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OPINION

Internal and External Risks to the Cyprus Economy

Internal and External Risks to the Cyprus Economy

Despite the tragic events of March 2013, Cyprus economy has showed resilience and the country was able to return back to stability and regain some of the lost confidence from international markets and investors rather quickly, which is necessary for a return to growth and gradual reduction of unemployment. 

 

This was an outcome of a number of factors – a recession much milder than what was expected, stabilizing unemployment (or at least increasing at a much slower pace), public debt that was kept at sustainable levels, diminishing budget deficits, and a primary surplus achieved well before than what everyone (including our international lenders) predicted. This outcome was then reflected in five successful Troika reviews, successive credit rating upgrades by all three rating agencies, a substantial reduction of the yields on our government bonds (we were even able to borrow successfully from the international financial markets after almost four years), and foreign direct investment to recapitalize our banking sector. However, many risks still remain that can easily put us off track and stop us from returning to the coveted growth. 

 

Internal Risks


As we all know, the progress of our adjustment programme is on hold since last summer (that was the last successful Troika review) mainly because of the successive extensions by the parliament of the suspension of the foreclosure law. At the same time, our parliament needs to pass also the package of insolvency bills (five bills). This delay is costing us a lot, and puts the economy in danger. First, it creates considerable uncertainty whether we will be able to keep our commitments as it relates to what was agreed under the MoU. Furthermore, it takes away a key tool that the banks require to exert more pressure on the borrowers that refuse to cooperate, and as a result the big problem with the non-performing loans remains unresolved (and is getting worse). The government was hoping to be able to borrow from the international markets in the first quarter (or first half) of this year, but this prospect right now looks remote as the government bond yields have gone up recently (I would imagine they would increase even more if the uncertainly in our programme, as well as the Greek programme, persists). If this situation continues, we run the risks of not meeting the targets that we aimed and as a result would be stuck in a recession for a longer period of time. 

 

External Risks


Right now, we are facing two main external risks that can have a big impact on our economy and the prospects for 2015. First, we are negatively impacted from the recession that the Russian economy is facing. Russia has suffered a lot lately, mainly due to the sanctions imposed by the US and EU, as well as the big drop in oil prices. The Russian ruble has lost almost half its value to the US dollar in the last 12 months, inflation has skyrocketed to more than 15%, consumer confidence has plunged, and real wages are expected to drop by 9% for 2015. A recession of 3% is expected for this year. As Russia is a major business partner of Cyprus, unfortunately the problems with the Russian economy will have a big impact on our economy. Then, we have the issue with the Greek economic stand-off and if it continues for much longer, it certainly does not help our situation. First, it creates uncertainty about the euro leading to higher borrowing yields for our government. Second, although our banks have exited from the Greek banking sector, there are still subsidiaries of Greek banks that might be negatively affected if the situation with the Greek programme is not resolved. Third, Greece is naturally one of our main trade partners and therefore problems in their economy affect ours.

 

In short, 2015 has not begun well unfortunately. Although it’s difficult to protect our economy from the external risks, what we can do at least is make sure that we solve our internal problems that exist right now that put an obstacle to any sort of future growth.

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