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Anastasiades' re-election reduces uncertainty over Cyprus' economic policies

The European Commission forecasts a 'Strong Growth Momentum' for Cyprus in its new release of the Winter Interim Economic Forecast

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Cyprus re-elected president Nicos Anastasiades (C) waves to supporters after he was officially declared winner of Cyprus presidential runoff in Nicosia, Cyprus on 4 February, 2018. Photo: AAP via EPA/Katia Christodoulou

12 February 2018

The re-election of President Nicos Anastasiades for a second term in office reduces uncertainty over the direction of economic policies in Cyprus, rating agency DBRS has said.

In a press release, DBRS said "the latest election result gives President Anastasiades a solid mandate for a second consecutive term," adding "the recovery of the economy under his first term seemed to have driven votes in his favour."

Furthermore, the agency noted that "with the presidential elections settled, the focus moves back to addressing the challenges Cyprus faces," such as the reduction of banks' high non-performing loans (NPLs), the still high private sector debt, and maintaining healthy growth prospects and public finances.

"DBRS sees the election outcome as reducing the uncertainty over the direction of economic policies. DBRS expects continuity on fiscal policy and the debt management strategy, and more progress on efforts to address banking sector vulnerabilities, after delays on pending reforms in Parliament ahead of the elections," the agency added.

Referring to the future reforms, DBRS said the government lacks a majority in the House of Representatives, which "resulted in delays in adopting additional reforms and is likely to remain a challenge for the government's reform agenda."

"Moreover, the completion of additional privatisations is likely to be a major test for the newly re-elected administration," the agency said, adding that if completed, reforms such as privatisations could contribute to a faster-than-expected decline in public debt.

In December 2017, DBRS changed the trend on the BB (low) ratings for Cyprus from Stable to Positive, the Cyprus News Agency reports.

"This change reflects DBRS's view that Cyprus' solid fiscal and economic performances are likely to be maintained, leading to a further reduction in the government debt-to-GDP ratio," the agency added.

DBRS said the Cypriot economy is expected to grow by 3.8 per cent in 2017 beating the earlier projection of 3 per cent, while economic growth is projected at 35 in 2018 and 2019.

The forecast for the 2017 fiscal surplus was revised upwards to 1.0 per cent of GDP from an earlier forecast of only 0.2 per cent and it is now expected to remain above 1.3 per cent over the next two years.

EU Commission forecasts strong growth momentum in Cyprus for the next two years

Growth in Cyprus for 2017 will peak at 3.8 per cent and will continue expanding at 3.2 per cent and 2.8 per cent for 2018 and 2019, according to the European Commission (EC), making Cyprus "one of the fastest growing economies in the euro area," while wages, employment and consumption will continue to expand, even if export and tourism may slow down due to capacity constraints.

The EC forecasts a 'Strong Growth Momentum' for Cyprus in its release of the Winter Interim Economic Forecast, published today in Brussels by Commissioner Pierre Moscovici.

The European Commission DGECFIN (the responsible directorate general in its structure that compiled this report) notes that "Cyprus is experiencing a very strong recovery," while "quarterly GDP growth in the third quarter of last year was just as solid as in the first half of the year", furthermore stating that "available 'soft' and early 'hard' data point to healthy growth in the fourth quarter as well."

The only negative aspect of the interim forecast was inflation that "surprised on the downside", at 0.7 per cent in 2017, mainly driven by energy prices, while prices of processed and non-processed foods and industrial goods declined in the second half of the year.

Even so, after two years in negative territory, "core inflation turned marginally positive in 2017 due to higher service prices linked to increasing wages."

Inflation in 2018 is expected to climb to 1.2 per cent, mainly as a result of higher oil prices, and to 1.3 per cent in 2019, amid higher domestic price pressures stemming from wage dynamics.

According to the EC, the economy's robust performance can be attributed "to strong private consumption and solid export growth, as well as some support from public consumption." Moreover, private consumption benefited "from rapidly expanding employment across all sectors (which led to a marked decline in unemployment, including long-term unemployment) and rising compensation per employee." Wages and employment are expected to continue growing into 2018 and 2019, supporting private consumption.

Furthermore, the EC notes that "exports of services were strong, especially in the second and third quarters of 2017, linked to the ongoing tourism boom in Cyprus," stating that "this coincided with a certain rebound in goods exports."

Meanwhile, import growth was "more moderate in the first three quarters of 2017" (compared to 2016, when imports and investment were heavily influenced by one-offs related to ship purchases), but "both investment and imports are expected to have picked up in the last quarter of the year."

After "the surge in 2016", investment "levelled off in 2017." The EC projects it "to pick up in 2018, on the back of buoyant residential construction and plans for large tourism projects."

In 2019, the EC expects "import growth is to strengthen", driven by "rising consumption and investment," while export growth "is set to slow given limited opportunities for further growth, especially in tourism" where "capacity constraints may become binding."

On Thursday the European Commission presented its first new issue of what will be twice-yearly interim forecasts, resuming its annual schedule of two-fully fledged forecasts and two much shorter interim forecasts as produced until the height of the sovereign debt crisis.

The interim forecasts provide an update of GDP and inflation developments for all EU Member States. They will be published in February and July, providing an update of its comprehensive spring and autumn economic forecasts.

This interim forecast updates the outlook of the autumn 2017 economic forecast of 9 November 2017.

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