On June 23rd 2016, the British people were called on to vote on a referendum that would decide whether they would leave or remain in the European Union. 51.9% voted for Brexit, as the withdrawal from the EU came to be known, thus triggering a series of political and economic changes both for the UK and other countries around the world. The future of Britain’s economy still remains uncertain, but the Brexit aftermath is certain to affect Cyprus since it is a country that has traditionally had strong ties with the UK.
What led to Brexit
In a climate of recession after the 2008 financial crash, discontent was brewing in Britain. The rise of the Eurosceptic UKIP party and the first place it secured during the 2014 European elections signalled a growing resentment towards the large influx of migrants to the country, as well as a desire to regain control of the country’s finances from EU regulations. Under pressure from many of his MPs, Prime Minister David Cameron announced that if re-elected, the Conservative Party would hold an in-out referendum in 2015 to renegotiate their place within the EU. After winning the majority in the general election, Cameron announced the 23rd June as the date for the referendum, and after a period of intense campaigning from both sides, 51.9% of the population voted to leave the EU while 48.1% voted to remain. It is worth noting here that according to statistics, younger people and those holding a degree were more likely to vote Remain, while the Leave vote was stronger in areas with a low median income or with people who held no passport (indicating they had not left the country in years). Following the result, David Cameron resigned and Theresa May took over as the Prime Minister who will have to navigate through what some have called the most painful and difficult economico-political ‘divorce’ in recent history. May has recently promised to invoke Article 50 which will activate negotiation processes by the end of March 2017, but the type of Brexit the government will pursue still remains unknown.
The Brexit aftermath
After Britain voted to leave the European Union, there were immediate economic repercussions felt globally. Following the referendum result, the sterling pound plummeted to a 31-year low against the dollar and lost 13% of its value against the euro. The FTSE 250 also fell and has yet to recover to its pre-Brexit vote level. There is serious concern from investors that the exit could cause damage to the country’s financial sector, since there is a general uncertainty as to the trade agreements the UK will be able to negotiate with the EU and other countries. Companies that were based in the country because it was a gateway to Europe as well as a buzzling business centre have begun looking for other bases in Europe. Nevertheless, the weak pound is boosting UK companies that mainly deal with exports, as their sales are now worth more, making them able to quote lower prices and become more competitive.
Brexit and Cyprus
Cyprus’ economic and political ties with Britain go back a long way – back to 1878 when it became a British colony after it was detached from the Ottoman Empire. Even after Cyprus obtained its independence in 1960, it remained a member of the Commonwealth just as the UK remained a guarantor of the island’s independence and territorial integrity along with Greece and Turkey. Britain still has two bases which are considered British Sovereign territory. The law on the island is also heavily based on English Common Law, which has proven to be a selling point for attracting corporations and business investments. According to Eurostat, the UK is also Cyprus’ second largest trading partner, as well as a very popular destination for Britons, who have steadily been the highest number of tourist arrivals on the island for years.
Even before the Brexit referendum had taken place, there had been widespread concern as to the negative effect a possible Leave result would have on Cyprus’ economy. According to Civitas, almost one in ten jobs in Cyprus is connected to trade with the UK, so the necessity to renegotiate every trade deal with the EU and other countries around the globe in the face of Brexit will inevitably mean that these jobs will somehow be affected. On top of that, the steep drop of the sterling pound’s value after the referendum result will directly have a manifold effect on Cypriot economy. Firstly, since the United Kingdom is one of Cyprus’ top export destinations with 7.7% of its total exports in 2014, the depreciation of the sterling pound against the euro makes imports from Eurozone countries more expensive for the UK. Depending on the course of the British economy and provided that the pound remains at that level, this may mean that in time they could seek cheaper alternatives from elsewhere. The other major issue for Cyprus, as Moody’s warned a month after the Brexit result, will become evident in the sector of tourism. The impact of Brexit on the exchange rate and the subsequent diminishing of Brits’ spending power is very likely to affect the large influx of tourists from the country, as well as the property market for holiday homes.
Yet while tourism is expected to be negatively affected from a possible UK recession, Brexit could create opportunities for Cyprus. In a speech he gave briefly after the referendum had taken place, billionaire investor and largest shareholder in Bank of Cyprus Wilbur Ross said that the Leave vote may mean that companies like banks, hedge funds, equity funds and insurance companies will consider relocating from London in order to maintain their European passport. He therefore called on the Cypriot authorities to implement more liberal financial policies in order to attract these companies as soon as possible, since Cyprus’ highly educated, English-speaking, British common law-based economy could potentially be as attractive to them as that of Ireland. Cyprus already currently offers one of the most attractive programmes that aim to appeal to investors who seek to find a gateway to Europe by offering them the possibility of acquiring a Cypriot passport through investment. Companies seem to recognise this willingness of the government, as can be testified by the CEO of the Greek company R Energy 1 who recently stated that they chose to move to Cyprus after Brexit because they considered its ‘business-oriented’ market mentality to offer the best alternative next to Britain. Wilbur Ross also referred to the possibility of ship owning and ship management companies that may seek to relocate their headquarters to another EU member-state, and since Cyprus is considered one of the biggest ship management centres globally, ranking 3rd in the EU, it could be an attractive option. Additionally, Bank of Cyprus CEO John Hourican believes that the funds industry in Cyprus should benefit, since there are only €2.9 bn-worth of domiciled funds here as opposed to the €3.8 trillion of funds administered or domiciled in Ireland. He also thinks that there is the possibility to attract higher-spending tourists (e.g. medical tourism) and put education more firmly on the map, as there are numerous opportunities in Cyprus to take courses in the English language. Finally, when it comes to the actual relations of Cyprus with the UK, Britain’s Minister of State for Europe Sir Alan Duncan has recently reassured the Cypriot Foreign Minister Ioannis Kasoulides that Cyprus is still at the top of their agenda and that they will hold regular discussions in the upcoming months in order to maintain bilateral relations as well as the openness in trade and social friendship that they want.
With Brexit, the United Kingdom and the rest of the EU have entered unchartered waters. Nobody can be certain as to the final outcome of the process and until negotiations have actually begun, the global market will reflect that uncertainty. While the predictions of doom were far worse than the actual outcome, the British economy has slowed and this is bound to have repercussions to any country that has ties with them, including Cyprus. What the Cypriot government needs to do in the face of this unprecedented state of affairs is to be pro-active in order to limit the damage from its exposure to Britain’s economy, while simultaneously taking advantage of the opportunities created from the situation by marketing itself as an attractive alternative investment destination. The Cyprus Investment Promotion Agency (CIPA) is already taking a step toward the right direction by sponsoring and participating in the ‘Markets Most Influential 2016’ events organised by Bloomberg on September 28th, where they had the chance to highlight Cyprus’ competitive advantages to international investment and business circles in front of international media. The Chairman of CIPA, in fact, made special reference to particularly increased interest by Chinese investors. By continuing to actively promote Cyprus in such a way, Brexit could turn out to be more of a positive rather than the disastrous event it was thought out to be.