The Cypriot economy has so far proven to be more resilient to the coronavirus crisis than initially expected, DBRS Morningstar says in a commentary on Thursday. It also notes that compared with other southern European economies, which also have important tourism-related activities, Cyprus`s recovery has out-performed all but Greece.
The Toronto based credit rating agency notes that the conditions are favourable for strong growth in Cyprus in the medium term, underlining that through its Recovery and Resilience Plan, Cyprus could address some of the challenges that have been holding back economic performance in the past.
Quoting the flash estimate released earlier this week, DBRS says Cyprus` seasonally and working day adjusted (SAWD) real GDP expanded by 5.3% YoY and 1.3% QoQ in Q3 2021, with the tourism related-activities and manufacturing sector as main drivers of growth during the quarter. As of Q3 2021, the country`s real GDP was only 0.7% below its Q4 2019 level.
DBRS Morningstar considers that Cyprus`s targeted and sizeable fiscal support, which cushioned the blow to domestic demand, and relatively more effective coronavirus containment measures have played a key role in this relatively favourable performance.
Also, DBRS Morningstar considers that Cyprus`s public sector and private sector balance sheet repair since the global financial crisis have provided valuable space to respond to the pandemic shock. “Cyprus entered the COVID-19 crisis, following a period of substantial improvement in terms of fiscal and banking system consolidation, private sector deleveraging and strong growth”, the rating agency notes.
Looking at the sectoral breakdown until Q2 2021 (latest available data), DBRS Morningstar notes that this rapid recovery has been possible thanks to the substantial growth in the financial services, the information and communication sector, and the public administration, education and social works sector. These three sectors, it says, had already surpassed their pre-pandemic levels by Q2 2021, contributing the most to the recovery. Also, the industrial sector had recovered pre-pandemic levels by Q2 2021.
DBRS Morningstar notes that “the conditions are favourable for strong growth in Cyprus in the medium term”, citing the European Commission’s latest forecast that projects GDP growth to reach 5.4% in 2021, 4.2% in 2022, and 3.5% in 2023, broadly in line with Cypriot government projections.
DBRS Morningstar expects private consumption, which contracted sharply in 2020, to recover strongly in 2021, driven by the release of pent-up demand and the strengthening labour market as the economy reopens, and to decelerate over the medium term. “The ongoing recovery in the tourism sector, with tourist arrivals currently assumed to reach pre-pandemic levels by 2023, is expected to boost real exports by more than 6% annually during 2021–23”, it says. Real investments are estimated to grow by 5% annually during 2021–23 lifted by the European Union recovery funds. “This is particularly encouraging, given the relatively low levels of investment in Cyprus since the global financial crisis”, the credit rating agency notes.
DBRS Morningstar highlights that “Cyprus`s Recovery and Resilience Plan presents a unique opportunity to address some of the challenges that have been holding back economic performance in the past. These include the country`s high level of troubled assets, relatively weak productivity, digitalisation, low productive investment levels, and weak energy efficiency”, it notes.
According to the credit rating agency, Cyprus`s ability to meet the key milestones and targets with the EC will ultimately determine the speed and total amount it will receive. It warns though that “this requires cross-party support to pass reforms and legislation, the lack of which has stalled the reform agenda in the recent past. Similarly, timely execution and collaboration between the public and private sectors will remain a key to effectiveness. In this sense, unlocking the full possibilities in the Next Generation EU is not a given”, says DBRS Morningstar.