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May 2021 Newsletter: Runway to Summer

As we emerge from Easter vacation and look forward to the summer, I am reminded of the saying from the great poet Robert Burns: “The best laid plans of mice and men often go awry.”

COVID Resurgent

Back in January, we forecast a series of rolling lockdowns to continue into May, followed by a relatively quiet summer season where growth could resume. The infection rates of the new coronavirus strains, however, means that even with a vaccine, we may be facing further lockdowns this summer and in the future.

Seychelles, which has fully vaccinated more of its population against Covid-19 than any other country, has closed schools and canceled sporting activities for two weeks as infections surge. The measures, which include bans on the intermingling of households and the earlyclosureof bars, come even as the country has fully vaccinated more than 60% of its adult population with two doses of coronavirus vaccines.

Please do not underestimate this virus. As frustrating as the situation may be, keep diligent and keep protecting yourself.

Tourism Restart

After a very long interval, the first Russian tourists started arriving in Cyprus—just in time for the second lockdown. Both Greece and Cyprus have moved faster than the European Commission in terms of announcing the entry to tourists this summer, including accepting tourists from the United States.

Our forecast is that if things go well, we will receive approximately 1.6 million tourists in Cyprus this year, or about 40% of 2019 arrivals. Our forecast is helped by the current ban on Russian flights to Turkey (until June 1st), but is affected by the continuing block on outbound UK tourism and continuing issues with tourism product quality and pricing in Cyprus.

Banking System Recovery

The Cypriot banking system is gradually recovering. According to the Cyprus Central Bank’s Aggregate Banking Data (8 April 2021), total deposits in the Cyprus banking system amounted to € 52.8 billion, of which deposits by households amounted to € 29.02 billion. Total loans to households amounted to an amortised value of € 10.4 billion, while total financial loans amounted to € 37.4 billion (amortised value). This data reflects the delays in various payments that have been implemented during the lockdown period (boosting household deposits), as well as write-downs in loan value.

Cyprus Public Debt reaches € 24.8 billion

Total government debt reached € 24.8 billion as of 31 December 2020. Please note that this concerns only general government debt, without Central Bank obligations. GDP at market prices is estimated at € 20.84 bln in 2020. So we are at 119% debt-to-GDP based on latest estimates.

Turbulence Ahead

The growing public debt in Greece, Italy, Cyprus, the United States and other countries will become an issue in 2022 and onwards. Three political events will take place over the next 18 months that will affect our ability to deal with any new debt crisis:

  1. Angela Merkel is retiring and will be replaced with a politically weaker candidate (Armin Laschet) in a Germany that is now significantly fragmented politically and, judging by the share of AfD voters, significantly more hostile to European bail-outs.

  2. Emmanuel Macron faces re-election in April 2022 in France and has a real chance of being defeated.

  3. There is a significant probability of a Republican takeover of both houses of Congress in the November 2022 elections in the United States.

As difficult as the 2010-2012 European debt crisis was, European political cooperation prevailed and a jerry-rigged, sub-optimal system for managing public debt refinancing was implemented.

In 2022 and onwards, I see few signs that such cooperation will prevail. The only artefact keeping our collective public finance afloat is central bank operations, including seemingly unlimited quantitative easing and a zero interest rate policy.

But with European Central Bank liabilities now at € 7 trillion and US Federal Reserve liabilities at over $ 8 trillion, how long can this continue?

As always, please remain vigilant. Although conditions are improving, we are still far from being safe. If I or my colleagues can assist you in any way, please contact us.




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