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Cyprus Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

Cypriot economic activity will continue to accelerate in 2017-18 amid the country's recovery from a series of crises in the preceding decade. Regardless, the economy will continue to be challenged by a weak external environment, public sector austerity, competitive pressures on wages and disposable income, and high levels of non-performing loans in the banking sector. Greek and Turkish Cypriots are nearing a tentative agreement to reunify the island after more than 40 years of division, though disagreements over the key issues of property rights and security loom large. If a deal does not emerge by early 2017, we doubt that another such window of opportunity will open up again for many years, if at all. The Cypriot government has exited its 2013 EU/IMF bailout, but the series of structural and fiscal reforms put in place under the programme have put the country in a position to boost private sector activity and reduce the public debt overhang substantially over the next decade. Major Forecast Changes We have revised up our 2017 real GDP growth forecast slightly to 2.6% from 2.5%, which reflects stronger-than-expected activity in the tourism sector. We have revised down our forecasts for the euro exchange rate, and now project the currency to continue its multi-year depreciation towards parity against the US dollar.

Table Of Contents

Cyprus Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Tourist Surge To Help Underpin Recovery...................................................................................................................................8
Cypriot economic activity will continue to accelerate in 2017-18 amid the country's recovery from a series of crises in the preceding
decade. An unexpected surge in tourism, due in part to external factors, poses upside risks to our near-term forecasts.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Outlook On External Position.................................................................................................................................. 11
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................11
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................11
TABLE: TOP 5 GOODS IMPORTS IN 2015............................................................................................................................................................12
TABLE: TOP 5 GOODS EXPORTS IN 2015...........................................................................................................................................................12
Structural Fiscal Position........................................................................................................................................ 13
TABLE: GENERAL GOVERNMENT EXPENDITURE AND REVENUE BREAKDOWN.......................................................................................... 13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................14
Currency Forecast.................................................................................................................................................... 15
EUR: Heading To Parity As Fiscal Woes Take Their Toll..........................................................................................................15
We have revised down our forecast for the euro, now seeing the currency weakening gradually over the coming years. The euro is
caught between the risk of rising inflation expectations on the one hand and a rising risk premium over the future of the eurozone on the
other.
TABLE: BMI EUROZONE CURRENCY FORECASTS............................................................................................................................................15
TABLE: DOWNWARD REVISIONS.........................................................................................................................................................................16
Chapter 2: 10-Year Forecast................................................................................................................... 17
The Cyprus Economy To 2025................................................................................................................................ 17
Long Road To Recovery...............................................................................................................................................................17
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. 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, and the potential reunification of the
island.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................17
Chapter 3: Political Outlook................................................................................................................... 19
SWOT Analysis......................................................................................................................................................... 19
BMI Political Risk Index........................................................................................................................................... 19
Domestic Politics .................................................................................................................................................... 20
Risks To Reunification Rising After Turkey Coup.....................................................................................................................20
The attempted coup in Turkey in July 2016 has increased the risk of failure in the Cypriot reunification talks. If a deal does not emerge
by early 2017, we doubt that another such window of opportunity will open up again for many years, if at all.
TABLE: POLITICAL OVERVIEW ............................................................................................................................................................................20
Long-Term Political Outlook................................................................................................................................... 21
Cyprus Problem, Economy The Dominant Issues.....................................................................................................................21
Cyprus has been 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 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. 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 the aftermath of an economic
depression. Nonetheless, the downside risks to long-term stability are limited by strong democratic institutions operating within the EU
framework.
Chapter 4: Operational Risk................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
Operational Risk Index............................................................................................................................................ 25
Operational Risk....................................................................................................................................................... 26
Labour Market Risk.......................................................................................................................................................................26
TABLE: DEVELOPED STATES - LABOUR MARKET RISK...................................................................................................................................26
Logistics Risk................................................................................................................................................................................29
TABLE: DEVELOPED STATES - LOGISTICS RISK..............................................................................................................................................29
Crime And Security Risk..............................................................................................................................................................31
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK..........................................................................................................................32
Trade And Investment Risk..........................................................................................................................................................34
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK.....................................................................................................................34
Chapter 5: BMI Global Macro Outlook................................................................................................... 37
Global Macro Outlook.............................................................................................................................................. 37
Broad Recovery But Three Notes Of Caution.............................................................................................................................37
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................39
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................41

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