Cyprus’ vulnerabilities continue to be significant

The European Commission notes that despite the recent improvement, Cyprus’ vulnerabilities, which are mostly because of long-lasting stock-imbalances, continue to be significant.

A report by the Commission to the Council entitled (Country Report Cyprus 2019 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances SWD2019 1012 final) says that "stock imbalances remain high, mainly in terms of non-performing loans, private, public and external debt",  Despite the recent improvement, Cyprus’ vulnerabilities, which are mostly because of long-lasting stock-imbalances, continue to be significant".

The government, private and external debt ratios are still high. The large, albeit decreasing, level of non-performing loans (NPLs) and weak profitability highlight vulnerabilities in the banking sector. Adjustment issues in the labour market have largely been resolved, as reflected by the strong employment growth and the fall in unemployment. Remaining risks in this area are mostly linked to the low labour productivity, which remains a major weakness of the Cypriot economy, the Commission notes.

According to the official document, "the composition of risks has shifted over the past year and some imbalances have been reduced while others have increased". It states that "in terms of flows, many imbalances are decreasing, helped by the cyclical upswing". "This is particularly the case for employment conditions, which have improved significantly, with unemployment rate now at an eight year low", the EC explains."The deleveraging in the private sector is also progressing, mostly because of strong GDP growth, non-performing loans write-offs, cash repayments and debt-to-assets swaps", while "nonperforming loans have been reduced significantly, as a large volume was carved out of the banking sector upon market exit of the Cyprus Cooperative Bank".

"However, this also led to a substantial increase in public debt in 2018, though this is expected to start decreasing again in 2019", the EC reports mentioning that "implementing effectively the policy measures in place and addressing any remaining inefficiencies are essential for further reducing the imbalances". In any case the Commission recognizes that "some progress has been made on implementing the measures that address macroeconomic imbalances, particularly the high stock of non-performing loans".

However, the Commission states that "reform commitments are still pending in several areas, for example the justice system reform (notably the handling of non-performing loans in the courts and the improvement of contract enforcement) and setting-up a reliable system for issuing and transferring title deeds". "The running of the Insolvency Service and the information on borrowers still need to be improved", says the report.

"Continued fiscal discipline is also crucial for public debt reduction", the report warns.