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Cyprus Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 51 pages

Core Views

Cyprus has emerged from a prolonged recession. Regardless, theeconomy will continue to be challenged by a weak external environment,public sector austerity, competitive pressures on wages anddisposable income, and high levels of non-performing loans in thebanking sector.Negotiations between Greek and Turkish Cypriots on the 40-yearold‘Cyprus problem’ are reaching a crucial phase. The odds of adeal to reunify the island are higher now than they have been sincethe last major peace effort ended in 2004, although parliamentaryopposition poses a threat.The Cypriot government has exited its 2013 EU/IMF bailout, butthe series of structural and fiscal reforms put in place under theprogramme have put the country in a position to boost private sectoractivity and reduce the public debt overhang substantially over thenext decade.Major Forecast ChangesWe have revised up our forecast for real GDP growth in 2016 to2.5%, from 1.9%, as a result of strong economic data in the beginningof the year, combined with positive leading indicators.We have revised up our projection for the Cypriot current accountdeficit in 2017 to 4.9% of GDP from 3.7% previously, on account ofweaker services growth due to an anticipated slowdown in touristarrivals from the UK.

Table Of Contents

Cyprus Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
From Laggard To Leader, But Headwinds To Persist8
Cyprus is swiftly going from a growth laggard to a growth leader among eurozone countries, as the country's economic recovery gathers
pace.
GDP By Expenditure Outlook. 10
TABLE: GDP GROWTH FORECASTS .10
TABLE: PRIVATE CONSUMPTION FORECASTS..10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
External Trade And Investment Outlook. 11
Tourism To Take A Hit From Brexit11
The UK's vote to leave the European Union in June will have a negative effect on the Cypriot external accounts in the near term,
primarily due to a weaker pound impacting tourism inflows.
TABLE: FIXED INVESTMENT FORECASTS.11
TABLE: NET EXPORTS FORECASTS..11
Outlook On External Position. 13
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE..13
TABLE: CURRENT ACCOUNT BALANCE FORECASTS13
TABLE: TOP 5 GOODS IMPORTS..14
TABLE: TOP 5 GOODS EXPORTS.14
Fiscal Policy And Public Debt Outlook 15
Solid Fiscal Position, But Risks Rising15
Cyprus' fiscal accounts will remain solid in 2016-17, putting the country on a continued trajectory of government debt reduction.
However, there are increasing downside risks to the reform drive and to the fiscal balance due to the results of the legislative election in
May 2016 and fatigue over reform.
Structural Fiscal Position. 16
TABLE: GENERAL GOVERNMENT EXPENDITURE AND REVENUE BREAKDOWN 16
TABLE: FISCAL AND PUBLIC DEBT FORECASTS.. 16
Regional Monetary Policy. 18
TABLE: NEGATIVE INTEREST RATES - SUMMARY.. 21
Regional Growth Outlook 23
Brexit Contagion Could Reignite Eurozone Crisis23
The UK vote to leave the EU on June 23 will act as a significant drag on domestic and regional growth in the coming year. However, in
terms of systemic risks to the global economy, a deeper crisis would be much more likely to emerge from the eurozone as opposed to
the UK, via political contagion or banking sector instability. We highlight Italy as a potential next epicentre of instability.
Chapter 2: 10-Year Forecast. 27
The Cyprus Economy To 2025.. 27
Long Road To Recovery27
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.
TABLE: LONG-TERM MACROECONOMIC FORECASTS. 27
Chapter 3: Political Outlook. 29
SWOT Analysis 29
BMI Political Risk Index. 29
Domestic Politics.. 30
Parliamentary Divide Threatens Peace Deal And Reforms.30
The Republic of Cyprus' May legislative election bore out our core view that President Nicos Anastasiades' Democratic Rally (DISY)
party would remain in power in the country's parliament. However, rising opposition from nationalist and anti-austerity elements has
placed increasing risks on the reform agenda and the peace process with the Turkish north.
TABLE: DOMESTIC POLITICS..30
Long-Term Political Outlook.. 32
Cyprus Problem, Economy The Dominant Issues32
Cyprus remains divided along ethnic Greek and ethnic Turkish lines for more than 40 years. Settlement talks between the leaders of the
ethnic-Greek South and ethnic-Turkish North have been going on for several years with little in the way of progress, but there is cause
for cautious optimism on a permanent accord being reached in the near future.
Chapter 4: Operational Risk. 35
SWOT Analysis 35
Operational Risk Index.. 35
Operational Risk. 36
Labour Market Risk..36
TABLE: DEVELOPED STATES - LABOUR MARKET RISK.. 36
Logistics Risk..39
TABLE: DEVELOPED STATES - LOGISTICS RISK.40
Crime And Security Risk..42
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK..43
Trade And Investment Risk.44
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK45
Chapter 5:BMI Global Macro Outlook. 47
Global Macro Outlook. 47
Brexit Risk Casts A Long Shadow..47
TABLE: GLOBAL ASSUMPTIONS.. 47
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %48
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %..49
TABLE: MACROECONOMIC DATA and FORECASTS.51

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