The European Bank for Reconstruction and Development (EBRD) bolstered its engagement with Cyprus in December 2014 with the opening of its new Resident Office on the island. Libor Krkoška, Head of the EBRD Office in Cyprus discusses how the bank’s intensified investment in Cyprus is taking shape.
How do you perceive the current momentum that Cyprus is enjoying?
What everybody can notice is that the recovery and implementation of economic adjustment program has been much faster than what people expected, even a year ago. The fact that Cyprus is now growing more than 1% a year, that major private banks such as Hellenic Bank or Bank of Cyprus are recapitalized, fiscal policy is in surplus and the government has returned to the international bond market are major achievements. These are successes that were not so easy to predict a year ago, including the fact that capital controls were removed fairly quickly.
What was the main reason behind the arrival of EBRD in Cyprus?
The reason why we came here was to provide our experience and expertise in banking sector restructuring, corporate restructuring and privatizations. The initial focus of the EBRD in Cyprus was to support the recapitalization of the local banking sector, to increase the confidence of both external investors and local depositors in the banking sector. I think this has been achieved. We are now focusing on expanding our support for the corporate sector, both large corporates and SMEs, and we are ready to support privatizations and private concessions, such as the planned concession of Limassol port.
How important is the support of EBRD to key financial institutions of Cyprus such as Hellenic Bank or Bank of Cyprus?
We are active shareholders in both banks. We have nominated independent directors for the board of directors of each institution who have experience in NPL restructurings and are international experts in the field, and of course those directors are also very active. The other important area is the support for the local banks in financing international trade, not just goods, but also services through the EBRD Trade Finance Facilitation Program, for example export of construction services from Cyprus to Middle East, in particular neighboring countries in the eastern Mediterranean.
What makes Cyprus different and attractive from other countries where EBRD is developing projects?
Cyprus has a unique geographic position within the European Union in the eastern Mediterranean, so investors coming to Cyprus can find very easy connections to neighboring countries, those to the south and east of Cyprus. Not just flight connections, but also sea connections because Cyprus is the first EU member for ships crossing the Suez Canal. It’s a natural hub in the east Mediterranean for investors who want to be based in the region while still benefiting from being in the EU.
How do you perceive the financial or advisory impulse that EBRD can give to Cyprus, not just to banks but also to SMEs?
We are ready to work with local banks on extending new loans to SMEs and, in particular, we’d like to also introduce to Cyprus our sustainable energy financing facility through which we can provide financing for small-scale sustainable energy projects, either renewable energy generation or energy efficiency improvements. At the same time we know that SMEs don’t need just financing, they also need to know-how to approach new markets, how to obtain new quality certifications or put in place more sophisticated organizational structures. We have started our small businesses advisory services program here in Cyprus funded by the EBRD shareholders, and we hope that through this program we can help between 50 or 60 small and medium enterprises over the next two years. We aim to continue with this program over the following three or four years, and eventually transfer it to the local authorities so that it continues providing know-how to SMEs after completion of the economic adjustment program.
As you are actively involved in different sectors of the Cypriot economy, which sectors are going to boost and move forward this country?
We work with a large number of companies, either directly or via our SME advisory services. We support in particular export-oriented enterprises, be it in food processing, the ICT sector, or professional services. Professional services normally do not need financing, but they can still benefit from EBRD’s presence via our SME advisory services that can help with growth strategies, marketing strategies for new export markets, or changes in their organizational structures and corporate governance as they grow from small, few people businesses into companies which employ dozens, or hundreds of staff.
If you look at Cyprus, there are probably three core areas where enterprises can grow and create new jobs. It’s tourism, shipping and professional services, and either directly or through our advisory services we’re already active in all these sectors. With financing outside the banking sector, we have started with shipping. We have also started supporting exports with our trade finance facility, and we expect to provide energy efficiency credit lines to local banks that will target in particular the tourism sector in the future, in addition to our current work in this sector with our SME advisory services.
Which are the most important programs that you have developed in Cyprus or that you aim to put on track?
The widest reach and the most important at this point in time is our trade finance facility, because Cyprus is a country of about 1 million people so the local market is fairly small; it has to be an export-oriented economy by this nature. Our trade finance program helps local companies to reach many more customers than they would do otherwise and I think that's what is at this point in time the most needed.
If you had asked me a year ago I'd have said our support for recapitalization of banks is key because the banking sector was recovering from a very deep crisis. We have invested in the two largest local banks and the sector is now stabilized, so what we have done served the intended purpose.
If you were to ask what it will be in the future, I think that over the next 12 months or so, we would very much like to link the banking sector and the shipping sector here in Cyprus, so that the success of the shipping sector could also help the banking sector to recover faster and be deeper and more diversified than in the past.
If you were to ask the question for about five or six years in the future, I would say the key issue will be our support for measures to address climate change, the expansion of renewable energy production, and investments in energy efficiency, because these are very often undervalued by investors or by companies, especially in Cyprus with such a perfect climate where thinking about insulation and saving on energy is sometimes secondary. We would like to increase the profile of this particular investment area, and it should be the case throughout our presence in the island.
Do you think that Cyprus has already restored its creditworthiness?
If you take a look at the issues of long-term eurobonds by the government, at the successful recapitalization of the banks, and also at the upgrades by credit rating agencies you will conclude that Cyprus has restored its creditworthiness. Once the privatization process is completed and the country resolves the problem of the NPLs and lowers substantially the unemployment rate, the confidence of national and foreign investors will be totally back.
If you had to choose a title for this interview…what it would be?
That's a good question, because I didn't think about it in this way, but I think I would like to see EBRD in the title, probably something like EBRD supporting economic reforms in Cyprus. You can probably rephrase it to say, ’Successful experience of EBRD following the start of its activities in Cyprus’.