14/03/2022 16:38
Cyprus may lose 1.5% to 2% of GDP in 2022 if the airspace with Russia remains closed throughout 2022, said DRBS Morningstar, noting that the war in Ukraine will impact negatively growth this year, however, “it should not derail Cyprus`s medium-term prospects.”
In a commentary, the rating agency said that “the introduction of sanctions and counter sanctions due to Russia`s invasion of Ukraine has increased the downside risks to otherwise strong medium term economic prospects for Cyprus,” adding that the main transmission channels for Cyprus are through tourism revenues and higher energy prices.
“DBRS Morningstar estimates that Cyprus stands to lose 1.5%-2.0% of GDP in 2022 if the airspace closures remain in place for the whole year. The impact could be much lower if the restrictions are lifted before the summer season or if Russian travelers are able to find alternative routes to Cyprus”, the agency said.
It noted that the economic benefits from an improving pandemic situation in Europe and the stimulus provided by EU funds will mitigate the risks and continue to underpin Cyprus`s economic recovery.
“DBRS Morningstar continues to believe Cyprus`s medium-term economic prospects remain solid and the country should be well placed to manage and adjust to the situation, contingent on the duration and depth of the crisis as it pans out,” it added.
Recalling that Russia has been Cyprus’ second tourist market, DBRS said that given the importance of Russian inbound tourism, the flight bans could curtail around 20-25% of the overall tourist inflows to Cyprus in 2022, although DBRS Morningstar expects the Cypriot tourism industry to attract tourists from other source markets instead, including from the UK.
“Even if the sanctions affecting flight availability are short-lived, the inflows of Russian tourists to Cyprus, are expected to be severely impacted by the massive effect of the sanctions on the Russian currency and its economy,” the agency said.
Furthermore, DBRS Morningstar noted that, although Cyprus economy has proven more resilient than expected with the economy recovering faster than expected, “the European Commission`s growth forecast for Cyprus of 4.1% in 2022 published in February before the invasion now appears optimistic.”
“In addition to the potential hit to Russian tourism flows, the rapid and material increase in crude oil and gas prices will increase the energy costs for the Cypriot private sector. Petroleum products accounted for 90% of total energy available in Cyprus in 2019,” the agency said adding that the main risk is linked to the higher prices rather than supply disruption as Cyprus only imports around 1% of its energy needs from Russia.
“While Cyprus’s dependence on Russian energy sources is small, households and firms face substantially higher energy costs, weighing on real incomes, and at the same time war uncertainty is likely to affect confidence and delay business decisions,” the agency added.
Furthermore, it noted that financial services exports to Russia have increased in recent years and accounted for approximately 7% of GDP in 2020; however it said that this figure could be significantly inflated by the presence of Special Purpose Entities with limited links to the domestic economy.