With Covid-19 still reverberating across the world, seemingly no industry remains unscathed. Finance Magnates spoke with Haris Stavrinides, Chief Executive Officer of Emporium Capital for his take on the pandemic as well as its impact on Cyprus.
Will the next day of the pandemic be a "dark one" for the economy? Locally in Cyprus and globally?
The next day of the pandemic seems to be the gradual easing of measures and the attempt to restart some sectors of the economy.
The impact on economies in 2020 is huge since 31.6 million unemployed people were already registered in the United States.
Another 6.6 million in China, and in Europe the unemployment rate is expected to exceed 10%. Cyprus's GDP is expected to shrink by 7-10% while the tourism sector will have a decrease near 50%, perhaps more so depending on when the airports open and tourists start feeling safe using airlines.
This will be difficult before the safe use of a vaccine as we observe that countries do not follow similar procedures in the fight against covid-19.
The intensity and extent of this period will be the determining factor in reducing the economic impact.
All sectors of the economy are affected, but which ones will be affected the most and struggle to restart? Both in Cyprus and internationally?
As I mentioned above, tourism and related services such as airlines, hotels, restaurants, pubs and leisure facilities will definitely be hit hard.
Some companies or facilities of these industries may never reopen if their non-operating time is extended or if they restart, they may face below cost revenues.
Also, other sectors such as the one of private consumption are expected to drop as disposable income has already declined.
The emphasis now on consumption is to meet our basic needs and not, for example, in buying a new car, jewelry or branded clothing.
Consumption in general, except supermarkets and basic needs establishments is expected to decrease and this will result in a reduction in government revenues from taxes.
The energy sector, which we are so eager to participate in, has also been hit hard, with oil and gas prices at incredibly low levels (Brent reached $ 15.98 a barrel compared to 60 three months ago).
Companies participating in the EEZ of Cyprus have lost close to 50% of their value and some of them are in danger of bankruptcy.
The real estate sector is also expected to be negatively affected since due to the crisis any investment moves, mainly foreign ones, will be postponed for the future.
Additionally, the domestic demand has already decreased and is not expected to recover soon since Cypriot households and businesses are over-indebted.
How is the current crisis different from the previous one we experienced in the economy?
The crisis of 2013 was clearly a banking related one, with economic suffocation stemming from the collapse of banks and the lack of Liquidity
Liquidity
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
Read this Term.
The banking sector was multiple in size compared to the size of the state. As a result, the state could not bail out the banks and the bail in solution was implemented with a haircut of billions of deposits.
Unfortunately, the government did not take any action or propose other measures to prevent such a devastating solution. At that time people run, to the banks while today people run to the supermarkets.
Today's crisis is due to the immediate suspension of work due to a pandemic. Banks today have cash liquidity, however, due to over-indebtedness, there is not much room for further liquidity absorption both from households and businesses.
On the other hand, the liquidity capabilities of the state are also limited due to high debt as a percentage of GDP while with the expected decrease of state revenues, things will become even more difficult.
A possible decrease in our credit rating taking us in the sphere of junk could increase our cost of borrowing from the markets.
How does the government handle the situation? Does it touch the essence of the problems or does it stay on the surface?
The measures that have been taken are in the right direction especially the subsidies ones as they provide immediate cash to employees who, due to the suspension of work, saw their income either reduced or even completely lost.
However, this is a temporary cash injection and of course does not completely compensate the lost income. The proposal to provide state guarantees so that banks may lend businesses and individuals is a rather risky one since banks may take decisions to lend borrowers that they would not have lend if there was a risk of nonpayment and therefore increase the probabilities of default.
If this happens then the burden will be transferred again to the taxpayers since the state guarantees these loans. An alternative would be for the state to borrow from domestic banks at lower interest rates than international markets, as banks now have excessive liquidity and then directly support workers who have been affected and indirectly the businesses by decreasing their payroll burden.
And how will the next day find us?
If in 2013 we said that we are sailing in uncharted waters, then today the crisis due to a pandemic is also completely unpredictable.
As I mentioned before, even if we have taken steps to loosen the lockdown measures and attempt to restart the economy, im afraid that without a vaccine we will not reach normal pre pandemic levels.
As medical experts say, this is not expected before the end of 2020, so if the state cannot intervene with further measures of financial support, then unfortunately I expect business bankruptcies in the areas I have mentioned above.
The duration of this crisis and the time until we reach normality will be the determining factor of the economic impact on businesses and the economies around the world.
Yes, in fact, the needs are estimated to be three times higher than those approved by the EU. Another level of disagreement is whether this money should be given as a loan or as a grant or subsidy, whereas you understand that a loan will be subject to repayment terms, a kind of memorandum of understanding.
This proposal is not acceptable by the Southern member states of Europe that were badly hit by the financial crisis and underwent hard repayment rules.
On the other hand the proposal for grants or subsidies essentially means a weighted recovery plan to all member states without repayment terms.
This proposal was not favored by the Northern EU countries but as we see the latest developments are in the direction of a recovery plan of 750bn with the 500bn as grants and the rest as a loan.
This could be a historical turn in the way the EU tackles a crisis as it has never been followed before. Still we remain to see the final proposal being approved and the details in the distribution and absorption of these funds.
In any case the mixed approach of a recovery plan with the biggest part being in terms of grants is in the right direction.
Didn't we learn from the past? Shouldn't the EU have been more prepared to deal with this or any other crisis?
The difference in how each EU country has tackled the pandemic shows once again the distance we have to travel before we reach the completion of the European idea, a truly unified Europe.
The insistence on not issuing a Eurobond and the form of lending any assistance to the members who need it show the lack of trust between the Member States that are eventually divided into North and South or the lazy and hardworking.
Certainly, we did not learn from the past, nor was the EU better prepared. Not because there are no prevention and treatment mechanisms but because there is a different philosophy on many levels.
I hope that this crisis will be a starting point towards European solidarity.
With Covid-19 still reverberating across the world, seemingly no industry remains unscathed. Finance Magnates spoke with Haris Stavrinides, Chief Executive Officer of Emporium Capital for his take on the pandemic as well as its impact on Cyprus.
Will the next day of the pandemic be a "dark one" for the economy? Locally in Cyprus and globally?
The next day of the pandemic seems to be the gradual easing of measures and the attempt to restart some sectors of the economy.
The impact on economies in 2020 is huge since 31.6 million unemployed people were already registered in the United States.
Another 6.6 million in China, and in Europe the unemployment rate is expected to exceed 10%. Cyprus's GDP is expected to shrink by 7-10% while the tourism sector will have a decrease near 50%, perhaps more so depending on when the airports open and tourists start feeling safe using airlines.
This will be difficult before the safe use of a vaccine as we observe that countries do not follow similar procedures in the fight against covid-19.
The intensity and extent of this period will be the determining factor in reducing the economic impact.
All sectors of the economy are affected, but which ones will be affected the most and struggle to restart? Both in Cyprus and internationally?
As I mentioned above, tourism and related services such as airlines, hotels, restaurants, pubs and leisure facilities will definitely be hit hard.
Some companies or facilities of these industries may never reopen if their non-operating time is extended or if they restart, they may face below cost revenues.
Also, other sectors such as the one of private consumption are expected to drop as disposable income has already declined.
The emphasis now on consumption is to meet our basic needs and not, for example, in buying a new car, jewelry or branded clothing.
Consumption in general, except supermarkets and basic needs establishments is expected to decrease and this will result in a reduction in government revenues from taxes.
The energy sector, which we are so eager to participate in, has also been hit hard, with oil and gas prices at incredibly low levels (Brent reached $ 15.98 a barrel compared to 60 three months ago).
Companies participating in the EEZ of Cyprus have lost close to 50% of their value and some of them are in danger of bankruptcy.
The real estate sector is also expected to be negatively affected since due to the crisis any investment moves, mainly foreign ones, will be postponed for the future.
Additionally, the domestic demand has already decreased and is not expected to recover soon since Cypriot households and businesses are over-indebted.
How is the current crisis different from the previous one we experienced in the economy?
The crisis of 2013 was clearly a banking related one, with economic suffocation stemming from the collapse of banks and the lack of Liquidity
Liquidity
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
Read this Term.
The banking sector was multiple in size compared to the size of the state. As a result, the state could not bail out the banks and the bail in solution was implemented with a haircut of billions of deposits.
Unfortunately, the government did not take any action or propose other measures to prevent such a devastating solution. At that time people run, to the banks while today people run to the supermarkets.
Today's crisis is due to the immediate suspension of work due to a pandemic. Banks today have cash liquidity, however, due to over-indebtedness, there is not much room for further liquidity absorption both from households and businesses.
On the other hand, the liquidity capabilities of the state are also limited due to high debt as a percentage of GDP while with the expected decrease of state revenues, things will become even more difficult.
A possible decrease in our credit rating taking us in the sphere of junk could increase our cost of borrowing from the markets.
How does the government handle the situation? Does it touch the essence of the problems or does it stay on the surface?
The measures that have been taken are in the right direction especially the subsidies ones as they provide immediate cash to employees who, due to the suspension of work, saw their income either reduced or even completely lost.
However, this is a temporary cash injection and of course does not completely compensate the lost income. The proposal to provide state guarantees so that banks may lend businesses and individuals is a rather risky one since banks may take decisions to lend borrowers that they would not have lend if there was a risk of nonpayment and therefore increase the probabilities of default.
If this happens then the burden will be transferred again to the taxpayers since the state guarantees these loans. An alternative would be for the state to borrow from domestic banks at lower interest rates than international markets, as banks now have excessive liquidity and then directly support workers who have been affected and indirectly the businesses by decreasing their payroll burden.
And how will the next day find us?
If in 2013 we said that we are sailing in uncharted waters, then today the crisis due to a pandemic is also completely unpredictable.
As I mentioned before, even if we have taken steps to loosen the lockdown measures and attempt to restart the economy, im afraid that without a vaccine we will not reach normal pre pandemic levels.
As medical experts say, this is not expected before the end of 2020, so if the state cannot intervene with further measures of financial support, then unfortunately I expect business bankruptcies in the areas I have mentioned above.
The duration of this crisis and the time until we reach normality will be the determining factor of the economic impact on businesses and the economies around the world.
Yes, in fact, the needs are estimated to be three times higher than those approved by the EU. Another level of disagreement is whether this money should be given as a loan or as a grant or subsidy, whereas you understand that a loan will be subject to repayment terms, a kind of memorandum of understanding.
This proposal is not acceptable by the Southern member states of Europe that were badly hit by the financial crisis and underwent hard repayment rules.
On the other hand the proposal for grants or subsidies essentially means a weighted recovery plan to all member states without repayment terms.
This proposal was not favored by the Northern EU countries but as we see the latest developments are in the direction of a recovery plan of 750bn with the 500bn as grants and the rest as a loan.
This could be a historical turn in the way the EU tackles a crisis as it has never been followed before. Still we remain to see the final proposal being approved and the details in the distribution and absorption of these funds.
In any case the mixed approach of a recovery plan with the biggest part being in terms of grants is in the right direction.
Didn't we learn from the past? Shouldn't the EU have been more prepared to deal with this or any other crisis?
The difference in how each EU country has tackled the pandemic shows once again the distance we have to travel before we reach the completion of the European idea, a truly unified Europe.
The insistence on not issuing a Eurobond and the form of lending any assistance to the members who need it show the lack of trust between the Member States that are eventually divided into North and South or the lazy and hardworking.
Certainly, we did not learn from the past, nor was the EU better prepared. Not because there are no prevention and treatment mechanisms but because there is a different philosophy on many levels.
I hope that this crisis will be a starting point towards European solidarity.
