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ERC: Strong recovery in 2021-22, but risks for Cyprus’ credit rating

15/07/2021 15:40

The Cypriot economy is projected to record high growth rates in 2021 and 2022, after 2020 contraction due to the COVID-19 pandemic, as a gradual return to normalcy and an increase in vaccination coverage is expected, Economic Research Center of the University of Cyprus, says in its Outlook for July. At the same time, it warns of possible dangers for the country`s credit rating as the pandemic continues.

Real GDP growth in Cyprus is projected at 3.7% in 2021 and 3.8% in 2022. The growth forecasts have been revised upwards relative to the forecasts in the previous issue. The upward revisions were mainly driven by the pickup in real activity in the first quarter of 2021 vis-à-vis the final quarter of 2020, as well as by substantial improvements in the second quarter of 2021, signalled by business and consumer confidence indicators for Cyprus and the EU.

Downside risks to the outlook stem from setbacks to the gradual normalisation of activities due to new waves of COVID-19 infections, new virus variants and delays in the vaccination coverage, particularly among younger age groups. Downside risks are also associated with the path of external demand for tourist services that depends on the epidemiological conditions and vaccination coverage in Cyprus and abroad.
It is also added that as the pandemic persists, downside risks may emerge as a result of the high levels of public and private indebtedness in conjunction with delays in key structural reforms and uncertainty around the foreclosure framework. Upward pressures on public finances and NPLs, as the pandemic evolves, may undermine the country’s credit rating position and weigh on banks’ balance sheets, limiting the growth prospects.
On the upside, a pickup in the pace of vaccinations in Cyprus and abroad, leading to improvements in the epidemiological conditions could boost demand, especially for tourist services. The implementation of Cyprus’s Recovery and Resilience Plan is expected to directly affect domestic activity and employment through higher investment, and enhance the country’s growth potential via reforms.
In 2021 and 2022, CPI inflation is projected at 1.6% and 1.8%, respectively, as demand is expected to recover.