Cypriot Economy Expected to Grow by 4.2% in 2018
Hellenic Bank estimates that the Cypriot economy will grow at a rate of 4.2% in 2018. Growth is expected to be supported by private consumption and investment and by an improving and robust labour market. Unemployment is expected to decline to 9.2% in 2018, while inflation to remain at relatively low levels, at around 0.5%.
In its Economic Review, the Department of Economic Research, notes that the recovery phase has passed and the economy is now entering its growth phase. In absolute terms, the value of all final goods and services produced domestically at constant prices, i.e, real GDP, stood at €16.6 billion recovering to the pre-crisis level. Correspondingly, nominal GDP, the value of all final goods and services produced domestically at current prices, reached € 19.2 billion in 2017, up from € 18.2 billion in the previous year. Τhe Economics Research Department notes that what is encouraging for the new growth phase, helping to avoid the repeat of the boom-bust cycle experienced in the economy in the past, is that the recent economic performance has not been driven by government through public spending and the related multiplicative role, nor is it funded from unsustainable credit-fuelled consumption as observed in the pre-crisis period.
In the Economic Review for the first quarter 2018, the Economic Research Department states that while consumption continued to be a key recovery driver, investment demand also rebounded, particularly for large construction and infrastructure projects. The main factor driving the increase in private consumption was the rise in labor income, which was a result of the growth in the number of employed people, rather than higher wages. As explained in the report, private consumption was also supported by the flourishing tourism sector with positive spillover effects in other sectors of the economy.
The Department affirms that public finances have been consolidated to a large extent to secure the sustainability of public debt. It also underlines that significant progress has been made to restructure and restore confidence in the Cypriot banking system. In the Economic Review for the first quarter of 2018, the Economic Research Department expresses the view that while decisive steps were taken and swift progress has been achieved throughout the banking sector, the high level of NPEs still exists. As explained, on the one hand, banks are continuously focusing on restructuring their NPEs portfolios, using a toolset of sustainable solutions, such as debt to asset swaps, balance reductions, extensions of maturity and instalments amount reduction, and grace periods. On the other hand, inefficiencies in the justice system and weak enforcement of court decisions, undermine the functioning of the new foreclosure and insolvency frameworks, thereby allowing strategic defaulters and non-cooperative borrowers to act against the system. As underlined in the report, strategic defaulters are socially irresponsible as they impose a heavy economic cost by perpetuating financial sector vulnerabilities. Addressing these inefficiencies and introducing additional legislations such as the securitization law will facilitate the banks’ efforts to resolve NPEs.
According to the economic review, the better that expected macroeconomic performance, does not justify complacency and does not signal a relaxation of efforts to further reform the economy. The introduction of significant structural reforms is the beginning of an improvement in the efficiency, productivity and competitiveness of the economy. Important reforms which are still outstanding relate to the implementation of the privatization agenda, along with the reforms within the Public Administration, local government and the healthcare sector. Additionally, further efforts should be made to improve and broaden Cyprus’ digital public services (e-government) including the promotion of electronic payments, which in turn will help to develop a more sustainable economy. The extended use of electronic payments, enhances the transparency in the economy and helps to contain the shadow economy and tax evasion, as electronic payments are far easier to track.
The report highlights that it is essential to use the current growth momentum for the implementation of the abovementioned reforms. These reforms are more effective and easier to implement when economies are growing. The cost of the reforms may have negative effects on the economy’s short-term prospects, but it is the only path to sustainable growth. As noted, the structural changes which have already been introduced, can lead the country on a path towards sustainable economic growth.
According to the economic review, despite the important steps taken towards restoring the positive economic climate, some degree of uncertainty remains, as the country still has certain issues to resolve, such as the high level of NPEs, high unemployment, the high ratio of public debt to GDP, which together render Cyprus vulnerable to negative shocks and delays in the advancement of structural reforms. The high private indebtedness levels that have led to deleveraging including the high level of NPEs, continue to pose significant risks to the stability of the domestic banking system and to the outlook for the economy. The improved macroeconomic environment is expected to support banks’ efforts to tackle the high level of delinquent loans. The modernization of the legislation on the insolvency and foreclosure framework which is now in place will be an invaluable tool towards this direction.
From an exogenous perspective, in the Economic Review, the Economic Research Department stresses that the economic οutlook may be negatively influenced due to a slower than expected growth in the UK, the uncertainty effects of Brexit and a weaker pound, including the developments in Russia (sanctions) and the depreciation of the rouble against the euro. Also, increased geopolitical tensions in the Middle East and Eastern Mediterranean, could trigger adverse spillovers to economic confidence, tourism and consequently to the aggregate economic activity. On the other hand, geopolitical tensions in neighbouring countries render Cyprus as a safer tourist destination and could therefore counterbalance, to a significant extent, any potential reduction in tourist traffic from the UK. Additionally, developments over a potential reunification of Cyprus along with the exploitation of Cyprus’ natural resources are being closely monitored to assess potential prospects and risks as they are evolving.
Source: Gold News
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