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Cyprus Business Forecast Report Q4 2014

  • July 2014
  • -
  • Business Monitor International
  • -
  • 34 pages

Core Views
Cyprus' major economic headwinds and ongoing territorial dispute with Turkey will remain dominant themes in policy-making over the coming years. Austerity measures and several years of economic stagnation could increase social tensions and give rise to marginalised olitical undercurrents, while efforts to develop offshore mineral resources are set to raise tensions with Turkey within a delicate geopolitical context. Cyprus appears to be past the worst of its brutal recession. Nonetheless, we do not forecast annual economic expansion until 2016, as credit growth remains impaired, public austerity deepens, and theinternal devaluation process keeps a lid on nominal and real wages.
Although the Cypriot government's fiscal consolidation plan has begun to bear fruit, with a reduced deficit, a budget surplus is unlikely to be posted anytime soon. With slow economic growth ahead and chronic budget deficits, it is likely that Cyprus's debt sustainability will be called into question again at some point in the next few years.

Major Forecast Changes
We have revised our 2014 real GDP growth forecast to -3.4% from -4.2%.
We changed our nominal budget deficit forecast for 2014 to 4.7% of GDP from 5.0%.

Table Of Contents

Cyprus Business Forecast Report Q4 2014
Executive Summary.... 5
Core Views..5
Key Risks To Outlook....5
Chapter 1: Political Outlook.. 7
SWOT Analysis.... 7
BMI Political Risk Ratings. 7
Bailout Programme And Reunification Remain Pivotal Issues...8
Our core view is that the Cypriot government will continue to adhere to the 2013 bailout programme, despite some political opposition.
Meanwhile, though there has been some progress on the question of the reunification of Cyprus' north and south, and the long-standing
stalemate could plausibly be ended this year, we believe that the obstacles to any binding solution will be extremely difficult to surmount.
TABLE: political overview....8
Long-Term Political Outlook.. 9
Cyprus Problem, Economy The Dominant Issues....9
Cyprus celebrated 50 years of independence on October 1 2010, yet the island remains divided along ethnic Greek and ethnic Turkish
lines. Settlement talks between the leaders of the ethnic-Greek South and ethnic-Turkish North have been going for several years with
li ttle in the way of progress. Economic policy will also be at the forefront of discussion in the coming years, as the government struggles
to deal with major fiscal austerity and an economic depression. In both cases, the downside risks to long-term stability are limited by
strong democratic institutions operating within the EU framework.
Chapter 2: Economic Outlook.. 13
SWOT Analysis.. 13
BMI Economic Risk Ratings. 13
Economic Activity.. 14
Economy Turning Around, But Full Recovery Unlikely....14
We have revised up our 2014 growth forecast for Cyprus to reflect improving consumer confidence as the country takes major steps
toward exiting its bailout programme. However, a full economic recovery by the end of our forecast period to 2018 remains extremely
unlikely, with investment and consumption likely to remain well below their pre-crisis peaks.
TABLE: GDP Cont ribution To Growth ..14
Balance Of Payments . 16
Services To Underpin External Accounts16
With net external liabilities soaring, the income account of Cyprus's balance of payments is likely to fall further into deficit. Nonetheless,
we believe that the current account deficit will swing into surplus as the trade balance improves over the 2014-18 period, with goods
imports remaining weak and services exports expanding strongly.
TABLE: Current Account17
Fiscal Policy . 18
Improving Budget Balance Belies Debt Risks...18
We have revised down our forecasts for Cyprus's general government deficits in 2014 and 2015 due to a stronger-than-expected fiscal
performance in Q114 and an upgrade to our economic growth forecasts for the country. However, the public sector debt burden will
remain high, which presents risks to economic stability.
TABLE: Fiscal Policy....18
Regional Economic Outlook. 20
Assessing The Aftermath Of ECB Policy Action ....20
The European Central Bank (ECB) has delivered on nearly all of the policy options that we were expecting for the June 5 meeting. This
is a step in the right direction in terms of warding off the risk of deflation and will be positive for European equities and sovereign bonds.
However, we warn - as we have done countless times during previous easing rounds - that the efficacy of ECB policy action will be
limited absent structural reforms in the eurozone at the national and federal level.
Chapter 3: 10-Year Forecast 23
Long Road To Recovery.. 23
Cyprus will continue to experience weak economic growth and a painful structural adjustment process over the coming years that will
leave a lasting mark on the domestic consumer and corporate sector alike. Although there is scope for stronger growth to return to
the island towards the end of our 10-year forecast period, as the economy enjoys a more solid fundamental picture following a painful
adjustment process, as well as benefitting from the emergence of new industries, such as offshore oil and gas, we believe that the
wealth destruction along the way will outweigh such benefits through to 2023.
TABLE: Long-Term Macroeconomic Forecasts..24
Chapter 4: Business Environment 25
SWOT Analysis.. 25
BMI Business Environment Risk Ratings 25
Business Environment Outlook 26
Institutions.... 26
Infrastructure 28
Market Orientation.. 30
Chapter 5: BMI Global Assumptions. 33
Global Outlook... 33
Global Recovery Still On Track..33
Table: Global Assumptions....33
Table : Developed States , Real GDP Growt H, %.34
Table : Eme rging Markets , Real GDP Growth , %35

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