour market is in line with business views about expecting a relatively small impact from the war.

Regarding developments in the Cyprus banking sector, he said data from the sector demonstrates that despite the negative international economic environment, the Sector is proving resilient, exhibiting a solid and healthy financial standing. The solvency position, as measured by the Common Equity Tier 1 ratio was edging up to 17.5 percent in the second quarter of 2022, a level higher than the respective European average of 15.2 percent. The Liquidity Coverage Ratio, indicating the availability of liquid funds against deposit outflows over a 30-day stressed period, stood at the level of 320 percent in July 2022 which is more than 3 times higher than the minimum requirement of 100 percent, placing Cyprus amongst the most liquid banking sectors in the Union, where the average LCR amounts to 168 percent. The non-performing loan ratio has continued its downward trend despite the supply and demand shocks caused by the pandemic and the inflationary pressures and stands at 11.2 percent as at June 2022, with total non-performing loans amounting to €2.9b, which is the lowest level observed since 2014 when the definition was harmonised across European Union.

Nevertheless, said Erodotou, all the banks need to remain cautious, prudent and active in order to confront a challenging period that lies ahead us.