Risk and Opportunity
There is no doubt amongst economic and financial analysts that Cyprus is currently undergoing a major transition as it weeds out bad debts and implements austerity measures in order to heal. However, in every crisis, there are always some obscure opportunities that only the keenest and most alert investors will notice. So there must still be lucrative investment opportunities in the country that are worth the attention of serious investors who are looking for short-term and long-term gains. But where are they, and when should and where should investors invest?
Professor Alexander Michaelides, the Director of Center of Banking and Finance at the University of Cyprus, who has written extensively about the Cyprus's financial services industry, told Asia Outbound during an interview that Cyprus will continue being a place that will attract international businesses because of its low tax regime compared to its European neighbors. Interestingly, according to Michaelides, the economic and debt crisis that has recently unraveled in the country will create new opportunities for new investors.
"Cyprus's economic crisis will not affect the country's tax brackets. In other words, the tax rate will remain very competitive at 12.5% within the Eurozone. Therefore the low taxation regime still remains relatively lower compared to other European competitors." Michaelides added, "I also expect the country's bureaucracy to be reduced in the future due to the implementation of the memorandum which should make the market even more business friendly (these reforms will gain strength from the urgency a large recession gives)."
Cyprus's economic crisis will damage the country's reputation worldwide and will shrink consumers' pockets in the years to come, but it will still be an ideal place for international companies to open a business in the country as long as the talent does not flee. As the employment rate increases and as inflation rises due to injected money into the economy, talented labor that is laid off will be keen to finding work, making them more open to accepting lower wages than they would accept in normal times. An international company setting up shop does not just acquire cheaper labor; it also benefits from the fact that the labor in Cyprus is talented and connected with many other parts of Europe since the population speaks good English and a variety of other European languages. Michaelides is correct that Cyprus' government will take steps to continue to make the island more business-friendly to maintain its international business presence. From a decision maker's standpoint that is looking for a cheap and quick entry into Europe, Cyprus is a place that might be on their list of interest.
Not all observers of Cyprus believe that the country will continue to be a friendly business center. In fact Jay Adkisson, an attorney with more than 20 years of experience who specializes in asset protection, and who has written about Cyprus' economic crisis in well known magazines, believes that Cyprus's days of being an international business friendly center have come to an end.
In an interview with Asia Outbound, Adkisson said, "Cyprus was--past tense-known as a business-friendly hub. It is now known as the one domicile where the government essentially raided accounts, including offshore accounts, to make up its fiscal shortfall. It is seriously doubtful that many persons and companies will begin to trust Cyprus as a serious offshore jurisdiction for some generations."
The views about surrounding the fate of Cyprus' business friendly center are divergent, which is clear by comparing the views of Adkisson and Michaelides regarding the future of the country's economic status. But both observers would agree that this year investing in the country would be risky, as it still has not hit rock bottom. The European Commission predicted before the island's financial rescue that the economy would shrink 3.5% in the current year. Even more worrisome for investors, an official from the Cyprus government said the crisis could be worse than most of us think. Christos Stylianides, a Cyprian government official said recently, "The recession may not be 8.7% in 2013 - as is estimated - it may reach 13%." This kind of data will have serious blows to the island's economy and its standing as an offshore financial center.
What investment opportunities are still options in Cyprus?
Cyprus' economy is tumbling to the bottom, and investors are shaking in their boots as they see the country's stock prices blow beneath their feet. But, to many people's surprise, there are still investment opportunities in Cyprus that are lucrative, especially for long-term investors.
Despite the economic crisis that Cyprus is currently dealing with, some CEOs in the region are planning on weathering the storm and to continue investing in the nation as the country has a skilled labor force, and because of its unique location in Europe. Gary Smart, the Vice President of Weatherford's Well Screen Technologies Business Unit recently said "Cyprus is strategically located between North Africa and the Middle East. This location allows for more rapid deployment of our technology to oil producing nations such as Saudi Arabia and those in West Africa. Cyprus is an ideal location to further extend Weatherford's production capacity globally, while meeting the needs of its clients in an increasingly efficient manner."
Even the Wall Street Journal commented, "Cyprus offers a strategic location, favorable tax environment, educated work force, excellent telecommunications, modern banking and legal infrastructure which make the country the perfect business bridge for the European Union and the Middle East."
To be more specific, there are investment opportunities in Cyprus's real estate market, and they will become cheaper as residences leave the region seeking work. Adkisson said, "Cyprus" real estate will get cheaper, and possibly much cheaper. For a country with a small population, Cyprus is about to see a significant portion of its wealthiest and most successful legal and financial professionals in the offshore sector go elsewhere, which means that they will be selling their residences and moving their families off the island." He added, "As Cyprus's economy continues to deteriorate and inflation inevitably sets in, local families will be forced to liquidate their holdings to provide living money. Also, Cyprus's real estate downturn is just starting, and experience has shown that it takes three to four years for real estate crashes to hit bottom. So, if I were looking to invest in Cyprus real estate, I would forget about it for now and target 2016 to begin looking at it again. Then, I would look for coastal properties suitable for tourism investments or rental villas."
In an interview, Georgios Akis Pittas, an executive at Investia, a real estate company based in Cyprus, said that now is the ideal time for investors to not only buy homes in Cyprus, but to also buy commercial properties there too.
"The cheapest properties right now in Cyprus are one-bedroom apartments that start at 50000 euros. Old apartments that have two bedrooms start around 100, 000 euros. Most Chinese who invest in Cyprus I personally believe buy property for permanent residency. Now is the right time to invest not only in residential property but also commercial property such as hotels and parks," said Pittas.
In the backdrop of the global financial crisis and economic slowdown in Europe, the price of the real estate market in Cyprus decreased by 20-25% providing unique opportunities for investors and buyers. With a crisis of that magnitude, prices of real estate could drop another 15%.
Other investment opportunities lie in tourism, which the Cyprus government will have to begin promoting to ease its way out of its economic crisis. The construction of hotels, restaurants, golf courses, theme parks, world-class yacht clubs, marinas, sporting and entertainment facilities could potentially bring a solid and steady income to investors looking for long-term cash flow.
Another noteworthy opportunity that has come from Cyprus's economic crisis could be very useful for investors who are looking to gain permanent access to Europe. In April 2013, Cypriot President Nicos Anastasiade announced that the "Citizenship for investment" program, which allows foreigners to become a citizen of Cyprus if they invest 10 million euros, has been decreased to three million.
One can also become a citizen of Cyprus by introducing new and innovative technologies to the country, or by having bank deposits in the country of 15 million for fives years. One must be thirty years old and also must have a home in the country that is worth at least 500,000 euros.
Cyprus economic depression and necessary measures to get back on track
As of now, Cyprus is still in economic limbo as the Cyprus and the European governments have not decided if Cyprus should exit or stay in the Eurozone. But according to different analysis, most observers believe that Cyprus should leave the Eurozone to build a new export center, let the currency fall, and to let it rebuild on its own terms.
Paul Krugman is an American economist, Professor of Economics and International Affairs at Princeton University, and who won the Nobel Memorial Prize in Economic Sciences in 2008, said that Cyprus must get out of the Eurozone immediately. Krugman wrote on March 26th 2013 on his blog, "Cyprus should leave the euro. Now, the reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding."
Krugman is not alone in believing that Cyprus must leave the Eurozone to fully restructure itself. Matthew O Brien, an associate editor at The Atlantic covering business and economics, recently wrote an article called "Cyprus is Doomed: Why the Country Must Leave the Euro Immediately" arguing that the economy has been hit by three mega-shocks: fiscal, financial, and wealth, which will soon result in an economic depression. In other words, he believes the economy will collapse.
Megan Greene, the chief economist at Maverick Intelligence, which advises governments and companies on political, policy and macroeconomic developments, wrote in Bloomberg that Cyprus leaving the euro would be a better option for Cyprus if - and only if - it can secure cooperation from its troika of creditors: the International Monetary Fund, the European Commission and the European Central Bank."
But in reality, the situation is more complicated than that. If Cyprus leaves the Eurozone it would not only damage the EU, but also possibly permanently damage Cyprus' economy as its talent would flee the country leaving the country with very little to offer in its main industry, finance.
Even with all the discussions that Cyprus should exit the Eurozone and implement significant and major reforms, the President of Cyprus has stated that the country will not leave the Eurozone. "In no way will we experiment with the future of our country' said President Nicos Anastasiades on March 29 2013. He is certain that the country can pull through these tough times by implementing capital controls to avert the risk of bankruptcy. The President added, "The situation, despite the tragedy of it all, is contained."
Restructuring the country's financial system
Cyprus's financial system is devastated, and the government will have to make significant changes in order to rebuilt stability in the economy. Adkisson mentioned that if Cyprus restructures its banking system correctly, it could make it more competitive in the long-term. He said, "They will need to restore confidence, both of their depositors and their potential investors. I expect they will become leaner and reduce wage costs. Eventually that will make them more competitive."
On the same note, Dr. Athanasios Hadjimanolis, Professor of management at the European University Cyprus said that the country appears to be on the right path to fixing its banking system. He said, "Cypriot banks will be much smaller after divestment of their foreign subsidiaries and much more focused to the local market. The recapitalization, which is now under process, will help them to recover and continue operation on a much sounder basis."
The question comes down to: "Has Cyprus taken serious enough measures to ensure that it stabilizes its banking system?" Only time will tell as the country's president negotiates with the world's international lenders and deals with the world's finance officials.
The bottom line: Wait for Signs of a Recovery and then Invest
There are definitely some investment opportunities that are emerging in Cyprus during their economic tumble, but as of now, they are too risky, even for daredevils to invest in the economy. Currently the country's future is uncertain. Its talent is fleeing the country, and the country's reputation as a financial center has been severely damaged. Before anyone considers investing in the country, an investor should look at the growth prospects of the government.
Multiple questions should be asked before one considers investing in Cyprus at this time. "Has the government implemented effective policies that will put the economy and financial system back on track to becoming a stable and functioning economy?" Another good question to ask yourself before investing money in this market is, "Will the economy get worse in the next few years, or in other words, has it bottomed out?" The key is finding the exact time the economy has bottomed out. As of now, it appears that the economy is breaking down, so for the next few months at least, investing in the economy is highly risky, but the opportunity still exist when the sign of recovery arise and at least for investors - the riskier, the more opportunities.
