Cypriot SME’s are facing an extremely challenging situation, according to the European Commission.

This is the situation as depicted in the 2013 annual report of the European Commission’s Directorate General on Industry and Entrepreneurship in the framework of the Small Business Act Initiative.

In a detailed, 18 page long analysis on Cyprus, the report notes that the crisis has led the country to a deep and protracted recession which peaked when it took the form of a liquidity crisis of the island’s banking system.

All Cypriot enterprises in all sectors recorded negative growth during the period 2008 – 2013, the analysis points out.

It continues to say that the value of the SME sector shrunk by 9% while its human capital fell by approximately 2% during the same period of time.

Due to the property sector bubble bursting construction SMEs were the ones affected the most, recording a drop of 20% of their added value.

According to the Commission, faced with these negative trends, the government is doing its utmost to take measures which are necessary for the establishment of a competitive business environment towards SMEs.

However, it also points out that measures announced in 2011 and 2012 were delayed while other problematic for SMEs policy areas such the environment, state aid and public procurements were ignored.

Because of these economic and political trends, Cypriot SMEs will have to fight hard in order to recover to before crisis levels, particularly if worrying upward trends of bankruptcies are taken into account, it adds.

During the period of 2008 – 2012 bankruptcies increased while the registration of new companies fell. This situation deteriorated further in 2011 due to the significant losses suffered by two large Cypriot commercial lenders as a result of their investments in Greek bonds.

Access to loans from local banks has since also become increasingly harder especially for newly established businesses.

The protracted macroeconomic crisis, the Greek bonds’ “haircut” and the prerequisites attached to the fiscal bail-out hit Cypriot banks hard and as a consequence greatly affected SME external financing, as family businesses with inadequate capitalisation traditionally choose to get bank loans by providing personal and family guarantees.

At the same time, the Commission refers to recent data on the transparency of credit information, which confirms that the granting of loans is hampered by the lack of transparency in the system.

The Economic Sentiment Indicator of the University of Cyprus’ Economic Research Centre for November 2013 registered an increase of 3.5 units compared with October owing to mainly an upbeat in the services sector and to the consumer’s improved expectations.

The improvement brings the index at the levels of 2011, before the outbreak of a banking crisis that culminated in the agreement, last March, between Cyprus and its international lenders (the European Commission, the European Central Bank and the IMF) on a €10 billion bailout that featured a bail in of uninsured deposits, which shattered the island`s financial system.

However, business climate in manufacturing continues to decline due to the accumulated inventories, whereas the ESI in retail trade deteriorated marginally due to the evaluations on sales in the next months. The indicator in constructions deteriorated significantly given the businesses` evaluations on the projects in progress and employment were more negative than the previous two months.

Leave a Reply