Public expenditure is also expected to contribute positively to growth through higher investment expenditures. According to the baseline macroeconomic scenario of Hellenic Bank’s Economic Research Department, growth is expected to be 4,0% in 2018 and 3,9% in 2019. The pick-up in domestic demand is expected to be reflected in improved labor market conditions with unemployment decreasing to 8,2% in 2018. Inflation in 2018 is expected to remain at relatively low levels, at around 0,7% in 2018.
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 €19,5 billion at end 2017, recovering to the pre-crisis level. Correspondingly, nominal GDP, the value of all final goods and services produced domestically at current prices, reached €19,6 billion in 2017, up from €18,5 billion in the previous year. The 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 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.
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. As highlighted, Cypriot banks have come a long way and are on a stronger footing. Recent bold moves to clean up banks’ balance sheets have reduced uncertainty in the system. These include:
- The carve-out of the Cyprus Cooperative Bank’s non-performing exposures (NPE) outside the banking system;
- The sale of non-performing loan portfolios by Hellenic Bank and Bank of Cyprus;
- The disposal of non-performing exposures by Alpha Bank Cyprus outside the system;
- The recent adoption of legislative amendments, aimed at facilitating further sales of loans and strengthening the foreclosure and insolvency toolkits; and
- The design of a social policy programme (“Estia”) by the Government aimed at providing financial assistance to vulnerable distressed borrowers (subject to income and wealth criteria) to start servicing their debt
The Economics Research Department notes that the better than expected economic recovery, along with the improved domestic financial conditions, have created and maintained an environment of improved confidence, expressed most indicatively with the recent upgrade of Cyprus to investment grade. In September 2018, Standard and Poor’s upgraded Cyprus’ long-term credit rating at “BBB-” to investment grade. In October 2018, Fitch also upgraded Cyprus’ credit rating to investment grade, to “BBB-” from “BB+”.
In its Economic Review, the Economic Research Department highlights thatthe better that expected macroeconomic performance, does not justify complacency and does not signal a relaxation of efforts for further economic reform. The implementation of important structural reforms will help strengthen the competitiveness of the Cypriot 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 develop a sustainable economy.
Also, further promotion of electronic payments will enhance transparency in the economy and reduce the size of the informal sector and tax evasion, as electronic payments are far easier to track.It is essential to use the current growth momentum for the implementation of the abovementioned reforms. Such reforms are more effective and easier to implement when economies are growing.
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 and the high private and public debt, which are however on a steady declining trend. 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 insolvency and foreclosure framework which is now in place will be an invaluable tool towards this direction.From an exogenous perspective, the economic outlook may be negatively influenced due to the uncertainty surrounding the developments in Italy, a slower than expected growth in the UK, the uncertainty effects of Brexit and a weaker pound. 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. At the same time, geopolitical tensions in neighbouring countries render Cyprus a safer tourist destination and could therefore counterbalance, to a significant extent, any potential reduction in tourist traffic from the UK.
Upside risks pertain to the buoyant confidence leading to stronger domestic demand as well as if exploitation of Cyprus’ natural resources prove financially viable.