How can Cyprus enhance its investment attractiveness now to build a sustainable future?

Foreign direct investment is of paramount importance for the development of any economy, even more so for a relatively small economy with limited natural resources and capital, like that of Cyprus. Especially during the current recession brought about by the COVID-19 pandemic, FDI may spark economic recovery and help transform the Cypriot economy.

The first EY Attractiveness Survey Cyprus 2020, which is part of EY’s broader FDI Attractiveness program, seeks to explore what drives businesses to invest in particular countries, how investors perceive Cyprus’s comparative strengths and weaknesses as an investment destination and what the government can do to influence their decisions.

We intend to repeat this survey at regular intervals in the coming years as a way to monitor changes in perceptions, and in order to identify policy changes and areas of improvement, allowing us to keep pace with the rapidly evolving business environment.

Cyprus has successfully attracted FDI in the past. This greatly contributed to the rapid development of its economy over the years. The local economy has been largely dependent on three key sectors, namely tourism, real estate and professional services. While participants in this survey acknowledge the predominance of these sectors, which have also traditionally driven FDI interest, they are also indicating alternative investment opportunities. It is indeed clear that Cyprus needs to diversify its economy and attract investment in new sectors that are today driving growth globally, including among others digital economy, clean tech, renewables, supply chain and logistics.

Against a background of global economic pessimism,our survey paints an overall positive picture about Cyprus’s investment attractiveness. If we build on our strengths, act decisively to deal with the obstacles identified by investors and adapt swiftly to the new normal, the investment climate can only improve.

FDI in Europe: COVID-19 triggered a sharp decline in FDI across Europe, but not a complete cutback

In 2019, Europe had one of its strongest years ever in terms of FDI, attracting 6,417 projects in 47 countries. The pandemic on the other hand, led to a sharp decline in the number of planned FDI projects, with 66% of companies reporting a decrease in their investment plans for 2020. Furthermore, one in two businesses participating, view Europe as less attractive in the coming years.

The negative climate gave rise to three megatrends that are expected to shape investment decisions in a post-COVID world:

• A reconfiguration of supply chains, with a new mix of reshoring, nearshoring and offshoring
• The acceleration of technology for customer access and cost reduction
• A sharper focus on climate change and sustainability in investment decisions

FDI in Cyprus: Healthy FDI inflows prior to the pandemic

FDI neared 29% of the country’s GDP in 2019 as FDI inflows amounted to €6 billion.

The figure almost doubled from 2018 as a result of the improvement in the country’s macroeconomic outlook and a (pre-pandemic) projected GDP growth of 2.8%  for 2020.

Key source countries for these investments included Russia and the wider Commonwealth of Independent States, Middle East and the Gulf, China, Greece, other European countries and, recently, the US.

The sectors that have attracted international investor interest in recent years range from hospitality/ tourism to real estate, infrastructure and shipping, energy, telecommunications and, more recently, financial services and higher education.

EY Attractiveness Survey results for Cyprus

One of the most striking findings of the survey is the persistent differentiation in the responses between established and non-established companies; with the former having a significantly more positive view of Cyprus as an investment destination. By contrast, companies with no prior activities locally were more negative about their views of Cyprus. A possible explanation is that established investors are de facto more aware of the local environment and its conduciveness to FDI.

Despite the pandemic, Cyprus remains an attractive investment destination.More than one half of the total sample of investors (56%)  are optimistic about the next three years. These findings compare favourably with those of other more mature European markets as well as the overall European market, where positive sentiment stands at 39%.

It is worth noting that the sample of established investors appear even more optimistic.

The investors recognise the high reliance of the country on a small number of sectors.There is a pressing need for the Cypriot economy to diversify its traditional dependence on sectors beyond tourism, real estate and professional services.

Following the lead of other European countries, potential expansion into evolving sectors such as the digital economy, energy and logistics may provide the answer.

Identifying Cyprus’s key strengths and weaknesses

According to established investors, quality of life tops the list of strengths, closely followed by the telecommunication/digital infrastructure and stable political/social environment.

The lowest results are observed in the area of flexibility of labour legislation, aid/subsidies/support measures from public authorities and favourable bureaucratic/administrative environment; indicating potential areas of improvement for the attraction of new investments.

Areas for Improvement

The survey further recorded participants’ views on areas where Cyprus should concentrate its efforts in order to strengthen its investment attractiveness (see graph below).

Almost half of the respondents (49%) identified the need to further support high-tech and innovation as a top priority. This category covers areas such as clean technology, logistics, life sciences, information technology, etc.

Investing in major infrastructure and urban projects emerges as the second key priority according to a third of the respondents (34%), a higher figure than that recorded in other European countries. Even though survey participants did identify telecommunications & digital infrastructure and transport & logistics among the country’s strengths, this answer indicates that there is a need, or opportunity, for further development.

EY’s recommendations and conclusions: Building on Cyprus’s vote of confidence

Based on the survey’s findings along with our deep market knowledge there are a number of conclusions, along with recommendations that can push towards improving the overall FDI attractiveness of Cyprus. These are:

• With Lack of awareness being evident by the huge divergence between the perceptions of established and non-established investors, Cyprus needs to undertake an aggressive and well-targeted information campaign to raise awareness about conditions and investment opportunities, promote success stories and clear up possible misconceptions or prejudices.
• Cyprus has been traditionally heavily dependent on a small number of sectors. It needs to revisit its strategy and diversify its economic model by opening-up and encouraging investment in new sectors, including those where the well-educated and skilful local human capital can be put to use.
• Cyprus lags behind its European counterparts on the adoption of digital technologies and innovation. The setup of the Deputy Ministry of Research, Innovation and Digital Policy in March 2020 is the first step towards a well-tuned research & innovation ecosystem and digital technology exploitation.
• The country’s continuous investment in infrastructure (airports, ports, telecommunication networks, etc) combined with its strategic position at the crossroads of three continents can support Cyprus becoming a regional logistics hub.
• Gearing for sustainable development and transition to a circular economy has proved challenging for Cyprus. The liberalisation of  the energy market and a well-designed green energy taxation system may help the transition  to a green economy.
• High educational attainment of the local workforce has resulted in overqualification and shortage of technical skills. The provision of professional orientation to young people, reskilling of existing workforce and the encouragement of vocational training will help to acquire technical skills that are currently in shortage.
• Enhancement of SMEs ecosystem and support to start-ups should be high on the agenda, with initiatives including tax and other incentives as well as support to grow and prosper.
• Steps to dilute bureaucracy with regards to approvals and processing by different government departments as well as eliminate delays in legal proceedings. These include the digitalisation of government processes and an e-justice platform.
• Fortification of the banking system and increased liquidity through an active stock exchange can facilitate the funding of FDI activities as well as support the exit strategies for foreign investors.

To read the full EY Attractiveness Survey: Cyprus 2020, click here.

To read the Executive Summary Document, click here.

To read the relevant Press Release, click here.