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Cyprus Economy
CB: Precarious growth
First Published: 24/06/2015 16:30
The economic growth is weak and is still considered precarious, says the Central Bank in its economic bulletin for June 2015.
As stated, the Cyprus economy, after an unprecedented period of deep recession, seems to be in the early stages of recovery. This
is reflected in the first, after almost four years, albeit small, positive GDP growth recorded in the first quarter of 2015, but also in the
positive performance of a series of other economic indicators.
In addition, macroeconomic and especially fiscal imbalances have shrunk considerably, creating a favourable climate for recovery
and growth in the near future. At the same time, the banking sector after the conditions became mature and allowed the complete
removal of restrictions on capital movement, now stands on more solid and sound foundations ready to face the great challenges that lie before it.
“Despite first promising signs in early 2015, growth is at a meager stage and is still considered precarious, as illustrated by the continued negative inflation. The stabilization and strengthening of
the positive course of the economy depends inter alia on the maintenance of the implementation of the adjustment program and the consolidation of the economy as well as a number of external
factors such as geopolitical developments in the region and especially in the euro area together with the outcome of the Greek issue. Also, the major challenges for full recovery remain, such as
the very high non-performing loans, high unemployment, restrained lending and low development costs”, it is stressed.
According to the CB, the continuation of the prudent policy and the commitment to goals both in relation to the economy and the banking system will help not only to meet the challenges and to
make recovery during the year, but also to ensure the sustainability of growth in the medium term. Towards this direction, the adoption of the insolvency framework by the House and the
implementation of the foreclosures law is a particularly positive development, which, as a memorandum obligation, allowed the unimpeded funding of Cyprus from our international creditors and
gives the opportunity to the country to participate in the ECB's quantitative easing program, while it is expected to greatly contribute to the goal of the CBC for the restructuring and reduction of
non-performing loans. Also the reduction of lending rates after the CBC's actions which facilitated the ECB's monetary policy transmission mechanism in Cyprus had a positive impact.
For banks, it is noted that during the first quarter of 2015 they recorded the first weak signs of recovery on both lending and deposit level, as a result of significant recent positive developments
mostly from October 2014 onwards. More specifically, the publication of the positive results of the stress test by the EBA and the ECB for the participating Cypriot banks (October 26, 2014) gave
impetus to domestic banks with increased liquidity to proceed with new lending – though small in size - to the domestic private sector.
The co-financed funds by the European Investment Bank (EIB) to domestic SMEs also contributed to the recent increase in new lending. Equally important is also the recent adoption of the
insolvency framework and the foreclosures law by the House of Representatives of the Republic, since it is expected to contribute significantly in the near future to the intensification of
restructuring of troubled loans, the significant gradual reduction of non-performing loans and the increase in the rate of new loans from domestic banks with increased liquidity. However, it is noted
that the effort of domestic banks for further deleveraging and correction of their balance sheets continues apace.
Factors such as the ongoing positive assessments by the troika for the Cyprus economy, the partial stabilization in outflows of deposits that resulted to the recent full lifting of restrictions in capital
movement (April 6, 2015) are expected to contribute to a further strengthening of depositor confidence in the Cypriot banking sector. A further stabilization of the banking sector is expected to
contribute significantly to the recovery effort of the domestic economy.
As for the near future, the fragile sentiment in the domestic economy, the reduced disposable income, high unemployment, the relatively low deposit rates as well as the fact that many households
and businesses use their deposits to cover current liabilities and repayment of existing loans are all factors that hinder the immediate improvement of the deposit base of the banking sector.
With regard to the CB forecasts, the Cyprus economy is projected to record a marginal recovery of 0.5% in 2015. This forecast, due to the last update of the forecasts, also includes the
preliminary data for the GDP of the first quarter of 2015. However, it can be regarded as conservative as it includes the possibility of negative quarterly GDP growth rates in some of the coming
quarters.
In 2016, it is expected that GDP will recover further by 1.6%.
As for the inflation, it is expected to record a negative growth rate of around 1.0% in 2015 compared to -0.3% in 2014 mainly as a result of the ongoing decline in oil prices.
In 2016 inflation is expected to stand at 0.9%, influenced mainly by the anticipated small domestic economic recovery expected to influence prices upward. Excluding energy, inflation is projected
to be around 0.5%.
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