AXIA Research Political Update Cyprus May 24, 2016 Cypriot Parliamentary Elections Results: DISY wins but challenges ahead As expected, the ruling right-wing party DISY won Cyprus’ May 22 Parliamentary elections claiming 30.68% of the vote and securing 18 seats in the 56-seat Parliament, down 2 seats from the 20 seats previously held. AKEL came in the second place reaching 25.67% of the vote securing 16 seats, down 3 seats from 19 seats previously. DISY and AKEL, collectively lost approximately 10.0% of their supporters (56.4% compared to 67.2% in the previous Parliamentary elections of 2011). However, AKEL was the party with the largest reduction in its voting power compared to the 2011 elections (-7.1%), in contrast to DISY which lost 3.7% of its votes compared to 2011. DISY managed to remain the largest party in the Cypriot political system, despite a period of hard austerity from a three-year bailout programme. The centrist DIKO secured third place, capturing 14.49% of the votes and 9 seats. The parliamentary elections were characterized by the high level of abstention (33.26% vs. 21.3% in 2011 parliamentary elections) which led smaller parties to ‘gain ground’ in the new Parliament. In particular, the smaller parties (EDEK, Citizens Alliance, Solidarity Movement, the Green Party and ELAM) gathered c20% of the votes in total, translating to a total of 13 seats compared to a total of 8 seats, occupied by the then smaller parties after the 2011 parliamentary elections. A total of 8 parties are now represented in Parliament. Although DISY managed to remain the biggest party, the results of the elections point to a more fragmented Parliament, potentially making it more difficult to reach a consensus on economic issues. Note that, even with the support of DIKO (9 MPs), DISY will still need another 2 votes to achieve a majority for passing relevant legislation through Parliament. There is less concern regarding the Parliamentary support on the Cyprus’ issue (reunification of the island) since we view that DISY could gain support from AKEL (as was the case in the past) reaching a comfortable majority of 34 MPs in Parliament. All in all the election results increase concerns that the Government will be able to pass the remaining structural reforms set by the country’s Economic Adjustment Programme (including the privatization of Cyta, the adoption of the National Health Scheme, etc.) through Parliament. These reforms are deemed necessary to maintain the country’s growth momentum. Note that beyond the fact that the majority of the political parties represented in Parliament do not share the same views as DISY on economic-related issues, the next Presidential elections are set to take place in 2018. The latter further reduces visibility on which parties will support DISY in the future, making the Cyprus’ political scene even more blurry. Please see important disclosures at the end of this report AXIA Research Page 1 AXIA Research DISY runs first in Parliamentary elections but challenges ahead... Breaking down the election results... Notwithstanding that DISY remained the first political power in Cyprus, abstention was the main characteristic of the elections, reaching a record level of 33.26% vs. 21.3% in the Parliamentary elections of 2011. The latter assisted smaller parties to exceed the minimum required 3.6% threshold to enter Parliament. Consequently, an 8 party Parliament has been formed. Parliamentary elections (May’16) Previous Parliamentary Elections (May’11) DISY 30.7% DISY 34.4% AKEL 25.7% AKEL 32.8% DIKO 14.5% DIKO 15.8% EDEK 6.2% EDEK 8.9% Citizens Alliance 6.0% European Party 3.9% Solidarity Movement¹ 5.2% Green Party Green Party 4.8% 2.2% ELAM 3.7% ELAM 1.1% Others 3.2% Others 1.2% 0.0% 10.0% 20.0% 30.0% 40.0% 0.0% 10.0% 20.0% 30.0% 40.0% Source: Cypriot Parliament, European Parliament, AXIA Research Note : ¹ Solidarity Movement absorbed the European Party in March 2016 The main opposition party, AKEL, earned 25.67% of the vote and ran second with 16 seats (compared to 19 in the 2011 elections). AKEL recorded the largest drop (-7.1%) in its votes compared to the parliamentary elections of 2011. The third largest party in the country, the centrist DIKO, managed to maintain its political stance gathering the same number of seats (9) as in the previous parliamentary elections, albeit recording a drop of 1.3%. The social-democratic party, EDEK posted a drop in support of 2.8% compared to the previous parliamentary elections (3 seats in the Parliament from the 5 seats previously held), while on their first appearance in the political landscape the centre-left, Citizens Alliance and the right-wing, Solidarity Movement (which absorbed the European Party in March 2016) claimed a significant portion of the votes (6.0% and 5.2%, respectively) hence, each party secured three parliamentary seats compared to one seat each in the previous government. Furthermore, the Green Party posted an increase of 2.6% in its votes, resulting in 2 parliamentary seats (compared to 1 in 2011 elections). The far-right National People’s front (ELAM) also made it to the Parliament receiving 3.71% of the votes (just above the 3.6% threshold to make it to the Parliament) resulting in 2 seats. Composition of the New Parliament (May’16) Previous Composition of the Parliament (May’11) 16 19 9 8 3 3 20 18 5 3 1 2 1 2 1 1 56 seats 56 seats DISY AKEL DIKO¹ EDEK DISY AKEL DIKO Citizens Alliance Solidarity Movement² EDEK European Party Green Party Green Party ELAM Citizens Alliance Independent Source: Cypriot Parliament, AXIA Research Note : ¹ During the last Parliament’s term, an MP left DIKO and continued his term as an independent MP ² Solidarity Movement absorbed the European Party in March 2016 AXIA Research Page 2 AXIA Research The day after the elections results... Following the Parliamentary elections, the short-term focus turns on who the next President of Parliament will be. According to press reports, the first session of the new Parliament is set for June 2, during which time the new President of the Parliament will be elected. Despite DISY’s win, Cyprus’ political landscape has become more complicated and more difficult to decipher. To this end, we view that several concerns will arise towards DISY’s efforts to sustain the momentum for reforms’ that are necessary to support economic growth going forward. Since the new Parliament is comprised of eight political parties, DISY’s task to pass the remaining structural reforms, or any other economic-related legislation, through Parliament is more challenging than before. DISY’s efforts should now turn to finding the required support from several MPs (most likely from different parties) in order to secure the majority in Parliament, which will enable it to pass legislation. On the other side, if AKEL’s political stance remains unchanged in regards to the Cyprus’ issue, DISY will be capable of securing the majority in Parliament, (they gather 34 MPs together) to enable it to pass any legislation regarding the Cyprus’ issue. AXIA Research Page 3 AXIA Research Disclosures General information This research report was prepared by AXIA Ventures Group Limited, a company incorporated under the laws of Cyprus (referred to herein, together with its subsidiary companies and affiliates, collectively, as “AXIA”) which is authorised and regulated by the Cyprus Securities and Exchange Commission (authorisation number 086/07). AXIA is authorized to provide investment services in the United Kingdom, Cyprus, Greece and in Portugal pursuant to its permissions under the Markets in Financial Instruments Directive and may also provide similar services in other countries, inside or outside of the European Union, subject to the applicable provisions. AXIA Ventures Group Limited is not a registered broker-dealer in the United States (U.S.), and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. In the U.S., this research report is intended solely for persons who meet the definition of “major U.S. institutional investors” in Rule 15a-6 under the U.S. Securities and Exchange Act, as amended, or persons listed under Rule 15a-6(4) and is meant to be disseminated only through “Axia Capital Markets LLC”, a wholly owned subsidiary of AXIA Ventures Group Limited and associated US registered broker-dealer in accordance with Rule 15a-6 of the US Securities and Exchange Act. Content of the report The persons in charge of the preparation of this report, the names of whom are disclosed below, certify that the views and opinions expressed on the subject security, issuer, companies or businesses covered by this research report (each a “Subject Company” and, collectively, the “Subject Companies”) are their personal opinions and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. Whilst all substantial sources of information for the research are indicated in this report, including, without limitation, bases of valuation applied to any security or derivative security, such information has not been disclosed to the Subject Companies for their comments and no such information is hereby certified. All information contained herein is subject to change at any time without notice. No member of AXIA has an obligation to update, modify or amend this research report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the Subject Company is withdrawn.