Economic Situation: Concrete Road to Recovery
Cyprus government is confident it is taking control of economic problems, as reviews from lenders & rating agencies indicate a stabilising trend, albeit subtle.
Published on: 06 February 2014 |
Cyprus’ economy is performing better than expected so far, as harsh yet determined efforts start to yield some results.
According to the troika of international lenders – European Central Bank, European Commission and International Monetary Fund – the economy has been more resilient than expected, with private consumption declining by less than projected, and tourism and exports holding up. Tax receipts have also been recovering since April 2013 relative to GDP, and sentiment has improved.
The Troika have since reviewed Cyprus’s progress twice, giving it positive reviews. They project contractions of 7.7 percent in 2013 and 4.8 percent in 2014, against a backdrop of shattered consumer and investor confidence, rising unemployment and a credit crunch.
But they see Cyprus returning to growth in 2015, and forecast GDP rising by 1.1 percent that year and 1.9 percent in 2016.
The main factors behind the positive outcome continue to be tight public spending and sizeable consolidation measures, as well as also one-off revenues of 1.6 percent of GDP from the sale of licences for gas exploitation and higher dividends due to extraordinary Central Bank profits.
“Everyone’s aim should be to restore credibility, upgrading the Cypriot economy’s credit ratings and eventually returning to the markets,” said the Cyprus Finance Minister, Harris Georgiades.
Standard & Poor’s already raised its long-term sovereign debt rating on Cyprus to B- from CCC+ at the end of last year, making it the first ratings upgrade in three years for Cyprus. At the time, the ratings agency released a statement saying: “The stable outlook reflects our view of the implementation risks that remain as the end of the three-year European Commission, International Monetary Fund, and European Central Bank program approaches, balanced against the upside potential we see coming from Cyprus' economy.”
According to the IMF, much has already been accomplished in the relatively short time since the approval of the stability program for Cyprus, highlighting some crucial changes, including:
- Addressing significant vulnerabilities that had built up in Cyprus’s large banking sector
- Measures to unwind the deterioration in public finances, together with prudent budget execution, in turn meeting fiscal targets, and
- Restoring the sustainability of the pension system and strengthen the economy’s competitiveness by implementing key structural reforms.
Despite the results – that the recession this year is projected to be less deep than initially projected – international lenders expect it to continue, with contracting output, rising unemployment, falling disposable incomes, and contracting credit to the economy.
According to the government, this year will probably be the most difficult for the Cypriot economy, and when most crucial decisions will be made to further correct errors and improve the long term situation – painful sacrifices by the people and decisive policies by government.
As regularly mentioned, hope is offered by the island’s untapped offshore gas reserves, whilst immediate growth should come from the private sector, as the government does not plan on imposing any more taxes.
No doubt though, strong macroeconomic policies are paramount to restoring confidence, macroeconomic stability, and growth. Restructuring of the financial sector needs to be completed to allow a clean-up of the banks’ balance sheets and the eventual return of sustainable credit growth, whilst fiscal policies need to balance short-run cyclical concerns with long-run sustainability objectives.
The country’s business model must also continue to better diversity, from financial services towards other areas where Cyprus has a comparative advantage, such as tourism and professional business services (legal, consulting, accounting), as well as new innovation.
Source: Investment Gateway
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