VZCZCXRO2262
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHNC #0172/01 0651420
ZNR UUUUU ZZH
P 061420Z MAR 09
FM AMEMBASSY NICOSIA
TO RUEHC/SECSTATE WASHDC PRIORITY 9689
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 5410
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 NICOSIA 000172 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR OFFICE OF EASTERN AND CENTRAL EUROPE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN CY
SUBJECT: CYPRUS ECONOMY: SO FAR, BETTER THAN MOST 
 
REF: A. 08 NICOSIA 759 
     ¶B. 08 NICOSIA 763 
     ¶C. 08 NICOSIA 932 
 
¶1. (SBU) Summary: Local economists expect the Cyprus economy 
to continue achieving slightly positive GDP growth this year 
despite being buffeted by the international economic crisis. 
A diversified economy, a generally stable real estate market, 
banks that avoided the excesses of those in money centers, a 
government that practiced strict fiscal and monetary 
conservatism in the run-up to its joining the Eurozone last 
year, and a populace that has eschewed stock market investing 
for most of this decade has put Cyprus in an enviable 
position relative to others in the EU and elsewhere despite 
the ongoing risks of further contagion. That said, key 
construction and toursim sectors are in decline and faceing 
challenging prospects for the foreseeable future. End Summary. 
 
Construction Down 
----------------- 
 
¶2. (SBU) The Cypriot economy is slowing markedly from the 
approximately 3.6 percent GDP growth achieved in 2008 
(including an annualized 2.4 percent rate in Q4 2008) to an 
anticipated growth of 1-2 percent for 2009. Construction and 
real estate, which had been the leading contributors to 
Cyprus' rapid growth over the past few years, and comprised 
about 25 percent of GDP in 2007, began to slow considerably 
beginning Q4 2008. Land Registry figures indicate a 31 
percent decline in real estate sales in 2008, largely 
concentrated in Q4, and due in particular to the exit of 
British buyers from the market. Construction activity is down 
40 percent so far in 2009 compared to last year and building 
permits down 8 percent. 
 
¶3. (SBU) According to the most widely used index, real estate 
values across Cyprus increased by 2.8 percent in 2008 
following a 19.2 percent rise in 2007. However, prices 
reversed direction in Q4 2008 with values declining 1.5 
percent. The biggest declines were in the tourist areas of 
Paphos and Agia Napa, districts where British and other 
foreign homebuyers comprise the majority of real estate 
purchasers. Sales volume has declined 70 percent in the 
Paphos district. With the fall of the British Pound against 
the Euro and the general financial distress in the UK, the 
British are not only no longer purchasing retirement and 
vacation homes in Cyprus, but many are trying to sell what 
they have. In cities such as Larnaca and Limassol, where 
Cypriots are the primary buyers of real estate, prices have 
not declined although the number of transactions are down 
more than 30 percent. Real estate values in Nicosia, where 
there is almost exclusively a domestic real estate market, 
are reportedly up 3 percent this year. 
 
Banks Hanging On 
---------------- 
 
¶4. (SBU) The decline in real estate has had limited effect on 
the banking sector. Non-performing loans from mortgage 
holders remain low (less than 2 percent) and given the 
glacial pace of the Cypriot judicial system, workouts of 
problem loans are more likely than foreclosures. The bigger 
concern is smaller developers who are highly leveraged and 
cannot afford to carry their inventory. A local banker told 
us that he expects loans to such companies to start failing 
by next month, but that most banks have already increased 
reserves for this eventuality. The larger developers tend to 
be less highly leveraged and to have sufficient cash flow 
from managing properties to allow them to sustain their bank 
payments. 
 
¶5. (SBU) Local bank stocks have been hammered over the past 
year, down more than 40 percent. This is the result of 
foreign stock holders selling these assets to raise capital 
as well as some concern that Cypriot bank exposure to Eastern 
Europe, Russia and Greece could prove problematic even if 
Cyprus itself manages to escape negative growth.  Bankers 
here tell us that their exposure to developing markets 
remains less than 8 percent of total assets and, so far, 
their businesses there continue to perform adequately due to 
conservative lending practices. Their exposure to the Greek 
market is more significant, about 30-40 percent of assets. 
However, the bankers say that their business is tracking with 
the growth of the overall Greek economy, and accordingly they 
are realizing slower growth but not losses in their Greek 
operations. The Cypriot banks with subsidiaries in Greece 
have declined access to GOG bailout funds saying that do not 
need the extra capital. For 2008, the three major Cypriot 
 
NICOSIA 00000172  002 OF 003 
 
 
banks, Bank of Cyprus, Marfin-Laiki, and Hellenic Bank, 
respectively realized a 4 percent net profit increase, a 30 
percent decline, and a 75 percent decline, mostly the result 
of poor performance in their investment businesses and 
increases to loan loss reserves. The Central Bank also 
assures us that the banking system here is not experiencing 
much stress and that bank deposits from Russian or 
Russia-related businesses and individuals (about 45 percent 
of total deposits) remains unchanged from last year. 
 
Word on the Street 
------------------ 
 
¶6. (SBU)  Anecdotally, although the restaurants and bars that 
cater to locals rather than tourists are as busy as ever, 
there has been a significant decline in economic activity. 
Car dealers tell us that their sales are down 25-40 percent 
from last year and car owners are more frequently taking 
their cars to independent garages rather than pay for the 
more expensive dealer servicing. The manager of Cyprus' 
largest travel agency said her sale of outbound tickets in 
January and February were 30 percent less than the same time 
last year because, "now is just not the right time to spend 
money on non-essentials." The Hotel Association reports 
bookings for this summer are down 20 percent. The editor of a 
major newspaper told us that his ad revenue has fallen more 
than 30 percent this year and he would have to begin laying 
off staff. 
 
Unemployment Up, Slightly 
------------------------- 
 
¶7. (SBU) Unemployment is inching up, to 4.3 percent in 
January from 4.2 percent in December. This is the third 
lowest in the EU according to Eurostat, and economists here 
do not believe it will go much higher despite the likelihood 
of increasing layoffs in the hotel and construction sectors. 
This is because of the large number of foreign workers 
employed in Cyprus, estimated at more than 20 percent of the 
total workforce. In the construction sector, more than 26 
percent of the workforce is foreign (and more than 40 percent 
if Turkish Cypriot construction workers employed in the south 
are included). In the hotel and restaurant sector, more than 
38 percent of workers are foreigners. Since these sectors are 
heavily unionized, and the Cypriot unions will protect 
Cypriot union members before foreign union members, 
expectations are that very few Cypriots will lose their jobs 
but many Sri Lankans, Filipinos, Bulgarians and Romanians may 
become unemployed over the next year. 
 
How Does Cyprus Do it? 
---------------------- 
 
¶8. (SBU) There are several keys to Cyprus' relative success 
in escaping the worst ravages of the financial crisis: 
-A large part of the population enjoys stable jobs and 
growing income by working for the government. About 15 
percent of the population is employed by the state or a 
parastatal. These employees receive biannual cost of living 
adjustments and last year received an 8 percent base salary 
increase. With the current left wing government, there is no 
likelihood of any reduction in this staff. Ten percent of the 
workforce is employed by the large banks. These are heavily 
unionized, like the government workers receive a biannual 
COLA, and layoffs and salary reductions are unheard of. 
About 12 percent of Cypriots receive COLA-adjusted pensions. 
These pensions were recently increased by the government, 
especially for those at the lower end of the income scale. 
 
-Cypriots have been largely absent from the global stock 
market since the local bourse crashed in 2000. Since then, 
property and bank CDs  have been the investments of choice, 
with Cypriot land values doubling post-2002. Cypriots 
generally still feel wealthier than they did a few years ago, 
even as the constant drumbeat of bad global economic news has 
caused them to reduce their consumption levels, which had 
reached unsustainable rates in any case. 
 
-Banks here have always funded themselves via deposits, not 
through the European interbank market, and they have utilized 
their funds through self-generated lending with no on-selling 
of the loans. Thus their exposure to exotic instruments and 
uncertain funding is very limited. Foreign currency deposits 
have a 70 percent reserve requirement. Loan/deposit ratios 
are very conservative at 85-90 percent. 
 
Government Stimulus 
-------------------- 
 
NICOSIA 00000172  003 OF 003 
 
 
 
¶9. (SBU) The government has promised a 300 million Euro 
stimulus package aimed primarily at the tourism and 
construction sectors. Landing fees have been reduced at the 
nation's airports and tour operators are being offered a 
reduction in VAT for their clients (from 8 to 5 percent). New 
construction projects, especially roads, schools and cultural 
centers, are expected to begin this year to help those 
construction companies no longer building vacation homes for 
British expatriates. Even with these increased expenditures, 
the government budget deficit is anticipated to be below 1 
percent of GDP for this year and overall government debt to 
remain below 50 percent of GDP. 
 
¶10. (SBU) Comment: There are some questions about the 
generally positive scenario in Cyprus: bank lending is down 
and credit harder to find, sales are dropping fast at retail 
establishments, and government is not particularly good at 
fast-tracking projects-so how can growth of any sort be 
achieved? And if the British economy that provides more than 
50 percent of all tourists to Cyprus continues to decline, 
will the Cypriot tourism sector suffer more than expected? 
And with the trade deficit having grown by almost 17 percent 
in 2008 (and the deficit equal to 36.5 percent of GDP.) 
additional declines in services exports could make financing 
future imports more expensive.  So far, however, it seems 
that with the banks apparently safe and with the GOC in a 
good position to provide more stimulus if needed, things in 
Cyprus are as good as they are anywhere in the Eurozone 
despite the uncertainties. 
Urbancic