Wednesday, 27 March 2013

Some further points on the Cyprus Model

I would like to come back to the, by now infamous, Cyprus model. If you haven’t checked my previous post on the subject and you have a few moments to spare here it is.

The lack of actual data on the subject and the abundance of empty talk still amaze me.

In this post I would like to take a closer look (mainly) at Cyprus’ external sector. I am not here to back either side of the fence but to share some data points with you so you can draw your own conclusions.

What separated Cyprus from my native Greece was the fact that its trade account was more balanced, bar from the mid-to-late ‘00s, when a significant spike of goods imports combined with anemic exports’ performance led the trade deficit to a whopping 11% of GDP. This was the time when Cyprus’ euphoria topped (along with its housing bubble).

source: Eurostat

Of course, what made that better balanced trade balance possible were not goods exports but services exports. Cyprus’ goods balance deficit is unbelievably high, which means that if the country cannot somehow maintain its services exporting edge, an unprecedented deterioration in living standards could be in the cards. Hence, fears of tectonic shifts in the island’s economic landscape are by no means unfounded.

Goods exports are minimal, although they have somehow fared better since the great trade collapse in 2009. Hence, any efforts to maintain the current living standards are almost impossible to find solid backing in the goods sector. Or if that is the chosen path then, this rebalancing would take a rather long while and would always depend to the state of the country's banking sector to fund it.

source: Eurostat

Services exports consist of travel, transportation and other services exports (i.e. financial services and other business services mostly).

source: Eurostat

Other services exports account for a bit less than 50% of overall services exports. What’s more important though is their breakdown.

source: Eurostat
As you can see, financial services correspond to a bit more than 20% of other services exports. Someone paying attention solely to media reports would probably think it was the other way around.  

It appears that Cyprus was a one-stop-shop for business and financial services. A good question is what will happen to business services should financial services receive a large blow. I don’t have an answer to that but anyone who does is welcome to say what he likes in the comments section and enlighten us all.

All in all, things are not looking particularly good for Cyprus and if services exports collapse then a similar collapse in living standards could not be that far away. I’m not going to say anything further just wish that reality somehow will surprise us on the upside.

P.S. As an annex to the post above here are a couple more data points, irrelevant to the country’s external sector.

Here is employment broken down by sector.

source: Eurostat
And here’s fixed investment in dwellings. The reason I’m including this chart here is that I read somewhere that Cyprus faces a housing bubble, similar in size to those of Spain and Ireland. While it is true that Cyprus' housing sector bubbled up in the 00s, this bubble is nowhere close to those witnessed in the aforementioned countries.

source: Eurostat, own calculations

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